Opinion | There’s No Real Ceiling for Federal Debt? I’m Not So Sure.

Most mainstream economists and participants in the financial markets argue that the Fed is and should remain independent of the Treasury — for example, in setting interest rates. They worried during “quantitative easing,” when the Fed was buying trillions of dollars in Treasuries on the open market to suppress long-term interest rates, because the central bank was effectively financing the federal government’s deficit spending. They worried that the government wasn’t subject to the discipline of investors, who demand higher interest rates when the government borrows heavily.

M.M.T.-ers point out that the Federal Reserve has the power to set interest rates wherever it wants, even all the way down to zero. True, but that could cause inflation by encouraging a lot of borrowing (because when the Fed lowers interest rates, the rates on car loans, mortgages and other forms of borrowing tend to fall as well). Kelton told me that there are new ideas for how to break the linkage, so zero rates on Treasuries wouldn’t cause excessively low rates on, say, mortgages. In any case, she argued, there’s little if any evidence that low rates set by the Fed cause inflation, pointing to the long period when the federal funds rate was near zero but inflation stayed stubbornly below the Fed’s 2 percent target. If anything, she wrote in an email, the causality is reversed: “Looks to me like rate hikes chase inflation up” and then rate cuts chase it back down.

While modern monetary theory says that a rising ratio of debt to gross domestic product doesn’t have to raise interest rates, in practice that’s what has usually happened. James Poterba, the Massachusetts Institute of Technology economist I quoted last week, wrote in a follow-up email: “One study of the 1976-2017 period by Ed Gamber and John Seliski of the Congressional Budget Office found that on average, when the debt-to-G.D.P. ratio rose by 10 percentage points, real interest rates on long-term Treasuries rose by about 20 basis points.” That’s 0.2 percentage points. “A number of other studies of the U.S. experience in the post-World War II period have produced broadly similar results,” he added.

Blanchard, the former chief economist of the International Monetary Fund, is fairly dovish on inflation and deficits. For example, he argues that central banks should set their inflation targets at 3 percent, not the current 2 percent. He told me he started working on the question of debt sustainability about five years ago to confront “fiscal hawks on both sides of the ocean” who contend that “debt is a catastrophe, and we have to reduce it and if we don’t the world comes to an end.” The book that resulted from his research, “Fiscal Policy Under Low Interest Rates,” was published on Jan. 10.

Blanchard pointed out in the book that if the interest rate the government pays on its debt is lower than the economy’s growth rate, the existing stock of debt will feel lighter over time because it will shrink as a share of gross domestic product even if the government isn’t running surpluses. In fact, he argued, the government can and should run deficits in that situation, as long as they aren’t too big. (Blanchard credits the notion to the economists Paul Samuelson, Edmund Phelps and Peter Diamond, among others. Scott Fullwiler, an M.M.T.-er at the University of Missouri-Kansas City, has been making the same point since 2006.)

But Blanchard didn’t give a carte blanche to deficit spending. The risk, he wrote, is that the felicitous coincidence of a low interest rate and a high growth rate could abruptly end. If the interest rate for some reason goes higher than the growth rate, and the government continues to run budget deficits, debt as a share of G.D.P. will “explode,” he wrote.

The fear of such an explosion can be a self-fulfilling prophecy. If investors start to fear that debt will become unsustainable, they will demand higher yields on the debt they own and will cause the very problem they fear, Blanchard wrote. It’s impossible to know when that reversal will occur, so it’s best to be cautious, he wrote.