Over at Worthwhile Canadian Initiative, Nick Rowe writes:
In a weird world, where r<g, government bonds aren’t really a government “liability” in the normal sense of the word. Having a positive debt/GDP ratio, and keeping it constant over time as the economy grows, is instead a source of revenue for the government. It’s like the government owning an asset, not owing a liability.
But if you think about the currency in your pocket, there’s nothing weird about it at all. It’s all very familiar. If r<g, financing government deficits by selling bonds is just like financing government deficits by printing currency. Because currency pays the owner 0% nominal interest (and minus 2% real interest if the central bank targets 2% inflation), which is less than the growth rate of the economy. So r<g for currency.
This is one way to think about secular stagnation, which is closely related, though not exactly the same thing is a r < g. The issue here is that an aging and risk adverse population wants to save more than investors are ready to invest. I think that this entire phenomenon is related to deep uncertainty about the future. In an odd sort of way, the prospects for lots of future technological growth create an investment shortfall today. The short-short is that, who wants to invest in a major project when two years from now, some app designer in of Silicon Valley has will find a way to trash your whole business model? The future is a headwind against the present.
However, there is an upside – economics always has two hands – and that is that it provides the opportunity for a credible player like the U.S. government to finance the transition essentially for free. This is an opportunity we should take advantage of at every margin. That means cutting corporate taxes, expanding the Child Tax Credit, and investing in new infrastructure and issuing long-dated bonds to pay for it all. The longer dated, the better.