Professor Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, is one of the most eminent monetary experts and financial historians. In the interview with PKU Financial Review, Professor Barry Eichengreen states that, “public debt is not entirely useless, but we should be wary of debt crises in low-income countries.”

PKU Financial Review: In your book “In Defense of Public Debt”, you have explained in detail the conundrum of debt sustainability and economic sustainability. Today, in the context of global aging, the expectation of a growing social insurance gap has become the biggest argument against current fiscal expansion. Because government-issued bonds are assets for present generations and liabilities for future generations, the increase in public debt is equivalent to redistribution between generations. While actively using public debt to achieve policy objectives, what do you think we can do to reduce the potential negative effects of public debt expansion and try to maintain a good intergenerational balance? Are there any successful cases globally?

Barry Eichengreen: Actively using public debt means borrowing to meet emergencies. But using public debt prudently — and fairly toward future generations — means reducing that debt burden once the emergency has passed. Jamaica, about which I wrote a paper for the Brookings Panel on Economic Activity earlier this year, is a good example of such prudence.

PKU Financial Review: In your study,“Sustained Debt Reduction: The Jamaica Exception”, you and your collaborators find that Jamaica offers a successful example of how a small open economy can dramatically reduce debt at a time when many countries, large and small, face heavy and growing public debt burdens. We also note that when debt is denominated in a foreign currency, it becomes much more difficult for a country's policymakers to address the debt problem. When the global debt expansion turns into a global debt crisis, how do you think emerging and developing economies can properly cope with the challenge?

Barry Eichengreen: There have been renewed efforts at least since the time of the 1997-8 Asian financial crisis to develop domestic bond markets as a way of enhancing governments' capacity to issue deb in their own currency. A few, generally larger and generally in Asia, economies have done so with success. Other emerging markets and also low income countries need to follow.

PKU Financial Review: Among the various studies on the causes of financial crises, one interesting point is that "good loans" can also be bad, because "good loans" may generate detrimental cumulative effects, and even most credits are not necessary for economic growth. What do you think of this view?

Barry Eichengreen: Even projects with a positive expected internal rate of return can suffer shocks that throw that rate of return off course. So governments need to worry not only about the expected return but also the variance of returns (where variance increases with the severity of shock). The IMF's 2023 revision of its framework for assessing debt sustainability in market access economies takes this issue into account, for example.

PKU Financial Review: You have pointed out that the dominance of the US dollar depends on whether the United States can control its ever-expanding debt. The US Congressional Budget Office recently predicted that the size of the US treasury bond will exceed 50 trillion US dollars in the next decade, accounting for more than 122% of GDP. A report from the Wharton School of the University of Pennsylvania predicts that the US financial market cannot maintain a debt ratio of more than 200% of GDP under any circumstances. Obviously, the continued growth of the US government's debt beyond a critical point will have serious consequences. What do you think that critical point will be? Is it possible for this critical point to occur?

Barry Eichengreen: There comes a point where all countries, not excluding the United States, could conceivably be at risk of a loss of market confidence owing to excess debt accumulation.  But we know from scholarly research over the last 15 years that there is no magic number — no value of the debt-income ratio — where this inevitably occurs. Anyone who gives you a prediction of exactly when this might happen for the US is, as we say in American English, "talking through his hat."