Writing this week in Barron’s, Harvard economist Martin Feldstein nails the proverbial issue of excessive debt square on when he notes that European Central Bank chief Mario Draghi has run out of runway when it comes to policy prescriptions. He writes:
“One of the goals of large-scale bond purchases—so-called quantitative easing— was to drive down long-term interest rates in order to stimulate business investment and housing construction. But with long-term interest rates now close to zero, bond purchases would not be able to lower them any further.”
But Professor Feldstein then concludes that when the inevitable economic slowdown comes in Europe, “an appropriate response to this dilemma may be a policy of coordinated fiscal expansion.” The fact that the world from Beijing to Brussels is literally choking on debt – thus Draghi’s infatuation with zero or even negative interest rates – does not dissuade Feldstein and other economists from recommending ever more debt-funded fiscal expansion.