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Let’s unpack this a bit. It’s very hard to come up with any reason why either the United States or Britain might default, since they can simply print money if they need cash. And given the absence of real default risk, long-term interest rates should be more or less equal to an average of expected future short-term rates (not exactly, because of maturity risk, but that’s a fairly minor detail). So if people expect the American and British economies to be depressed for a long time, with the central banks keeping rates low, long rates will be low too — end of story. But won’t that money printing cause inflation? Not as long as the economy remains depressed. Budget deficits could lead people to expect higher inflation down the road, once the slump finally ends — but that would be a good thing for the economy in the short run, discouraging people from sitting on cash and weakening the exchange rate, thereby making exports more competitive.

The point, then, is that the whole “credibility” argument is incoherent. Twenties Tales The 1920s — when several of the victorious Allies emerged from World War I with large debts in their own currencies — offer in some ways the nearest parallel to the debt concerns dominating recent debate. And it occurred to me that it would be useful to do a side-by-side comparison of Britain and France.

The two countries dealt with their debts very differently. Britain was a model of orthodoxy, returning to the gold standard and running huge primary surpluses to pay its debts; France, which had a weaker political system, ended up inflating away much of its debt and accepting a big devaluation of the franc. So how did the two economies fare? We shouldn’t start the clock in 1918, because France was in part a battlefield, and could be expected to have some bounce as the war damage was fixed. So see real gross domestic product from 1913 on, from the Maddison Database, on the first chart on this page. And debt, from the International Monetary Fund’s debt database, on the second chart. So virtue was not rewarded, and French political weakness actually led to a better economic performance.