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The financial markets are no longer very concerned about the rise in public debt ratios and the issue of countries’ fiscal solvency. Why is that, when the problem is obviously still present? How are countries going to restore their solvency?
– By a return of growth, where there is a sufficient autonomous growth momentum (which is the case in the United States);
– In the other cases, probably through fiscal dominance: central banks will be forced to constantly keep long-term interest rates low and therefore to transfer a growing quantity of the countries’ public debt to their balance sheets in return for monetary creation. A rise in long-term interest rates would very quickly lead to a loss of fiscal solvency.
If the second solution must be used, two risks appear:
– High volatility of asset prices due to the transfers of growing quantities of liquidity from one asset class to another;
– Lack of confidence in money if the money supply grows too fast, leading to purchases of securities in foreign currencies by the residents of the country in question and, as a result of capital outflows, a steep depreciation of the exchange rate (which has started in Japan).
