Rather than offered a mangled summary of what Blanchard wrote, I just want to sketch out some of my complaints about the mainstream approach. To be clear, I am saying that these points are debatable; whether or not the mainstream is wrong about them is a bigger question, well beyond the scope of my comments here.
- How are interest rates set for a floating currency sovereign? It is safe to say that nominal interest rates are largely driven by expectations for the path of the nominal policy rate. The question then becomes: how constrained is that policy rate? For example, could the policy rate be locked at "close" to 0%, which makes it look like "deficits are money financed." How plausible is the belief that the private sector will force deflation in the price level, in order to achieve a positive real rate? Would locking the interest rate at 0% cause inflation (or even hyperinflation)?
- Why ignore the private sector, other than vague notions of liquidity preferences (or whatever)? We are in a rather unique demographic position, with the baby boomers in a position of needing a high stock of assets to fund retirement plans. Private sector preferences are a major input into fiscal balance outcomes.
- Why do we care? Do we believe that bond holders can force a default? Why not make such an outcome impossible (which would only require trivial changes to operating procedures, and have no measurable effect on the macroeconomy)?
- Debt levels just do not happen, they are the result of policy choices. Why would the welfare effect of interest payments be anything other than a small residual of the welfare effect of the policy change?
(c) Brian Romanchuk 2019