Money For Nothing

If global markets consider you a creditworthy borrower—the way the United States and United Kingdom are considered—they will lend you money at a negative real rate of interest. The chart is from Martin Wolf, who remarks:

The most important contribution would be a move to a world economy in which the countries with the best investment opportunities—the emerging countries—became very large net capital importers, as the emerging countries of that time (the US, for example) were in the late 19th century. A huge investment boom in the high-income countries would also help a great deal. But I cannot see that happening in current circumstances. The advanced countries, as a group, need to become large net capital exporters. Will that happen? I strongly suspect not.

I suspect not either, so perhaps here’s a different way to think about it. The world economy “wants” to finance a lot of sovereign debt from a handful of creditworthy institutionally sound countries who issue debt in their own currency. That gives different countries choices about what to do. They can temporarily maintain baseline levels of government spending while enacting large temporary tax cuts. They can undertake massive programs of short-term investment in public infrastructure. Or they can simply refuse to acceed to global credit markets’ request that they borrow more money. The countries that make smart decisions about this opportunity will be in much better shape than the countries that make bad ones.