Can Bond Vigilantes Prevent the Next Debt Crisis?

Large, growing budget deficits and rising public debt-to-GDP ratios in advanced economies are rattling markets. With interest rates on government debt having gone from near zero (and even negative, in some cases) to much higher levels, rising short- and long-term bond yields have cast doubt on the sustainability of some public debts and led many to ask if a crisis might be looming.

There is no simple answer to this question. In some cases, a country will have large stocks of financial assets—such as foreign reserves held by the central bank, or assets held by sovereign wealth funds or other public funds—that leave net debt below gross debt. But in many aging societies, implicit liabilities of unfunded pension funds and health-care systems are already larger than a country’s formal public debt, which means that the situation is worse than it appears.

A second crucial consideration is economic growth. If the average yield on public debt is lower than the nominal GDP growth rate, and if the primary budget (net of interest payments) is not too negative, the public debt-to-GDP ratio will fall over time. Growth can therefore resolve most debt problems. The United States and other economies that can boost their potential growth with advances in AI and related technologies will have a more sustainable path than those, like the eurozone, where growth is likely to remain slower.

Read the full Project Syndicate article.
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Nouriel Roubini is a Professor Emeritus of Economics and International Business and the Robert Stansky Research Faculty Fellow.