Does public debt cost what we think it does?

When safe interest rates are expected to remain below growth rates for a long time, rolling over public debt without later tax increases is feasible and public debt may carry no fiscal cost.

Filed here becauseThe best-known statement of this position in the archive, and it is one its author has since revised — see the changes of mind below.

1. Olivier Blanchard 6 Nov 2023 · held 5 years Across advanced economies, the celebrated ( r - g ), i.e., the difference between the interest rate and the growth rate, appears to have durably changed sign or, at a minimum, to have gone from a substantially negative number to a number closer to zero.

   Economist; former chief economist of the International Monetary Fund

   No longer holdsAcross advanced economies, the celebrated ( r - g ), i.e., the difference between the interest rate and the growth rate, appears to have durably changed sign or, at a minimum, to have gone from a substantially negative number to a number closer to zero.

   ↗If markets are right about long real rates, public debt ratios will increase for some timepiie.com

There is no universal debt-to-GDP threshold beyond which government debt becomes unsustainable; sustainability depends on factors like the real interest rate.

1. Olivier Blanchard 1 Jun 2022 The analysis in this chapter has shown that there is no such thing as a universal threshold over which debt becomes unsustainable, and that the relevant debt level depends on many factors, in particular the real interest rate on debt.

   Economist; former chief economist of the International Monetary Fund

   Their wordsThe analysis in this chapter has shown that there is no such thing as a universal threshold over which debt becomes unsustainable, and that the relevant debt level depends on many factors, in particular the real interest rate on debt.

   ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu

The lower a country's neutral interest rate, the smaller the fiscal and welfare costs of public debt and the larger its welfare benefits.

1. Olivier Blanchard 1 Jun 2022 The lower the neutral rate, the smaller the fiscal and welfare costs and the larger the welfare benefits of debt and deficits.

   Economist; former chief economist of the International Monetary Fund

   Their wordsThe lower the neutral rate, the smaller the fiscal and welfare costs and the larger the welfare benefits of debt and deficits.

   ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu

Judging by output kept near potential despite weak private demand, Japan's decades of high debt and low inflation reflect a qualified policy success, not failure.

1. Olivier Blanchard 1 Jun 2022 Japanese macroeconomic policy is often characterized as a failure, with the central bank unable to achieve its inflation target, a low growth rate, and debt ratios steadily rising to reach more than 170% for net debt and 250% for gross debt. I think it should be seen instead as a qualified success, with the use of aggressive fiscal and monetary policies to compensate for very weak private demand: Output has remained close to potential.

   Economist; former chief economist of the International Monetary Fund

   Their wordsJapanese macroeconomic policy is often characterized as a failure, with the central bank unable to achieve its inflation target, a low growth rate, and debt ratios steadily rising to reach more than 170% for net debt and 250% for gross debt. I think it should be seen instead as a qualified success, with the use of aggressive fiscal and monetary policies to compensate for very weak private demand: Output has remained close to potential.

   ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu

A government's debt dynamics are a household's or a company's, except that it can print money and tax -- and those two powers are what change the ending.

1. Ray Dalio 21 Aug 2026 The debt dynamics work the same for a central government as they do for a person or a company, except that a central government has a central bank that can print money (which devalues it) and it can take money away from people via taxes.

   Founder of Bridgewater Associates

   Their wordsThe debt dynamics work the same for a central government as they do for a person or a company, except that a central government has a central bank that can print money (which devalues it) and it can take money away from people via taxes.

   ↗How Countries Go Broke: The Dynamic Behind What is Happening Nowraydalio.substack.com

A government debt crisis is measurable and therefore visible well in advance; the diagnostic is mechanical rather than a matter of judgement.

1. Ray Dalio 21 Aug 2026 Because one can measure these things, one can monitor this debt dynamic happening, so it’s easy to see problems approaching. I’ve used this diagnostic process in my investing and I’ve kept it to myself, but I’m now explaining it in detail in How Countries Go Broke: The Big Cycle because it is too important to keep to myself.

   Founder of Bridgewater Associates

   Their wordsBecause one can measure these things, one can monitor this debt dynamic happening, so it’s easy to see problems approaching. I’ve used this diagnostic process in my investing and I’ve kept it to myself, but I’m now explaining it in detail in How Countries Go Broke: The Big Cycle because it is too important to keep to myself.

   ↗How Countries Go Broke: The Dynamic Behind What is Happening Nowraydalio.substack.com

The late stage of the Big Debt Cycle shows itself as long rates leading rates up, the currency falling against gold, and the treasury shortening maturities.

1. Ray Dalio 21 Aug 2026 Early in the final stage of the Big Debt Cycle, the market action reflects this dynamic via interest rates rising led by long-term rates, the currency declining especially relative to gold, and the central government’s treasury department shortening the maturities of its debt offerings because of a shortage of the demand for long-term debt.

   Founder of Bridgewater Associates

   Their wordsEarly in the final stage of the Big Debt Cycle, the market action reflects this dynamic via interest rates rising led by long-term rates, the currency declining especially relative to gold, and the central government’s treasury department shortening the maturities of its debt offerings because of a shortage of the demand for long-term debt.

   ↗How Countries Go Broke: The Dynamic Behind What is Happening Nowraydalio.substack.com

With r-g near zero, any advanced economy running a primary deficit will see its debt-to-GDP ratio rise once existing debt is refinanced at current rates.

1. Olivier Blanchard 6 Nov 2023 Thus, once current debt has been refinanced and the average interest on debt reflects the higher long rates, absent changes in policy, debt ratios will increase.

   Economist; former chief economist of the International Monetary Fund

   Their wordsThus, once current debt has been refinanced and the average interest on debt reflects the higher long rates, absent changes in policy, debt ratios will increase.

   ↗If markets are right about long real rates, public debt ratios will increase for some timepiie.com

Interest rates have little effect on investment, and central banks have limited control over real interest rates.

1. TC Tyler Cowen 1 Oct 2023 In the actual data, interest rates don’t seem to drive investment that much, and furthermore central bank influence over the real rate of interest typically is limited.

   Economist at George Mason University

   Their wordsIn the actual data, interest rates don’t seem to drive investment that much, and furthermore central bank influence over the real rate of interest typically is limited.

   ↗GOAT: Who is the Greatest Economist of all Time and Why Does it Matter?tylercowen.com

Low interest rates reflect underlying fundamental economic factors rather than central bank policy choices.

1. Olivier Blanchard 1 Jun 2022 In other words, central banks are not to blame for low rates: these low rates just reflect underlying fundamental factors.

   Economist; former chief economist of the International Monetary Fund

   Their wordsIn other words, central banks are not to blame for low rates: these low rates just reflect underlying fundamental factors.

   ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu

A persistently low safe interest rate signals that capital is not very productive at the margin, an underlying economic problem rather than a policy variable.

1. Olivier Blanchard 1 Jun 2022 A low r is actually a signal that something is wrong with the economy: In effect, if we think of the safe rate as the risk-adjusted rate of return on capital, the low safe rate is sending the signal that, risk adjusted, the return on capital is low.

   Economist; former chief economist of the International Monetary Fund

   Their wordsA low r is actually a signal that something is wrong with the economy: In effect, if we think of the safe rate as the risk-adjusted rate of return on capital, the low safe rate is sending the signal that, risk adjusted, the return on capital is low.

   ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu

There is no tight relation between growth rates and interest rates, either theoretically or empirically.

1. Olivier Blanchard 1 Jun 2022 while the growth rate may well affect saving and investment, there is no tight relation between growth rates and interest rates, either on theoretical or empirical grounds.

   Economist; former chief economist of the International Monetary Fund

   Their wordswhile the growth rate may well affect saving and investment, there is no tight relation between growth rates and interest rates, either on theoretical or empirical grounds.

   ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu

Aggressive quantitative easing should raise long-term interest rates, because effective monetary stimulus raises them.

Filed here becauseA prediction about what effective stimulus would do to long rates, abandoned by its author the following day.

1. SS Scott Sumner 6 Sept 2010 · held 1 day I predicted that aggressive QE would raise long term interest rates, a view which seemed to be refuted by the response on T-bond yields to the March 2009 Fed QE announcement.

   Monetary economist known for NGDP-level targeting

   No longer holdsI predicted that aggressive QE would raise long term interest rates, a view which seemed to be refuted by the response on T-bond yields to the March 2009 Fed QE announcement.

   ↗A few of my mistakesthemoneyillusion.com

A central bank can eliminate a self-fulfilling ('sunspot') debt crisis simply by credibly committing to buy as many bonds as needed at the low interest rate.

1. Olivier Blanchard 1 Jun 2022 This is precisely the role the central bank can play. By announcing that it stands ready to buy the bonds that investors want to sell at the price associated with the low interest rate, and credibly indicating that it has deep enough pockets to buy whatever is needed, it can eliminate the bad equilibrium.

   Economist; former chief economist of the International Monetary Fund

   Their wordsThis is precisely the role the central bank can play. By announcing that it stands ready to buy the bonds that investors want to sell at the price associated with the low interest rate, and credibly indicating that it has deep enough pockets to buy whatever is needed, it can eliminate the bad equilibrium.

   ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu

Central bank purchases of government bonds are not bailouts and do not automatically cause inflation, since they only change the composition of the consolidated government's liabilities, not their total.

1. Olivier Blanchard 1 Jun 2022 Governments have not been bailed out by their central banks. As I discussed earlier, central bank intervention does not reduce the overall liabilities of the consolidated government, just their composition. And it does not automatically lead to more inflation: It increases the size of the balance sheet of the central bank, but it does not increase the size of the non-interest-paying money stock.

   Economist; former chief economist of the International Monetary Fund

   Their wordsGovernments have not been bailed out by their central banks. As I discussed earlier, central bank intervention does not reduce the overall liabilities of the consolidated government, just their composition. And it does not automatically lead to more inflation: It increases the size of the balance sheet of the central bank, but it does not increase the size of the non-interest-paying money stock.

   ↗Fiscal Policy under Low Interest Ratesdirect.mit.edu