Quick thread on covid19, debt and fiscal policy.
1. Parking the government debt indefinitely is not an option. The old random walk result presumes that govts don't have fisal limits and don't have to worry about default and sustainability. They do.
2. Future generations need some of that fiscal space for themselves to fight other pandemics, and climate risks we have shoved onto them by doing nothing.
3. Inflating the debt away is one option. But this is just a tax of a different form. Some would fall on foreign bond holders. The rest on ourselves. It's just default by another means.
4. Hopefully at some point we will raise the inflation target to something like 4 for other reasons - to make room for more interest rate cuts. [Another story]. This will help a bit but not much. Moderate inflation rates only get you a fraction of a per cent of GDP in revenue
5. Against this, if funding is locked in at today's very low rates, there is a long time to decide what to do and set a relaxed pay back schedule if that is what intergenerational equity suggests.
6. Importantly, for the next few years we are going to be fighting a recession, even supposing the virus is successfully tamed with test/trace, or a vaccine. So we need forcefully stimulating fiscal policy for now. Debt payback comes later.
7. The BoE are, one might say, 'temporarily monetizing' with QE and Ways and Means overdraft. But this is because it's currently consistent with their inflation target. It won't be forever, so don't think of making this forever as a costless option.
8. When it comes, I hope the conversation about the design of burden sharing bears in mind 1) that the young have been helping out the old here and 2) that the covid19 shock was horribly regressive.
