Which brings us to a paradox. Although it’s widely thought that the world has too much debt, in one sense our problems are the result of too little of it. As MIT’s Ricardo Cabellero has said, the global economy has in recent years suffered from a shortage of safe assets. This year, for example, the world will generate over $17 trillion of new savings, but issues of top-quality government bonds such as those of Germany, the UK and (yes) US will amount to less than $2 trillion. The very fact that prices of northern European government bonds are sky-high is a sign that such assets are scarce. With safe assets offering so little return, there’s a danger of excessive buying of speculative assets.
There is, technically, a simple solution here – for northern Europe to issue more bonds. One reason for it to do so is that the conversion of peripheral government debt into Eurobonds guaranteed by the whole of the euro zone should be part of a solution to the euro’s crisis. Another reason is that the euro area needs a fiscal expansion in the north not just for ordinary counter-recessionary reasons, but also to raise inflation in the north relative to the south, thus helping relieve the latter’s lack of competitiveness.
Such an increased supply of bonds would also help satisfy the world’s demand for safe assets and – insofar as the extra supply helps to raise yields – it would satisfy investors’ demand for yield without them having to take more risk which could destabilize the financial system.
Many of our economic problems (such as low productivity growth) are intractable. But some aren’t.
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