Pursued Economy: Directed by independent commissions, borrowing for infrastructure spending is the new economic model.

• Author: Koo, Richard C.

The most fundamental macroeconomic challenge for all pursued economies, those advanced countries where the return on capital is lower than that available in emerging economies, is that households are still saving for an uncertain future, much as they always have, but businesses are unable to absorb those savings because they cannot find enough domestic investment opportunities, even at very low interest rates. While most authors pay attention only to the debt numbers, it is the savings numbers in these countries that are most disturbing.

Figure 1 [Figure 4.1 in the book] shows that the net borrowings by the U.S. non-financial corporate sector have been zero on average since 1990 in spite of very low interest rates. This marks a huge change from the 1970s and 1980s, dubbed "golden era" here, when businesses were eagerly borrowing and investing on average 3.14 percent of GDP. Similar developments have been observed in other advanced countries. In Japan, for example, the sector borrowed on average 5.96 percent of GDP in the 1980s, but actually saved on average 1.85 percent of GDP since the 1990s.

This shrinkage in net corporate borrowings is an existential challenge for all pursued economies because if the household sector is saving but the corporate sector is not borrowing, someone else outside the private sector, i.e., the government, must borrow and spend that money to keep the economy from sliding into deflation. And Japan's decades-long deflation had a lot to do with its businesses not borrowing money.

This a monumental challenge for governments because the public debt has already reached very high levels in most advanced countries, and the "pursued era" can go on for decades in today's globalized economy. This challenge is similar to the problem that economies in balance sheet recessions confront. In a balance sheet recession, it is the millions of underwater balance sheets following the bursting of a debt-financed asset bubble that lead to the disappearance of private-sector borrowers, whereas in pursued economies, it is the lack of attractive domestic investment opportunities that produces the same outcome. In both cases, the problem could last for years.

FUNDAMENTAL SOLUTION TO FUNDAMENTAL PROBLEM

The key to addressing this seemingly impossible challenge for pursued economies can be found in the ultra-low government bond yields that all these economies were experiencing, at least until the post-Covid supply constraint-driven inflation...