So something interesting
has been happening. We’re changing the way we
talk about sovereign debt. By sovereign debt, that’s just
a country borrowing money. We used to talk about
it like it’s dessert. So before, dessert, right? You can have it, but go easy. Baklava: bad. Now we’re starting to talk
about it like it’s protein. Too much might still be bad. But too little might
still be bad too. You might get a little anaemic. So now: protein. That said, it’s very
difficult to figure out what the right amount of debt is. It’s hard to optimise
sovereign debt because the stakes are so high. Here’s one way of looking
at it that we borrowed from Olivier Blanchard. He used to be the chief
economist at the IMF. What we’re looking at right
here are two measures, G and R. G is your growth rate. This is the nominal growth
rate of the US economy. That is we’re not
adjusting for inflation. We’re just seeing
how much bigger it’s getting quarter after quarter. R is return. So this is the
return on US debt. This is what the
US pays to borrow. This happens to be for
a one-year Treasury. You could do a 10-year Treasury. You could do any
number of things. There are different
ways to adjust it. But the story remains
basically the same. So here’s the question that
we’re trying to answer, is G greater than R? So, if G is greater than
R, that is your economy is growing faster than
the cost of your debt, you may be able to
borrow more, right? So if G is greater
than R, that may be OK. Because what happens is even
though you’re borrowing more, your ratio of debt to GDP
will remain stable over time. However, if G is lower than
R, then your debt-to-GDP ratio will start to rise. That could become a problem. Lower than R,
again, we don’t know what’s going to happen there. Historically G has
been greater than R. You can see it’s true over here
in the 60s and the early 70s. That changed. And the reason
that’s important is that there are a lot of people
in policy and in politics still who have formative experience
from these years right now that were a little scary. There’s a famous
James Carville quote – he was an adviser
to President Clinton – where he said he used
to want to come back as a baseball player. Now I want to come
back as the bond market because everybody’s
scared of the bond market. Right here, G and R were trading
places pretty regularly, right? So here’s what we have,
important, horrible, scared. We used to be scared of these
mythical creatures called the bond vigilantes,
who would punish you by raising your cost of debt if
you borrowed too much, right? Again, this was when we were
talking about this, terrifying. However, what’s happened
over the last 15 years or so, since 2000 and definitely
since the recession, is that G has been
consistently greater than R. And you can see
that gap right now. So does that mean borrow away? No. And Olivier Blanchard
would also definitely say no, it doesn’t necessarily
mean borrow away. But it does mean that debt
isn’t definitionally bad. It’s not like
dessert, where it’s bad for you no matter what. It might be good. It might be bad. But we have to look at it
rationally and figure out what are the costs of
borrowing too much? But what are the costs
of borrowing too little? So where are we now? It used to be that
baklava was bad. Here’s where we are now. Kobe beef, I don’t
know, it might be good.