The big misunderstanding here is that, though structural changes are certainly persistent and less responsive to policy, they are not permanent. Conditions are always changing. Productivity transforms economies, and so do shifting age structures and demographics. Foreigners are already losing their appetite for U.S. debt; much of it is now bought by the Fed or by banks required to hold it for regulatory reasons. Thus prices may not be as revealing as we think.
And we can’t be sure that debt monetization won’t unleash inflation or higher interest rates. The Fed buys bonds from the banks and credits them with reserves. Eventually banks may want to spend their reserves, and the Fed will need to sell some bonds—which could increase interest rates, or increase inflation, or both. The world could also discover a new safe asset, like German stocks. For many years, gold was considered the only safe asset, and it was unimaginable that a fiat currency could be safe.
Structural changes happen more often and much faster than people realize. We could come out of the pandemic in a new regime of less trade and more reliance on tech that could change debt and price dynamics in ways that we don’t yet understand.
Author(s): Allison Schrager
Publication Date: 12 February 2021
Publication Site: City Journal