An absolutely crucial point for analysing debt: The cause of low real interest rates

As long as real interest rates are low, high debt ratios are not a problem. To determine whether high debt ratios could trigger a debt crisis in the future, we have to understand what causes low real interest rates. There are two possible major explanations: Low real interest rates are due to long-lasting structural causes: high level of private savings, strong demand for risk-free bonds, slow productivity growth. If that is the case, real interest rates will remain low, and debt will not be a problem . Low real interest rates are due to expansionary monetary policies. If that is the case, real interest rates could rise if central banks one day were to react to the return of inflation, and this would trigger a debt crisis. We see the importance of the choice between these two assumptions. In a recent paper 1 , the Bank for International Settlements stated quite clearly: the savings-investment equilibrium and excess demand for risk-free assets do not play a robust role in explaining the low level of real interest rates. This is, by contrast, linked to the monetary policy regime implemented. If we accept this analysis, we will therefore conclude that there is a risk of a debt crisis if monetary policy has to become more restrictive in the future, in particular to react to a risk of inflation that could reappear. 1 C. Borio, P. Disyatat, P. Rungcharoenkitkul (2019), “What Anchors for the Natural Rate of Interest”, BIS Working Paper no.   777, March