After the financial crisis, investors intensively discussed the large amount of new debt accumulated by governments during the crisis and how this debt could be reduced over time (financial repression was the fashionable expression back then).
Joachim, do you think there is a sweet spot when it comes to financial repression and negative real rates? What I'm considering is whether central bankers (politicians?) would prefer more negative real rates to inflate debt burdens away faster, or less negative real rates to keep inflation in check but reduce the debt burden more slowly. I'm trying to avoid forecasting structurally higher or lower inflation with this thought experiment, since higher inflation would permit higher nominal rates but still resulting in negative real rates.
That’s a very good question. Until a couple of months ago I would have said central banks prefer lower real rates to inflate away the debt. But over the last couple of months the mood has quite decisively swung in favour of fighting inflation. Let’s see how long that mood change persists.
Joachim, do you think there is a sweet spot when it comes to financial repression and negative real rates? What I'm considering is whether central bankers (politicians?) would prefer more negative real rates to inflate debt burdens away faster, or less negative real rates to keep inflation in check but reduce the debt burden more slowly. I'm trying to avoid forecasting structurally higher or lower inflation with this thought experiment, since higher inflation would permit higher nominal rates but still resulting in negative real rates.
That’s a very good question. Until a couple of months ago I would have said central banks prefer lower real rates to inflate away the debt. But over the last couple of months the mood has quite decisively swung in favour of fighting inflation. Let’s see how long that mood change persists.