“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
AI Summary.France's National Rally party, historically a champion of big-state spending, has pledged to clean up the country's degraded public finances alongside tax cuts it describes as a fully financed "competitiveness shock." The party also proposed lowering the retirement age from 62 to 60 for those who start working young, estimating €15bn–€20bn in pension savings from correcting "unjust or inefficient" measures.
Leila Abboud, Sarah White and Ian SmithFinancial Times
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Marine Le Pen has proposed a referendum that would cap national debt at 60% of GDP and reduce the public deficit by .5pp annually to reach “close to a balanced budget.” At the same time she has also proposed to reduce the retirement age from 62 to 60.
Is a populist party shifting toward fiscal restraint and tax cuts?
Core argument: Marine Le Pen’s Rassemblement National estimates it could save €15bn–€20bn on pensions spending by correcting what it calls “unjust or inefficient measures” in the current system, helping fund its plans.
Long a champion of big-state spending to protect the working class, Le Pen in recent months has swung behind the idea that France needs a major clean-up of its degraded public finances. Her party, Rassemblement National (RN), also pledged tax cuts on Tuesday in what it said would be a fully financed “competitiveness shock” from 2027. Allianz chief economist Ludovic Subran called the proposals “voodoo economics.” “The RN now presents itself as the party of fiscal rectitude, but the route to its targets is unclear. The savings figures are disputed,” he said. Delivering the announced savings would be impossible unless the RN reversed tack to lower the retirement age.
Takeaways by Macro Roundup® AI
Marine Le Pen’s Rassemblement National estimates it could save €15bn–€20bn on pensions spending by correcting what it calls “unjust or inefficient measures” in the current system, helping fund its plans.
Rassemblement National pledged tax cuts as part of what it said would be a fully financed “competitiveness shock” from 2027, alongside lowering the retirement age from 62 to 60 for those who begin working at a young age.
Le Pen, long a champion of big-state spending to protect the working class, has swung behind the idea that France needs a major clean-up of its degraded public finances.
Related Articles:
France is the Biggest Loser in the Global Rates Reset— French government borrowing costs now exceed the country's nominal income growth by about 2 percentage points, the most unfavorable gap between borrowing costs and growth in the rich world. By contrast, Spanish and Greek bond yields remain about 2 percentage points below their income growth rates.
Le Boomer Spread— The gap between French and German 10-year government bond yields exceeded 140 basis points, up from 40–50 basis points, which the author attributes to political choices favoring pensioners over bondholders, including a suspended pension reform leaving the minimum retirement age near 62. French over-65s hold higher average incomes than working-age people.
Soaring Yields Find Europe’s Weak Spot— A rapid rise in long-term US Treasury yields has highlighted vulnerabilities elsewhere, notably France, where risks are elevated. Because France is in the euro zone, any crisis there would extend to the currency area, and European stocks have sold off alongside a weakening euro.
AI Summary.The gap between French and German 10-year government bond yields exceeded 140 basis points, up from 40–50 basis points, which the author attributes to political choices favoring pensioners over bondholders, including a suspended pension reform leaving the minimum retirement age near 62. French over-65s hold higher average incomes than working-age people.
Hanno LustigThe Two Cents
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France has signaled that pensioners are the senior claimants on government revenues. In 2026, private investors must absorb net bond issuance equal to 7.5% of GDP, after years when ECB purchases exceeded issuance.
Why has France's borrowing cost gap with Germany widened?
Core argument: The French OAT-Bund 10-year spread exceeded 140 basis points in mid-2025, up from 40–50 basis points between 2022 and June 2024, which Lustig attributes to political decisions prioritizing pensioners over bondholders.
France’s 10-year spread over Germany has risen above 140bp, from 40–50bp before mid-2024. France has repeatedly signaled that pensioners are senior claimants on government revenues: pension reforms have been weakened or reversed, while governments trying to restrain pension spending have fallen. The minimum retirement age is now 62 years and 9 months, and French over-65s have higher average incomes than the working-age population. Meanwhile, ECB purchases exceeded French net bond issuance in five years from 2015–22, so private investors were net sellers of French bonds; in 2026 they must absorb net issuance equal to 7.5% of GDP. The 10-year (r-g) gap has swung from −3.9pp in October 2020 to +1.9pp. French insurers and pension funds’ share of negotiable government debt has fallen from about 25% in 2014 to under 11%, while nonresidents’ share has risen to 57.5%.
Takeaways by Macro Roundup® AI
The French OAT-Bund 10-year spread exceeded 140 basis points in mid-2025, up from 40–50 basis points between 2022 and June 2024, which Lustig attributes to political decisions prioritizing pensioners over bondholders.
France’s legal minimum retirement age remains frozen at 62 years and 9 months for men — the lowest in the Eurozone except Bulgaria — after Prime Minister Lecornu suspended the 2023 pension reform, and French over-65s hold higher average incomes than the working-age population.
French insurers and pension funds’ share of France’s negotiable state debt fell from about 25% in 2014 to under 11%, non-residents hold 57.5% of OATs, and private investors are projected to absorb 7.5% of GDP in net issuance in 2026.
Related Articles:
Soaring Yields Find Europe’s Weak Spot— A rapid rise in long-term US Treasury yields has highlighted vulnerabilities elsewhere, notably France, where risks are elevated. Because France is in the euro zone, any crisis there would extend to the currency area, and European stocks have sold off alongside a weakening euro.
France Seeks To Rein In Pensions And State Salaries In 2027— France plans to narrow its budget deficit to 5% of GDP by cutting state spending, capping increases to pensions and civil servant salaries, and raising taxes. Deteriorating public finances have left France borrowing at higher interest rates than Italy and Greece, with 10-year bond yields reaching their highest since 2002.
Global Debt Report 2026— Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.
AI Summary.French government borrowing costs now exceed the country's nominal income growth by about 2 percentage points, the most unfavorable gap between borrowing costs and growth in the rich world. By contrast, Spanish and Greek bond yields remain about 2 percentage points below their income growth rates.
Matthew KleinThe Overshoot
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The change in a country’s interest rate, Klein argues, should be measured against the change in nominal income growth. By that metric, France has moved from “core Europe” into the periphery – while Italy, Spain and especially Greece have moved in the opposite direction.
Do French borrowing costs now exceed its income growth?
Core argument: France’s borrowing costs exceeded its nominal income growth rate by about 2pp as of 2026Q2, and by roughly 3pp at current yields, the most unfavorable such spread in the rich world.
The problem for France is that its bond yields are surging even as its nominal income growth has slowed relative to the 2017-2019 pace, to the point that, almost uniquely among rich countries, borrowing costs there now substantially exceed growth rates. In fact, the spread between French sovereign borrowing costs and French growth rates is now the most unfavorable anywhere in the rich world. The French economy was not quite growing by 2% a year in euro terms as of 2026Q2, which was even worse than the anemic 3% yearly average nominal growth rate recorded in 2017Q1-2019Q4. As of 2026Q2, France’s cost of borrowing was therefore about 2pp higher than its income growth rate. (At current yields, the penalty is more like 3pp.) By contrast, Spanish and Greek bond yields are still about 2pp lower than their income growth rates.
Takeaways by Macro Roundup® AI
France’s borrowing costs exceeded its nominal income growth rate by about 2pp as of 2026Q2, and by roughly 3pp at current yields, the most unfavorable such spread in the rich world.
French nominal growth was running just under 2% a year in euro terms as of 2026Q2, below the 3% yearly average recorded in 2017Q1–2019Q4, even as French bond yields surged.
Spanish and Greek bond yields remain about 2pp below their nominal income growth rates, in contrast to France’s unfavorable gap.
Related Articles:
Soaring Yields Find Europe’s Weak Spot— A rapid rise in long-term US Treasury yields has highlighted vulnerabilities elsewhere, notably France, where risks are elevated. Because France is in the euro zone, any crisis there would extend to the currency area, and European stocks have sold off alongside a weakening euro.
France Seeks To Rein In Pensions And State Salaries In 2027— France plans to narrow its budget deficit to 5% of GDP by cutting state spending, capping increases to pensions and civil servant salaries, and raising taxes. Deteriorating public finances have left France borrowing at higher interest rates than Italy and Greece, with 10-year bond yields reaching their highest since 2002.
Global Debt Report 2026— Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.
AI Summary.The Congressional Budget Office projects that if interest rates rose to 1 percentage point above its baseline, federal debt held by the public would reach 222% of GDP by 2056, 47 percentage points above baseline, with primary deficits averaging 2.3% of GDP and annual growth 0.1 percentage point slower.
CBO StaffCongressional Budget OffIce
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If interest rates rise 1pp above CBO’s current extended baseline (a mean rate of 4% over 2026–2056), CBO projects federal debt held by the public will be 222% of GDP in 2056, versus 175% under the current baseline.
How much would higher interest rates raise projected federal debt?
Core argument: CBO projects that under a scenario in which interest rates rise to 1 percentage point above its extended baseline, debt held by the public would reach 222% of GDP in fiscal year 2056, 47 percentage points above the extended baseline.
Under a scenario in which interest rates increased until they were 1 percentage point higher than in CBO’s extended baseline, primary deficits—that is, deficits excluding net outlays for interest—would average 2.3% of GDP over the 2026–2056 period, 0.2 percentage points larger than in the extended baseline. Debt held by the public would grow to 222 percent of GDP in fiscal year 2056, 47 percentage points larger than in the extended baseline. Average annual GDP growth over the 2026–2056 period would be 0.1 percentage point slower than in CBO’s extended baseline, and the average interest rate on federal debt would be 0.7 percentage points higher.
Takeaways by Macro Roundup® AI
CBO projects that under a scenario in which interest rates rise to 1 percentage point above its extended baseline, debt held by the public would reach 222% of GDP in fiscal year 2056, 47 percentage points above the extended baseline.
Primary deficits, which exclude net outlays for interest, would average 2.3% of GDP over 2026–2056 in CBO’s higher-interest-rate scenario, 0.2 percentage points larger than in its extended baseline.
Under CBO’s higher-interest-rate scenario, average annual GDP growth over 2026–2056 would be 0.1 percentage point slower and the average interest rate on federal debt 0.7 percentage points higher than in its extended baseline.
Related Articles:
The Budget and Economic Outlook: 2026 to 2036— The Congressional Budget Office projects the federal deficit will grow from $1.9tn (5.8% of GDP) to $3.1tn (6.7%) over a decade, above the 3.8% averaged over the past 50 years, with rising net interest costs driving much of the increase. Federal debt held by the public is projected to rise from 101% to 120% of GDP.
How Might Fiscal Policy Respond to the Rise of Artificial Intelligence?— The Congressional Budget Office estimates that a permanent 0.5 percentage point increase in annual productivity growth would lower publicly held federal debt after 30 years by 39% of GDP, offsetting roughly half the projected rise from 101% of GDP to 175%. Higher revenue and slower spending growth outweigh higher interest costs.
Soaring Bond Yields, Gaping Deficits and Towering Debts: What Could Go Wrong?— An analysis of 22 rich countries estimates that if each refinanced its entire debt at current five-year bond yields, Britain would need the largest primary surplus to stabilize its debt-to-GDP ratio, about 1.5%, followed by Italy at 1.4%, France at 1.2% and America at 1%.
AI Summary.Estimated sustainable government net debt limits across 25 OECD countries average 234% of GDP under historical interest-rate and growth assumptions (221% for the US) and 214% under current rates (186% for the US). If interest rates rise systematically with debt, the model yields no solution for the US, UK, France, Italy, Greece, and Japan.
Mark WarshawskyAmerican Enterprise Institute
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Warshawsky calculates the US has a sustainable net debt limit, “the lowest level of debt at which a country can no longer service its sovereign debt and must effectively default,” of 186% of GDP, which he forecasts will be reached in ~15 years under current policy and economic conditions.
How high can government debt rise before it becomes unsustainable?
Core argument: Sustainable net debt limits across the US and 24 other OECD countries average 234% of GDP under historical interest rate–growth differentials and 221% for the US, falling to 214% on average and 186% for the US under current, higher interest rates and growth.
Using historical, current, and dynamic interest rate-to-economic growth differentials, countries’ sustainable debt limits are calculated on a net of central bank holdings of government debt basis. Sustainable net debt limits average 234% of GDP for these countries assuming historical rates and economic growth (221% for the US), 214% assuming (higher) current interest rates and economic growth (186% for the US). If, however, interest rates were to rise systematically with debt according to conservative assumptions, there is no model solution for France, Greece, Japan, Italy, the UK, and the US, given their current high debt levels; the average sustainable limit is 178% for the other countries. A reasonable conclusion to draw for the US is that the fiscal path under current policy and trends with rising interest rates is not sustainable in the short to intermediate term. A major fiscal consolidation package will be needed soon, as interest rates rise, unless significantly higher inflation or capital controls will result.
Takeaways by Macro Roundup® AI
Sustainable net debt limits across the US and 24 other OECD countries average 234% of GDP under historical interest rate–growth differentials and 221% for the US, falling to 214% on average and 186% for the US under current, higher interest rates and growth.
If interest rates rise systematically with debt under conservative assumptions, the model yields no solution for France, Greece, Japan, Italy, the UK, and the US given their current high debt levels, while the average limit for the remaining countries is 178%.
A reasonable conclusion is that the US fiscal path under current policy and trends with rising interest rates is not sustainable in the short to intermediate term, and a major fiscal consolidation package will be needed soon unless significantly higher inflation or capital controls result.
Related Articles:
Soaring Bond Yields, Gaping Deficits and Towering Debts: What Could Go Wrong?— An analysis of 22 rich countries estimates that if each refinanced its entire debt at current five-year bond yields, Britain would need the largest primary surplus to stabilize its debt-to-GDP ratio, about 1.5%, followed by Italy at 1.4%, France at 1.2% and America at 1%.
How Might Fiscal Policy Respond to the Rise of Artificial Intelligence?— The Congressional Budget Office estimates that a permanent 0.5 percentage point increase in annual productivity growth would lower publicly held federal debt after 30 years by 39% of GDP, offsetting roughly half the projected rise from 101% of GDP to 175%. Higher revenue and slower spending growth outweigh higher interest costs.
Can AI Avert the Impending Federal Budget Crisis?— U.S. GDP per capita, about $87,000, is projected to reach $102,000 by 2035 with 1.8% annual productivity growth, or $110,000 with 2.7% growth. Because the healthcare sector has been slow to adopt AI, health spending is projected to rise from 18.3% of GDP to 21% under slower growth and 21.7% under faster growth.
AI Summary.An analysis of 22 rich countries estimates that if each refinanced its entire debt at current five-year bond yields, Britain would need the largest primary surplus to stabilize its debt-to-GDP ratio, about 1.5%, followed by Italy at 1.4%, France at 1.2% and America at 1%.
Economist StaffThe Economist
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Refinancing the entire US debt stock at the current five-year borrowing rate, on current growth forecasts, would require a primary surplus of 1% of GDP to hold the debt ratio stable, a fiscal consolidation of 4.7pp. In October 2025, it would have required 2.3pp.
How much belt tightening would rich countries need to stabilize debt?
Core argument: The Economist calculates that Britain would need the largest primary surplus of 22 rich countries, about 1.5% of GDP, to hold its debt-to-GDP ratio stable if it replaced its entire debt stock at today’s five-year yields.
The Economist calculated what would happen if rich countries had to replace their entire debt stocks at today’s five-year bond yields, using IMF forecasts for nominal growth. Out of 22 countries, Britain would need to run the largest primary surplus, of about 1.5% of GDP, merely to keep its debt-to-GDP ratio stable. Italy and France are next, needing surpluses of 1.4% and 1.2%, respectively. America is not far behind, requiring one of 1%. Japan can run a deficit of 0.8% since its growth is estimated to outpace the interest rate on its debt. America is running a primary deficit of nearly 4% of GDP, meaning significant belt tightening of nearly five percentage points of GDP is needed to stabilise its debt ratio at today’s borrowing costs. The situation is deteriorating fast as a result of persistent deficits and surging yields. Just a year ago America required an adjustment of more than two percentage points less than it does today.
Takeaways by Macro Roundup® AI
The Economist calculates that Britain would need the largest primary surplus of 22 rich countries, about 1.5% of GDP, to hold its debt-to-GDP ratio stable if it replaced its entire debt stock at today’s five-year yields.
America requires a primary surplus of 1% of GDP to stabilise its debt ratio at today’s borrowing costs while running a primary deficit of nearly 4%, implying belt tightening of nearly five percentage points of GDP, by The Economist’s calculation.
Japan can run a primary deficit of 0.8% of GDP and still keep its debt burden stable because its growth is estimated to outpace the interest rate on its debt, while Italy and France need surpluses of 1.4% and 1.2%.
Related Articles:
America’s Risky Debt: What Markets See That Policymakers Don’t— Two market-based measures suggest the safety premium investors pay to hold US Treasuries has compressed toward zero and at times reversed: the spread between top-rated corporate bonds and Treasuries after stripping out default risk, and the gap between currency-hedged foreign G10 government yields and Treasury yields at the same maturity, where longer-maturity comparisons now favor foreign bonds.
The United States Capital Structure— Because Social Security and Medicare benefits are politically untouchable, retirees effectively hold the most senior claim on US government resources while Treasury bondholders hold the riskiest one. On this argument, bondholders absorb adverse fiscal shocks through surprise inflation, financial repression, or both.
How Might Fiscal Policy Respond to the Rise of Artificial Intelligence?— The Congressional Budget Office estimates that a permanent 0.5 percentage point increase in annual productivity growth would lower publicly held federal debt after 30 years by 39% of GDP, offsetting roughly half the projected rise from 101% of GDP to 175%. Higher revenue and slower spending growth outweigh higher interest costs.
AI Summary.Safe public debt is jointly produced: governments supply the promise while the financial system supplies the market-making and rollover capacity that makes it liquid. The authors argue this creates a limit beyond solvency—past a turning point, further issuance reduces both debt's contribution to demand and the equilibrium safe interest rate.
Ricardo CaballeroMassachusetts Institute of Technology
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Even with a solvent fiscal authority that credibly promises to repay, safety and liquidity require market-making, warehousing, and rollover support. A sufficiently large increase in Treasury supply can be contractionary if these constraints bind.
Is there a limit to safe government debt issuance beyond solvency?
Core argument: Safe public debt is jointly produced: the fiscal authority supplies the promise, while the financial system supplies the market-making, warehousing, and rollover capacity that makes the promise liquid and safe.
Safe public debt is jointly produced. The fiscal authority supplies the promise, but the financial system supplies the market-making, warehousing, and rollover capacity that makes the promise liquid and safe. Solvency therefore leaves open a second limit to issuance: the cost of mobilizing that capacity. The safe-debt Laffer curve follows from this cost. At low debt, the wealth created by an additional claim exceeds the fiscal cost of supporting it. As rollover pressure builds, the premium rises and so does the cost of refinancing the stock. The turning point is reached when this stock-wide marginal cost exhausts the finite-horizon wealth effect. Beyond it, further issuance lowers both debt’s contribution to aggregate demand and the equilibrium safe rate, even though the claims remain safe. Maturity changes the form of the exposure. Short debt puts more of the stock through rollover; long debt reduces that flow but magnifies the price response of the claims left outstanding.
Takeaways by Macro Roundup® AI
Safe public debt is jointly produced: the fiscal authority supplies the promise, while the financial system supplies the market-making, warehousing, and rollover capacity that makes the promise liquid and safe.
The safe-debt Laffer curve turns when the stock-wide marginal cost of refinancing, driven by a premium that rises as rollover pressure builds, exhausts the finite-horizon wealth effect of an additional safe claim.
Beyond the turning point, further issuance lowers both debt's contribution to aggregate demand and the equilibrium safe rate even though the claims remain safe, with short debt pushing more of the stock through rollover and long debt magnifying the price response of the claims left outstanding.
Related Articles:
America’s Risky Debt: What Markets See That Policymakers Don’t— Two market-based measures suggest the safety premium investors pay to hold US Treasuries has compressed toward zero and at times reversed: the spread between top-rated corporate bonds and Treasuries after stripping out default risk, and the gap between currency-hedged foreign G10 government yields and Treasury yields at the same maturity, where longer-maturity comparisons now favor foreign bonds.
The Coming Great Repression?— Across countries and over time, higher public debt burdens are associated with lower relative returns on government bonds, the opposite of standard risk-premium predictions. The authors estimate financial repression—making banks captive bond buyers and loading them with low-return reserves—contributed 90.7 percentage points of GDP to Britain's postwar debt reduction, versus 20.3 from surprise inflation.
The United States Capital Structure— Because Social Security and Medicare benefits are politically untouchable, retirees effectively hold the most senior claim on US government resources while Treasury bondholders hold the riskiest one. On this argument, bondholders absorb adverse fiscal shocks through surprise inflation, financial repression, or both.
AI Summary.A US Treasury intervention in the bond market pushed the 30-year yield down eight basis points before it returned to roughly its prior level, while the dollar fell below its 200-day moving average and gold posted its best day in six months. The author argues only an unequivocal move to reduce the deficit will bring yields down.
John AuthersBloomberg
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Reacting to Bessent’s effort to bring down the long end of the yield curve, Authors warns that in the absence of fiscal consolidation, “yields aren’t coming down.”
Can Treasury intervention lower long-term yields without deficit reduction?
Core argument: The 30-year Treasury yield, at its highest since the eve of the 2007 crisis, fell eight basis points after Bessent's intervention before returning essentially to its prior level, leaving the upward trend intact.
The 30-year yield — at its highest since the eve of the crisis in 2007 — dropped eight basis points [in response to Bessent’s intervention, later returning essentially to its previous level.] But the upward trend remains intact. Investors heeded Bessent’s warning flare, but told him he would need to do much more to ease conditions substantially. The maneuver did have a dramatic impact on the dollar, which had its worst day in months and dropped below its 200-day moving average. Gold was the clearest tell that investors are concerned by Bessent’s move. Wednesday’s intervention drove the metal’s best day in six months, bringing it back up to the 200-day moving average. More maneuvers like this will likely weaken the dollar further and increase the pressure on a central bank whose independence is currently in question. It remains hard to see what gets bond yields down other than an unequivocal move to reduce the deficit. The more it hurts politically, the more seriously it will be taken. Without any pain, it appears, yields aren’t coming down.
Takeaways by Macro Roundup® AI
The 30-year Treasury yield, at its highest since the eve of the 2007 crisis, fell eight basis points after Bessent's intervention before returning essentially to its prior level, leaving the upward trend intact.
The dollar had its worst day in months and dropped below its 200-day moving average following Bessent's maneuver, while gold posted its best day in six months, returning to its own 200-day moving average.
Further maneuvers of this kind will likely weaken the dollar and increase pressure on a central bank whose independence is in question, and it remains hard to see what lowers bond yields other than an unequivocal move to reduce the deficit.
Related Articles:
The Coming Great Repression?— Across countries and over time, higher public debt burdens are associated with lower relative returns on government bonds, the opposite of standard risk-premium predictions. The authors estimate financial repression—making banks captive bond buyers and loading them with low-return reserves—contributed 90.7 percentage points of GDP to Britain's postwar debt reduction, versus 20.3 from surprise inflation.
The United States Capital Structure— Because Social Security and Medicare benefits are politically untouchable, retirees effectively hold the most senior claim on US government resources while Treasury bondholders hold the riskiest one. On this argument, bondholders absorb adverse fiscal shocks through surprise inflation, financial repression, or both.
Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements— Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.
