Featured Publication

“r < g”

by John Cochrane

A situation in which the rate of return on government bonds r is less than the economy’s growth rate g suggests that borrowing has no fiscal cost. I argue instead that r < g is irrelevant for the current US fiscal problems. r < g cannot begin to finance current and projected deficits. r < g does not resolve exponentially growing debt. r < g can finance small deficits, but large deficits still need to be repaid by subsequent surpluses. The appearance of explosive present values comes by using perfect-certainty discount formulas with returns drawn from an uncertain world. Present values can be well behaved despite r < g. The r < g opportunity is like the classic strategy of writing put options, which fails in the most painful state of the world.

Click here to learn more.