In another thread I wrote:
To relate these two posts:
- If economic outlook brightens (all else equal), then G goes up and debt to GDP decreases.
- If stock and bond (asset) valuations decline, then R goes up and debt to GDP increases.
Note that G is a real rate and R is a nominal rate.
The question I’ve been wondering, is there a mechanism that can act so the formula above, and debt to gdp ratio, just doesn’t matter?
Suppose this scenario for the US.
- G is about at its max, 2-3%.
- Most of the production in G flows to the upper classes.
- Because most of G goes to upper classes, several things happen: The other classes have little extra to spend, so inflation stays low, the upper classes have way more money than they spend, so they have a lot of savings, which goes into demand for assets and keeps asset valuations high (and interest rates low-ish).
- Most of the flows from R (interest on bonds) and D (deficit spending) flow to the upper classes (D flows via G), which just gets recycled into assets (because most is saved, not spent).
It feels like this is the world we have been in at least since 2008-2009.
Can it just continue?
It feels like it could.
That doesn’t mean something couldn’t come along and break it.
What is that thing or things that breaks it?
Maybe if interest on debt becomes too large relative to the total government budget. This would act to reduce G, as more of government spending would just go to interest payments, R, which maybe would force austerity.
I have no idea, and there could be a contradiction or three in what is written above.