The affair began with an economists’ joke, and it was Jean Pisani-Ferry who made it on X (formerly Twitter). “A quote from Keynes that I love is ‘When the facts change, I change my mind. What are you doing, sir?” As this short article from the Peterson Institute illustrates, Olivier Blanchard is definitely a Keynesian economist., writes Jean Pisani-Ferry. Indeed.
Olivier Blanchard, 74, has always been a Keynesian, when almost no one was anymore. The former chief economist of the International Monetary Fund (2008-2015) was one of those who criticized, after the great financial bankruptcy of 2008 and during the sovereign debt crisis, too timid budgetary support for Western economies, due to the obsession with balancing the budget. He is also one of those who warned of the return of inflation in the wake of the Covid-19 pandemic, notably during the adoption of Joe Biden’s support plan deemed excessive and untimely in March 2021. An impeccable pedigree for a moderate and highly influential economist across the Atlantic.
And there you have it, in a text published on the Peterson Institute website, a pro-globalization think tank in Washington, Olivier Blanchard makes a masterful about-face on debt and public deficits. The cause is the surge in American long-term interest rates, which exceeded 5% in October, the highest level since 2007, and are now at more than 4.5%.
A new austerity cure
“If markets are right about real long rates, public debt ratios will rise for some time. We need to make sure they don’t explode.”writes Olivier Blanchard. “I certainly did not foresee the surge in long-term rates”entrusted to World the economist, who takes up Pisani-Ferry’s joke. “Personally, I think the markets are wrong, but it is too dangerous to make this type of assumption. If I am finance minister, I must present a coherent budgetary plan so as not to terrorize the markets. »
The affair is already very bad in the United States. For the fiscal year ending September 30, 2023, interest expenses on US debt jumped by $184 billion (€172 billion) to reach $659 billion, or 2.4% of GDP. The average US debt rate is currently 2.97%. And the addition is likely to increase with the rise in rates. To avoid mortgaging the future too harshly, the American Treasury decided to borrow less than expected at ten and thirty years, favoring durations of two to five years and hoping that the cost of money would fall again. .
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