The acceptability of money

W hen the fiscal deficit became very high in the past , the problem was the acceptability of public debt: would savers and investors be willing to hold more government bonds? When the acceptability of public debt was low, long-term interest rates would rise sharply so that the debt could be held and private spending would be crowded out. But today, huge fiscal deficits are being monetised: the problem is no longer the acceptability of debt, but the acceptability of money: are savers and investors willing to hold much more money? In the short term, the answer is visibly yes. But what will happen later if the acceptability of money wanes? It will have to be restored by making it less attractive to hold other assets (bonds, equities, real estate), leading to very low long-term interest rates and sharp rises in share prices and real estate prices. So it is important to understand the major difference between restoring the acceptability of debt (via a rise in long-term interest rates) and restoring the acceptability of money (via rises in the prices of all assets other than money, namely financial and real estate assets, and in particular via a fall in long-term interest rates). Understanding the change in the sign of the effect of the fiscal deficit on long-term interest rates is crucial.