High public debt does not matter. That has been the mantra from both academics, policymakers, and investors and for a long period they have been right. It was the foundation of modern monetary theory. It has been a research question that has driven many researchers a little crazy.
The premise for debt matters is simple. If the supply of debt increases too quickly, the price of debt will fall, and rates will rise. Of course, the demand side must be addressed to determine the equilibrium rate. This is where there are complexities.
Yet, the conclusion for many is that at some level of debt relative to GDP, there will be a problem with financing which leads to higher rates or at the extreme the inability to pay. While government debt can be paid with taxes, there is a limit on what can be raised. Debt can be monetized, yet this will lead to higher inflation.
Where is the point of no return? There is no clear answer. All we know is that fiscal deficits are not sustainable. See "Living with High Public Debt"; however, a quick look at the current debt levels suggest that there will be a reckoning. The US has the special feature of being funded only in dollars, yet a debt crisis will impact the price of the dollar.
Looking at current US government financing suggest that the degrees of fiscal freedom are falling if there is a recession. Rates will fall as money flows to bonds, but the supply will continue to grow. Without monetary help, the rates markets will not behave the same as the last recession.
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