Debt Dynamics and Monetary Policy

Comment la politique monétaire peut jouer sur la distribution de crédit aux ménages, et derrière jouer sur les inégalités? Les politiques monétaires expansionnistes jouent normalement sur la quantité de crédit et les taux d'intérêt payés par les ménages. Dans ce papier co-écrit avec Salima Ouerk (National Bank of Belgium), nous montrons que l'impact de la politique monétaire sur le volume de crédit des ménages en France est NUL pour les classes populaires et les classes moyennes. Seuls les ménages les plus aisés en profitent, et surtout pour de l'investissement locatif. Cela témoigne de l'importance de la distribution de crédit dans la dynamique des richesses, et doit nous inviter à agir sur la régulation du crédit et de l'immobilier. Je vais avoir le plaisir de présenter ce papier demain au laboratoire Centre for Economics at Paris-Saclay à l'Université d'Evry (Université Paris-Saclay). Title: The unequal distribution of credit: Is there any role for monetary policy? Abstract: Is current monetary policy making the distribution of credit more unequal? Using french household-level data, we document credit volumes along the income distribution. Our analysis centers on assessing the impact of surprises in monetary policy on credit volumes at different income levels. Expansionary monetary policy surprises lead to a surge in mortgage credit exclusively for households within the top 20% income bracket. Monetary policy then does not impact mortgage credit volume for 80% of households, whereas its effect on consumer credit exists and remains consistent across the income distribution. This result is notably associated with the engagement of this particular income group in rental investments. Controlling for bank decision factors and city dynamics, we attribute these results to individual demand factors. Mechanisms related to intertemporal substitution and affordability drive the impact of monetary policy surprises. They manifest through the policy's influence on collaterals and a larger down payment. The link to the seminar web page: https://lnkd.in/ej_kqTyt

Where the fiscal stops, the monetary begins: Today's budget was a clear shift of focus from capex to consumption. While the last few years had seen a major shift and increase to capex spending, for FY26, capex remains almost constant at 11.1 TN INR. It is perhaps high time that the so called private crowding in effect of high govt capex actually take place which has been missing for last few years. It is the consumption push which this budget focusses on by rationalisation of tax slabs across all income slabs. But consumption always has lower multiplier effect on growth than investment spending. Hence the core issue of anemic growth remains unsolved considering today's budget still continues to be fiscally conservative. So if the problem statement is that there is a growth issue with Indian economy then the solution now entire lies in monetary levers since fiscal lever has not been used in today's budget. Assuming potential output at 7% for Indian economy even at 6.5% for FY26 (which looks aggressive), output loss is significant. And most of the output loss is on account of high real rates & misplaced notions of FX stability & inflation growth dynamics. Indian equities saw a 78k Crs outflow from FPIs in Jan'25. For FY25, it is -89k Crs. FPI shareholdings in equities have fallen from long term average of 18-19% levels to 16%. FPIs are exiting not only because they are getting comfortable exit levels because of domestic fund flows but also because India's current growth nos do not justify the high valuations. Only if the FPIs see a growth opportunity then only they might return to equities. That will also solve the deprecation issue of INR. So contrary to theoretical concept that lower rates might lead to further depreciation, the reverse could be true. And this is evident in recent monetary policy actions of Indonesia, China, ECB. Each country is trying to preserve it's growth in an environment of global instability due to tariffs/wars/dxy strength. Moving on to monetary side, local policy rates have been kept elevated to protect INR volatility as well as high food inflation. But this has led to a significant growth sacrifice. Perhaps it is time to let INR function as per market forces and use the monetary lever to stimulate growth. Else both INR & growth will suffer. Hence the need for monetary action to cut rates by 75bps in FY26 in an environment of sufficient core liquidity. FY27 has a huge repayment wall of 7TN INR in IGBs. As the banker for GoI, refinancing such a huge maturity at elevated rates will only spoil the interest serviceability of the sovereign. For that reason too, local rates need to come down significantly in FY26. Summary: While there might be short term pain points for bond yields due to higher switch, slightly higher gross borrowing etc today, in medium term local rates in India can fall significantly in FY26. Expecting 50 bps CRR cut & the 1st 25 bps repo rate cut in Feb policy. Total 75-100 bps cut in FY26. O

The Fed rarely speaks about the fiscal side of monetary policy, but in today’s high public debt environment, understanding the fiscal-monetary policy nexus is highly relevant. This post examines how rising interest expenses and the loss of Fed remittances directly link rate decisions to the federal budget. With record debt levels and a growing reliance on short-term bills, the fiscal sector may now be the most interest rate–sensitive part of the US economy, making even small policy moves at the short end influence deficits, bondholder transfers, and potentially the broader outlook. #FederalReserve #interestrates #monetarypolicy #fiscalpolicy #USeconomy #CentralBanking #economicpolicies

Should a central bank cut interest rates mainly to make government borrowing cheaper? I keep seeing this idea resurface whenever public debt rises and interest bills become politically painful: why not ask the central bank to lower rates to ease fiscal pressure? It sounds practical. But it’s also one of the quickest ways to create bigger problems later. Yes—lower rates can reduce the government’s financing costs in the short run. But if markets start to believe monetary policy is being steered by budget needs rather than inflation and employment conditions, the trade-off becomes brutal: credibility weakens, inflation expectations rise, and long-term borrowing costs can end up higher—not lower. This is the thin line between a central bank that stabilizes the economy and a central bank that starts implicitly stabilizing the budget. Once that line is crossed, it’s hard to restore confidence—and expensive to regain stability. The deeper lesson for policymakers is simple: fiscal problems require fiscal solutions. If debt dynamics are worsening, the durable response is a credible medium-term fiscal strategy—better spending quality, stronger revenue systems, and reforms that lift growth—rather than pressuring monetary policy to do a job it cannot sustainably do. Because in the end: cheap financing is temporary. credibility is the real asset. #MonetaryPolicy #CentralBankIndependence #FiscalPolicy #DebtSustainability #Inflation #MacroEconomics #EconomicStability #PublicFinance

The U.S. is quietly entering uncharted fiscal territory. Interest payments on federal debt are projected to reach 5% of GDP—the highest of any major economy and a level not seen in modern U.S. history. As shown in the second chart, this burden has accelerated dramatically in just the past few years. Unlike Japan or Europe, the U.S. isn’t running this cost alongside significant domestic savings or primary surpluses. Instead, we are layering higher debt service on top of persistent deficits, entitlement growth, and aging infrastructure—all while defense and geopolitical spending are increasing. What’s the likely policy response? History offers a clear pattern: • Loose monetary policy (to reduce real borrowing costs), and • Avoidance of fiscal tightening (to delay hard political choices). But this comes with a cost: a weaker dollar and diminished purchasing power over time. We’ve seen this movie before—1970s stagflation, post-war currency corrections, and the 2000s twin deficit concerns. The bottom line: If interest expense continues climbing past 5% of GDP without structural reform, it could force a reckoning—not just for markets, but for the credibility of U.S. fiscal stewardship.

📉 𝗪𝗵𝘆 𝗥𝗶𝘀𝗶𝗻𝗴 𝗚𝗼𝘃𝗲𝗿𝗻𝗺𝗲𝗻𝘁 𝗗𝗲𝗯𝘁 𝗛𝗮𝘀 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀 𝗪𝗮𝘁𝗰𝗵𝗶𝗻𝗴 𝗟𝗼𝗻𝗴-𝗧𝗲𝗿𝗺 𝗥𝗮𝘁𝗲𝘀 The U.S. federal debt has recently surpassed $35 trillion, marking a significant milestone that has far-reaching implications for investors. As of July, this debt equates to over $100,000 per citizen, reflecting an increasing federal debt-to-GDP ratio now at 122%. Key Points to Consider: 1. 𝗗𝗲𝗯𝘁 𝗚𝗿𝗼𝘄𝘁𝗵 𝘃𝘀. 𝗚𝗗𝗣 𝗚𝗿𝗼𝘄𝘁𝗵: The federal debt is growing at around 7.7% annually, while nominal GDP grows at 5.4%. This disparity suggests that the debt-to-GDP ratio will continue to rise, potentially exceeding 150% by 2030. 2. 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗣𝗮𝘆𝗺𝗲𝗻𝘁𝘀 𝗦𝘂𝗿𝗴𝗲: Quarterly interest payments on federal debt have now surpassed $1 trillion, up from 1.22% of GDP in 2015 to 2.41% at the end of 2023. This figure is projected to reach 3.6% by 2033, comparable to current defense spending. 3. 𝗜𝗺𝗽𝗮𝗰𝘁 𝗼𝗻 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗥𝗮𝘁𝗲𝘀: With increased debt issuance and stagnant revenue, interest rates are expected to rise over the long term. The Federal Reserve's quantitative tightening and increased debt supply will likely exert upward pressure on rates. 4. 𝗗𝗲𝗰𝗹𝗶𝗻𝗶𝗻𝗴 𝗙𝗼𝗿𝗲𝗶𝗴𝗻 𝗗𝗲𝗺𝗮𝗻𝗱: Foreign investment in U.S. Treasuries has decreased from 58% in 2008 to 33% as of mid-2024, influenced by global yield differentials and deglobalization. 5. 𝗙𝘂𝘁𝘂𝗿𝗲 𝗣𝗿𝗼𝗷𝗲𝗰𝘁𝗶𝗼𝗻𝘀: The CBO estimates the federal debt could reach $52 trillion by 2033. While immediate rate reductions may be on the horizon, investors should be prepared for longer-term pressures on rates due to rising debt levels. As we navigate through current monetary policies and economic conditions, understanding these long-term debt dynamics is crucial. It’s a reminder that while short-term factors may influence rates now, underlying debt trends will play a significant role in shaping the future landscape.

This macro variable will tell us when the music is about to stop. High interest rates are supposed to break something because an overly indebted economy will have to service a mountain of debt at expensive rates and it will have less money for income and spending. The problem is that people are looking at the ''wrong'' debt. Private sector debt levels and trends are far more important than governmment debt. Contrary to the government, the private sector doesn't have the luxury to print money: if you get indebted to your eyeballs and you lose your ability to generate income, the pain is real. As Dario Perkins' left chart shows, the biggest financial crisis happened as a result of high and growing private sector debt.  The Japanese or Spanish house bubble bursting, the Asian Tigers, or China today are clear examples. So, where does the US stand on this important macro metric? The chart on the right shows how US private sector debt as a % of GDP sits well below the ~200% dangerous line, and it has rapidly declined since 2008. In the US, government fiscal stimulus are supporting income and consumption while households and corporates are reducing leverage from their balance sheet. The AI debt-driven capex cycle will reverse this dynamics, as corporates lever up to spend big and position themselves in the AI race. It's only when private sector debt increases rapidly that one should begin to really worry about a bubble burst. What do you think? 👉 If you enjoyed this post, follow me (Alfonso Peccatiello) to make sure you don't miss my daily dose of macro analysis.

Central banks have embarked on the most aggressive and synchronised rate hiking cycles in decades. At the same time, fiscal deficits and debts in advanced economies continue to climb upward. This has led many observers to note the potential tensions between monetary and fiscal policies: the combination of tight monetary policy and large deficits are damaging for fiscal sustainability, while loose fiscal policy can fuel inflationary pressures, complicating monetary policy. To better understand fiscal-monetary tensions, some IMF economists recently introduced the concept of a “fiscal R-star.” Here they explain why it matters.

Several of my followers have inquired about the administration's persistent efforts to urge Federal Reserve Chair Jerome Powell to implement substantial reductions in the Federal Funds Rate—potentially as much as 300 basis points in the near term. The primary rationale appears to stem from the structure of the U.S. government's debt portfolio, where a significant portion is comprised of short-term instruments. This creates ongoing refinancing needs, and lower interest rates would enable the Treasury to roll over this debt at reduced costs. To illustrate, the table below outlines the maturity profile of privately-held marketable U.S. Treasury securities as of March 2025 (the most recent detailed breakdown available; figures may have shifted modestly since then). As shown, approximately 35%—or over one-third—of this debt matures within the next 12 months, necessitating frequent refinancing. By advocating for aggressive rate cuts, the administration aims to facilitate the issuance of new short-term debt at lower yields, thereby mitigating immediate fiscal pressures. However, I view this strategy as inherently risky. Reliance on short-term financing exposes the government to potential liquidity challenges, similar to those experienced by financial institutions during the Global Financial Crisis of 2008. Should investor confidence wane—due to economic uncertainty, policy shifts, or market volatility—a refinancing crisis could materialize rapidly, with severe implications for financial stability. #Finance #Economy #Investing