Brad DeLong and
Tyler Cowen point to an interesting exchange in the Financial Times.
Martin Wolf argues that in the U.S., U.K., and Germany, the household, business, and foreign sectors want to spend much less than they earn, pushing interest rates to exceptionally low levels, and signaling that the public sector in these countries needs to borrow more and spend more to pick up the slack.
Stephen King maintains instead that Treasury yields are low for the same reason that gold prices are high– naked fear: “Investors are trying to find pockets of safety in a world where the financial system appears to be slowly crumbling.” King notes that in September 2005, the interest rate on 10-year government bonds from countries like Greece and Italy was only 3.3%, but denies that the willingness of creditors to lend at those low historical rates should have been interpreted by the governments at the time as encouragement for even bigger deficits.
Fear seems to be one of those things that can quickly change focus.
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If bond yields were low because we are in a “deflationary” period (as Paul Krugman argues), then real interest rates would be high; just as they were in Japan and in the 30’s.
The fact that real interest rates are negative means Krugman is wrong: markets do not fear deflation. Yields are therefore low 1) because the Fed has bought a lot of bonds; and/or 2) because Treasury bonds are seen as a safe haven. The latter statement bears some examination. Safe haven against what? If it were against deflation, then real rates, again, would be positive. Obviously, they are not a safe haven against inflation. Losses on risk assets? If investors fear those, why not just buy up T-bills: why take duration risk?
Its not clear what the answer is.
Treasury yield have been falling for 30 years. Likely cause? First look to the obvious, Congress cannot find anywhere to invest that yields anything useful.
Its a mistake to assume the bad monetary policy in the 30’s that created high real interest rates means that deflation must equal high real rates.
Its also a mistake to place too much power in the magic of 0%. The difference in 0.1% and (0.1)% is very small.
1.The FED hasn’t bought any bonds at all. Figuratively. Not that they haven’t bought bonds, but the amount is so small and irrevelant, it means they haven’t bought a thing to effect the market, remember QE is about the OPPOSITE of its intentions.
2.Fear is there, but that has been there for the last 4 years.
Bondholders don’t see any monetary inflation on the horizen and with the inventory correction starting earlier this year, it reduced expectations even more. So it is a good deal for bondholders. If the FED announces a NGDP targetting program, maybe that will change some minds. QE flopped in that area. At least the monetary libertarians(Milton Friedmans gang) could smoke a cigar lol. My main worry is that debtholders get sick of the governments inactivity on infrastructural/debt restructuring programs and decide to “liquidate” the US.
If you want a better way to raise interest rates. Have the government announce a multi-trillion dollar infrastructure program: upgrade power grids, fix bridges/roads, build “some” high speed rail, overhaul the NYC transit system, Build a better transit system from the O’hare airport in Chicago, Sewers…..man I could go on and on.
Government commits to that, expectations would change. The US is so deficited in infrastructure, we could have a mini-economic boom during the passive while the banking problems are resolved, debt restructured and ZIRP ended.
Gold just happens to be one of the few things that is guaranteed against total loss. It may lose value, but it will always have value, unlike something like a bank stock that could drop to Zero tomorrow.
Treasuries are low because it allows the government to loan money to banks at the lowest rate possible. With deflated low home prices, banks don’t have enough to cover their loans, so government is making sure they can borrow at the lowest rate possible.
Also, nations like China make adopy policies to promote a strong dollar, which helps to keep bonds low as well.
How is the Greece experience relevant to interest rates in the US, UK and Germany? Martin Wolf has the better argument.
Jason11,
When I said real rates would be “high” under deflation, I meant moderately positive (Japan) to very positive (30’s); versus what we have now, which is moderately negative.
Again, the point is we are not in a “deflationary” environment, at least as far as the bond market is concerned.
Mainly low long term risk-free rates reflect a belief that the overnight rate (set by the central bank) will remain low. That’s not the complete answer, since bondholders also care about correlations with other assets, etc. But the expected path of the central bank rate is key.
Bottom line, the bond market is pricing in a Japan scenario.
David Pearson:
Long term bond rates reflect future inflation expectations. Actual/measured inflation is backwards looking, so comparing the two isn’t using the same basis. When the economy goes through turns you’ll see odd results, as we are now. Bond yields are low because investors are expecting trouble ahead, either temporary recession or outright deflation.
This is much like stocks where present price reflects present expectations of future earnings.
“Long term bond rates reflect future inflation expectations.”
Not mine. I don’t see how the Federal Government gets out of this mess without a ferocious bout of inflation. I think Helicopter Ben has been trying to provoke it, but has failed so far. That does not mean he won’t succeed when he, and we, least expect it.
The future looks very grim.
With the Fed & other central banks directly buying [monetizing] a huge portion of new US debt, one should be slow to assert that “the market” is telling you anything at all.
And when a price isn’t a market price but a govt manipulated price, it is guaranteed to mislead.
A Guy, long-term interest rates in the early 70s were worthless as predictors of inflation of the later 70s. Bond holders lost their shirts.
The flattening yield curve at low nominal and low or negative real yields is characteristic of the deflationary Long Wave (LW) Trough, which lasts 2-3 business cycles (Kitchin) and one Juglar (business investment) cycle, which in turn converge in a downward trajectory with real GDP per capita, the Kuznets (infrastructure and real estate) cycle and the larger Long Wave price cycle.
The flattening yield curve will squeeze banks’ margins with charge-offs and delinquencies at 10% of loans, discouraging further bank lending and forcing banks to continue to raise cash.
Thus, we now will experience the weakest Kitchin cycles of the past 60-70 years within the simultaneously downwardly converging Juglar, Kuznets, Long Wave price, and real GDP per capita cycles, the phase of the Long Wave that aligns with the historical periods of the 1780s-90s, 1830s-40s, 1890s, 1930s-40s, and Japan from the ’90s to date.
The reflationary effects of ~30 years of falling nominal interest rates during the LW Downwave are over. The avg. duration of LW Downwaves throughout history has been 32 years, ranging from 28 to 40 years. The increased lifespans and duration of plateau of births of the peak Baby Boomers have extended the current LW Downwave by as much as 10-15 years beyond the historical avg. of 54-60 years.
The debt-deflationary slow-motion depression of the LW Trough will likely last into the end of the decade.
Economists are trained to dismiss such structurally deterministic long-term waves and cycles; but they ignore them at the peril of us all.
A Guy,
Long term real bond yields are negative. In fact, I don’t know if they have ever before been negative this far out the curve (10 yr TIPS). Markets are clearly not expecting FUTURE deflation.
Clear that the US Government (This is what the FED is) is merely montetising its debt. Good piece in the FT from Bill Gross last week, a twist is now no good for Banks, they need a yield curve 3-8yrs duration to recapitalise, that is basically a flat line now. Therefore the whole purpose of low rates, to capitalise banks has been negated by the US Government’s need to monetise debt. As for negative real rates, would love to know how Krugman at al can see any upside to these. I literally can not make a coherent case for low yields across the curve, no idea…..Can someone please enlighten me?
David P,
It would much more convincing to show where Krugman says that the US is in deflation before imposing a deflationary position on him. Krugman has a fairly complete, mostly internally consistent story, and to my recollection it doesn’t involve claiming that the US is actually in deflation now. He is concerned that the US could suffer deflation, not that we are in deflation now. Krugman is a poor choice of strawman.
Matt,
If your explanation were the obvious one, then it would be wildly shared. It is not widely shared, so must not be all that obvious. The conventional – and obvious – explanation for falling nominal rates is that inflation has come down over the past 3 decades.
kharris,
Nothing personal against Krugman! Its just he recently wrote:
“Last time those low real rates had a lot to do with inflation, but this time they’re taking place in a deflationary or at least disinflationary environment.”
Deflationary is wrong, and he at least alludes to that by throwing in “disinflationary”. What does that word mean? One would assume, “an environment in which inflation is expected to fall.” Medium term inflation expectations show no evidence of “disinflation” fears.
I think this is economists’ natural inclination to conflate Japan, the ’30’s, and today. Unfortunately, the analogy doesn’t work in terms of price level expectations.
inflation low, economy weak, the QEs. These explain some. But not this low and not in spite of govt deficits seen.
I suggest you look up the chart your buddy Menzies supplied a while back showing the collapse of non guaranteed securitization. And it not coming back. It supplied about HALF of fixed income supply in 2007. this drying up of supply and the banks dont want to do old fashioned lending either with all the leverage 100% repo to do, has created an artificial fixed income shortage including treasury rates
Missing are the equities markets charts and the swings from equities to bonds.
Missing are the households savings.
In percentage term the savings in the euro area are down and declining since Q1 2010 (P23)
http://www.ecb.int/pub/pdf/stapobo/spb201108en.pdf
On a trend profile, the OECD savings rates do not show a very large upside and anticipations are negative.
OECD savings rates
http://stats.oecd.org/Index.aspx?QueryId=29820
Missing,may as well be the states support to equities,triggering a new fond attraction for alternative assets.
Supply of capital has and continues to grow faster than the demand. Sources of excess capital would be, imho, demographic imbalance, artificially large trade deficits (evil currency peg or good communism fighting through exporting manufacturing jobs, your choice,) government deficits. The market based solution is for the excess capital to be destroyed.
Negative real interest rates does not mean interest rates are low and in fact they are probably not low enough. They need to be even more negative to accord with current circumstances.
The rally in US Treasuries the past 11 years can be fully explained by the fall in real rates http://yfrog.com/hs8p2g .
Low nominal rates do not reflect a fall in inflation expectations. In fact, those expectations are probably slightly higher now at 1.92% 10 years rates than they were at over 6% 10 year rates in year 2000.
“The market based solution is for the excess capital to be destroyed.”
That’s called debt/asset/debt-money deflation, and debt-money capital will be destroyed as the Long Wave debt-deflationary slow-motion depression worsens hereafter from additional bank failures, sovereign debt defaults, and the drag effects from Baby Boomer demographics, Peak Oil, falling net energy, population/ecological overshoot, and eventually escalating resource wars.
The 10-year Treasury yield below 2% implies that there will be no growth hereafter for private real per capita GDP for a decade, and the 10-yr. avg. trend rate will continue to contract.
We in the West have become Japanese, but we don’t know it (or are supposed to deny the fact or not allowed to know it). One of several differences, however, is that, while Japanese household savings is higher than in the US, US savings is disproportionately held in the form of highly overvalued corporate equities and obscenely concentrated to the top 1-10% of US households (40-85% of financial wealth and 20-50% of income).
Were the current secular bear market for stocks to repeat the pattern of those of the past, combined losses to US equity and unreal estate values (not counting junk bonds and other assets) will far exceed today’s US GDP by the time the secular bear market and slow-motion depression resolves later this decade.
While the top 0.1-1% of US households will experience large absolute losses to the equity share of their net wealth, the losses as a share of annual income and total net wealth to income will be relatively modest compared to the losses suffered by the next 9% of US households (overwhelmingly Baby Boomers), who will experience large, and perhaps debilitating, losses to income and wealth to income, dramatically increasing their risk aversion and liquidity preference in the years ahead (and likely for the rest of their lives).
Again, were the historical self-similar bear market pattern to repeat, the US stock market is now aligning in time with previous years 12-13 of secular bear markets during debt-deflationary regimes in Japan in ’00-’01 and the US in 1938-39, 1893-94, and 1838-39.
Consequently, the worst 5-, 10, and 20-year avg. returns will occur for stocks over the next 2 to 8-9 years, yet Wall St., economists, the financial services industry, nor financial media pundits will tell you this for fear you will panic and act prudently in your self-interest.
It’s the Fear.
TIPS are bid-only today on the retail sites (Vanguard, Fidelity) out to 15 year maturities. No one wants to sell TIPS to you at current prices? Prices are too low (real yields too high) for sellers to be interested. Is it because they fear inflation? Possibly. But remember TIPS have that neat deflation-protection in which you at least get your principal back, too. So it may be that bond investors fear both inflation AND deflation, in the sense that we recognize one or the other is highly likely, but because the choice is political no one knows what we’ll get with any certainty. So you hedge against both risks. Ditto for Treasuries AND Gold.
BTW, if we were to let TIPS price out in a balanced market, the yields would be lower and the implied inflation expectations higher. Guess that wouldn’t suit the Fed’s play to bail out their banker owners again, though… so maybe the bid-only market is a policy choice to suppress perceptions of inflation expectations?
It’s tough to guess who everyone else will choose to win this beauty contest, when all the contestants look so ugly! Unfortunately no one with any investments can avoid playing this horrid game!
Fullcarry,
Exactly! How is this a “disinflationary” environment?
David Pearson,
You have things exactly backwards. The fact that real interest rates are negative means the markets are discounting deflation, no inflation.
To the best of my knowledge, no one (other than Jim) has yet offered an explanation of why GDP growth rates fell this year.
Certainly, neither King nor Barro (in the NYT) finger oil prices. For King, it’s GDP growth in 2010 which appears anomalous, with investors “now licking their wounds having moved prematurely into equities without understanding the nature of the crisis”, which is that “the totality of claims within the financial system on economies that have badly underperformed relative to previous – over-optimistic – expectations.”
So is unexpectedly weak growth in 2011 a function of this realization? It would certainly explain the collapse of equity values, but not necessarily the weak economic growth observed prior to that. I am ultimately unable to squarely determine why King thinks growth in H1 2011 was so anemic.
By contrast, Barro offers a more business-friendly environment–in the form of reduced corporate taxes and a new VAT–as a means to stimulate the economy. But is the problem of the economy that corporate taxes and private consumption are too high? Is this the reason the economy is struggling so? If so, why are Germany, France and Japan also showing such lackluster growth rates? I just don’t find this line of reasoning intuitively compelling, even if I agree with Barro’s general conclusion that austerity is unavoidable and likely necessary.
Or perhaps slow growth is the result of fading government intervention. If government spending increases, then so does GDP. And spending can increase year after year, thereby increasing GDP for those years, as well as increasing the deficit as a percent of GDP at the same time. But at some point, the deficit can be increased no longer. So don’t we face a situation now where a deficit of 9% is not providing any stimulus compared to earlier periods, because government spending can no longer be increased? What does this do to GDP growth? Is this King’s unsustainable 2010 performance?
But if so, then why the poor performance in Japan and Germany in H1? That’s still unexplained.
Of course, oil does explain it.
It is a common misperception that the US went into recession when oil reached $147 in 2008. This is untrue. The recession started in December 2007, when oil was $92 for WTI and $86 for RAC, representing 4.5% of GDP on a RAC (US refiners’ average acquisition cost of oil) basis. For this past spring (March to July 2011), RAC was always above $100, peaking at $112 in April and ranging 4.8 to 5.1% of GDP, a good bit above the December 2007 recession threshold of 4.5% of GDP. Indeed, even last month, RAC was $96 or 4.5% of GDP, the same as seen in Dec. 2007.
What if we use gasoline rather than crude oil prices to assess the situation? The average price of unleaded gasoline for December 2007 was $3.02 / gallon (using EIA STEO data), with gasoline expenditure representing 6.7% of GDP (projected over the entire volume of crude oil consumption). Gasoline expenditure for March-July 2011 period (same basis as above) was 7.1-7.3% of GDP, and 7.2% in August, versus 6.7% for Dec. 2007.
If oil matters for the economy, then the statistics firmly implicate it in recent weak GDP growth. King and Barro might have thought the topic worthy of mention.
David,
I would not characterize the current environment as dis-inflationary. Since the recession ended, inflation has been generally trending higher.
RN,
Assuming unchanged nominal rates, the lower the level of real rates, the higher the break even inflation expectation in the market.
King is right to say that low yields do not mean that government should borrow. But he is wrong to assert that they are caused by fear. His own examples show that they can be low for other reasons – real rates were low in 2005 owing to excess desired global savings (business demand having never fully recovered from the dot-com crash), just as they are now.
Today, just as in 2005, official currency interventions are an important source of excess global savings. And they have got to be stopped. Looking at the behavior of the U.S. current account deficit, one would be right to question whether expansionary fiscal policy would not be just about entirely bled away in a bigger international deficit. We have excess desired savings now, yet we allow $600 billion of AD to leak away in trade deficit. That’s a pretty big de-stimulus. Nor is the answer to engage in competitive devaluation with other countries that maintain floating rates – they are not big enough to hold up Chimerica. We are about to see the results of such misguided attempts (Ben’s QE) as the euro dissolves.
King should read Krugman’s excellent analysis of why gold prices have risen. When I saw the name and the summary of his “analysis” I thought it was the more well-known author.
I find it hard to believe that nobody has stated the obvious problem in King’s analysis, namely that he is comparing countries that issue their own non-convertible currency (US, UK, Japan and one might argue functionally Germany as well, since they control the policy of the Eurozone) with countries that don’t (Italy, Greece.) Countries that issue their own currency can’t be forced into default by the market, period, full stop as the say in the UK. They may risk running or initiating high inflation, but they will not default. Countries that do not issue their own currencies can and do default all the time, at least historically. Effectively, peripheral countries in the Euro are the same as emerging market countries were in Latin America in the 80’s and Southeast Asia in the 90’s, hostage to the policies of the real issuers of their currency and hence of markets. You can make this argument using MMT or you can make it more conventionally like De Grauwe does in his recent paper. Either way, King’s argument is fallacious.
And while the Wolf argument is a different issue entirely, I tend to agree with him. If a government can borrow for free, that tells me that the economy overall wants more cash, probably in our case with which to de-lever private debt and it would be wise to accommodate it, through either more spending on productive public goods or by providing a tax cut to as many people as possible. Remember, it is basic national accounting, the public deficit is equal to the private surplus and vice versa (ignoring exports for the moment, which given the US need for oil will almost certainly be negative as far as the intermediate eye can see.) That is actually just accounting, it isn’t really even economics. When the market is ready for the US to stop borrowing, they will let it know. The real question is whether or not they will listen, clearly the government is not listening now, so why will it then. This is intended as a rhetorical question.
David Pearson is putting a lot of faith in the short term (unrevised) gdp deflator accuracy.
The negative real return could be revised away any day.
Anonymous,
I’m not relying on the deflator. TIPS real rates are negative out to ten years.
Full Carry,
I meant to imply that others make that claim, not you.
The printing press is the reason rates are low, but not just the US press. Foreign banks print too, and their satellite banks then re-lend it where they think it is safe. This makes low US rates both a function of world printing, plus the flight to safety.
It would be better for banks to print a bit less. That way citizens and countries could buy stuff without so much debt. Printing is a tax levied by central banks, which is then loaned out. That’s why the debt to GDP ratio has kept rising for decades. Unfortunately, beyond 90% or so, debt is counter productive. Simple historical fact.
Nominal GDP growth (the actual risk free rate of return).
the flight to safety argument for gold is laughable: there is no guarantee of principal repayment, or yield, unless someone else buys it at a higher price. It’s not “safe” and there have been ample 6-month periods where one has lost 30%+. The “safety” of gold is a faith based argument – faith in the 10 year trend.
The probability one will lose money on gold is quite high! IF we were on the gold standard, sure it would be different. But we are not on the gold standard, nor will be ever be again. Not even the GOP prez candidates endorse that, except Ron Paul.
the difference between now and 2005 is that investors believed ECB would support growth. The idea that Europe would divide into north and south – with north growing and the south not – was not fathomable. Keep in mind there are two macro equilibria: one with high NGDP growth, where the debt is sustainable, one with low or negative growth where debt is not. greece is now firmly in the second. They keep missing their fiscal targets because, duh, when you cut government spending, the multiplier works both ways! so the beatings will continue until the patient is dead.
Here’s what low government bond yields signify. First the low fed funds rate. Second, the Fed’s commitment to keeping the funds rate near zero for the next two years, this of course driving the 2-year note yield to 20 basis points because the expected average funds rate over the next 2 years must equilibrate with the 2-year yield. That leaves the yield spread between the 10-year and 2-year to be explained. In April, the spread of 281 basis points was perfectly normal given then Fed policy and inflation. Since then this spread has narrowed to 207 basis points, call it a 3/4ths of a point drop that needs explanation. About half of this additional decline to today’s historic low bond yields is due to the collapse in the economic outlook since late-spring, another 25% flight to the US because of Greece, the euro crisis, and fears for the US banking system, and the remaining 25% due to other factors the most notable of which being the reining in of government spending via the debt ceiling agreement.
Now of course you can go back and look at the next explanatory level down for each of these factors. For example, what explains the main factor – historic low fed funds rate? The answer is complex and multipart, but primarily it is because (a) the Fed is trying to bail out the economy from the down-phase of the long credit cycle and in the process re-liquefy the big banks some of which are insolvent, and (b) the ineptness and failure of the current administration in the White House in addressing the primary impediments to growth (including its anti-business bias) which are keeping this economy from prospering as it otherwise could.
(sans goverment spending)
Steve Kopits,
Lowering corporate taxes is appealing, butI don’t think corporate taxes are much of an issue, and having them low incetivises using corporate spending as vehicle for personal consumption. This could exacerbate the income inequality.
I see income inequality as a major issue, and I think having a low capital gains tax is partially driving this problem. A dollar paid to a shareholder provides more benefit than than a dollar paid to an employee.
Perhaps eliminating corporate taxes and taxing captital gains as income would reduce income inequality.
@Randy “That is actually just accounting, it isn’t really even economics.”
No, that’s actually fundamental economics, and too many economists ignore the import-export aspect when trying to figure out why their policies don’t work as expected! (e.g. It does no good to “stimulate” when the funds printed are immediately exported to import more-expensive oil!)
You don’t hear physicists saying that Einstein’s “E=mc^2” is “just accounting”, although in fact that’s an accounting identity too.
IMHO Economists would do well to focus more on the things they genuinely know (accounting identities and their ramifications) and less on pseudo-religious beliefs for which there is minimal hard evidence…
JDH:
“the remaining 25% due to other factors the most notable of which being the reining in of government spending via the debt ceiling agreement.”
The Federal govt will spend more in 2012 than in 2011.
I have great difficulty conceiving of an intelligent human beings lending money for 10 years at distinctly negative interest rates to a fundamentally dishonest institution which can pay you back with money they can print.
Are current interest rates really that low, or are we just comparing them to the 1960 to 2000 era that may have been the unusual era?
If you look at the composite yield on all long treasuries published by the Treasury they were lower than current yields from 1930 to 1955.
So what did low rates from 1930 to 1955 signify?
Aaron –
The biggest contributor to income inequality is unemployment. No one is more unequal than someone with zero income.
The issue is jobs, not egalitarianism.
I had an interesting experience here in Denver today. The taxi from the airport was using propane as fuel. First time I’ve seen this in the US. Of course, I asked the driver. Propane costs $2.50 / gal, versus $3.50 for regular gasoline, about the same mileage. Propane is locally produced (a by-product of natural gas production).
Figure the guy uses a tank of fuel a day. That’s $20 in savings, more or less. Equal to an hour of labor or so.
The taxi company had a 1,000 gallon tank for the propane. But it was being used so quickly, that they had to recently install a 10,000 gallon tank. That’s economics at work. Substitution, plain and simple.
Interest rates are low because most potential borrowers have little ability or useful purpose to demand borrowed funds, while most suppliers of such funds have ample supply.
We are in the process of reversing our excessive use of debt that has built up during the last two decades. This process will take a decade to work through.
The recent market conditions also reflect a hightened preference by investors for short-term safety, driving Treasury yields down.
You can theorize on a grand scale all you want. But the yields are market driven, and the market responds to simpler motives and more immediate conditions than your models suggest.
@ Wisdom Seeker. Point taken, though my point is that this does not require an esoteric, or other, kind of model to justify. I suspect on this we are basically in violent agreement. A little Okam’s razor would go along way in today’s economics world. Re: your comment on stimulus, it is inaccurate to say it does no good, because not all of the stimulus will be spent on oil or other import goods on the margin, just some of it. So we can say, in fairness, that for a country with a net deficit in trade stimulus will be less effective, not ineffective. As long as we want to be precise and all.
to various on real rates and iflation premium
negative real rates come from the overall rate suppressed by new factors QE and no securitization. and the usual stuff
negative real is in one respect the opposite of deflation fears, as the other half of rates, the expected inflation component, is remaining resistant to the overall rates decline and positive.
@ Wisdom Seeker. Point taken, though my point is that this does not require an esoteric, or other, kind of model to justify. I suspect on this we are basically in violent agreement. A little Okam’s razor would go along way in today’s economics world. Re: your comment on stimulus, it is inaccurate to say it does no good, because not all of the stimulus will be spent on oil or other import goods on the margin, just some of it. So we can say, in fairness, that for a country with a net deficit in trade stimulus will be less effective, not ineffective. As long as we want to be precise and all.
David Goldman has pointed out the normally gold and interest rates are contrary indicators but recently they have been moving in the same direction. He believes that the volitality of the market has created a situation where gold is a put on inflation while bonds are a call. Both are demanded because of the huge uncertainty in the market. He makes the point that the recent pull back in the POG is because conditions in Europe have favored deflation over inflation.
“Countries that issue their own currency can’t be forced into default by the market, period, full stop as the(y) say in the UK. They may risk running or initiating high inflation, but they will not default.”
If inflation is effective in eliminating the debt, have they not “defaulted?” Are the consequences of an inflation “solution” less nasty than those of default accomplished in the more conventional way? In fact, even if markets just get a whiff of the notion that the inflation solution will be attempted, won’t the results be rather painful?