When interest rates are near zero, government debt doesn¡¯t matter. That was the theory at least, in the previous decade, not just from economists on the fringe but also from a few in the mainstream. If rates stayed low, the argument went, the U.S. didn¡¯t need to worry about debt.
And it didn¡¯t. Debt increased and economists who cautioned against it (ahem) were dismissed as cranks, with many of our critics pointing to the history of one nation: Japan, which managed to keep interest rates low even as its debt grew to more than 200% of its gross domestic product.
Reality, however, has a way of catching up with theory eventually, and now it has for Japan, whose long-term bond yields are rising as the yen is depreciating. The Japanese experience, it turns out, is not an excuse to run up lots of debt. It is a cautionary tale.
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