Koo refutes the over-leverage argument by implying that government borrowing simply replaces private sector borrowing, so the economy as a whole is no more levered – the borrowing is simply shifting.
Today’s worry about deficits is palpable, and I must admit that I too am worried. Debt is bad. And the numbers are mind-blowing. Regardless of the reality, the current rate of borrowing just feels dangerous. Is it? As Edward Chancellor recently stated, debt crises are highly unpredictable.
Looking back to the Great Depression and Japan’s Lost Decade – two debt-deflationary liquidity traps – we saw government borrowing skyrocket in both cases. Yet yields fell and neither resulted in a debt crisis. (Perhaps Japan’s crisis is yet to come.)
Read Richard Koo’s Full Presentation
