How are States going to deal with the accumulation of public debt generated by the Covid crisis? For many, the answer is clear: central banks will take on their balance sheets a growing share of the debts, and everything will be settled. In reality, things are more complex. Money is part of the solution but will not be enough. Sooner or later, the wealthiest will have to be called upon.
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Picketty makes a couple of mistakes. First, in his first para he claims the Covid debt will have to be paid back. As he puts it, “Sooner or later, the wealthiest will have to be called upon.”
The reality is that if the private sector is happy to continue holding state liabilities (i.e. debt or base money) at a zero or near zero rate of interest, then there is no need for those paper assets to be clawed back from the private sector. Japan has a debt/GDP ratio double that of most other Western countries without any problems.
Second in his last para he says, “It was by resorting to exceptional levies on the better-off that the large public debts of the post-war period were extinguished and that the social and productive pact of the following decades was rebuilt.”
In fact in the UK the large public debt in 1945 (about 250% of GDP) was reduced to about 50% in the 1990s almost entirely via real economic growth and inflation eating away at the real value of the debt.