In short, we spend way too much time worrying that high deficits + a high BoC balance sheet is unsustainable.

The real risk is that it is, in fact, sustainable and we’re entering a period of Japanese-style economic stagnation.

That’s not a prediction, rather it’s a possible future, where:

Low commodity prices
+ high household debt
+ lagging productivity
+ aging workforce
+ barriers to Labour Force participation
= growth so slow that not even highly accommodative fiscal and monetary policy can save it.

That’s the outcome we should be worried about. A future of a return to normalcy, where interest rates go up and government budgets are squeezed may be a best case, rather than a worst case, scenario.

In short: Our post-pandemic focus must be on growth.

Japan shows us that there is, in fact, a sustainable equilibrium of high government debt, low interest rates, and a continually climbing central bank balance sheet. And it’s not a happy one.