Public Debt in a Regime of Zero Interest Rates – Saving and Investment in Front of Demographic Change

Public debt has two faces, here called the «face of Janus». On one side, it stands in competition with private debt: less public debt reduces the interest rate and creates space for private capital formation and investment («crowding out», where the «Ricardian equivalence» also holds). On the other side, public debt is, in the same amount, private wealth, which must be added to the real wealth of the economy (plus land). In this way, individuals can provide for their old age beyond the capacity of the producing sectors to build up real capital. These two faces are then identified with two different regimes: the «neoclassical regime», where (real) interest rates are equal or higher than the (natural) growth rate of the economy; and the «Keynesian regime», where interest rates are lower than the growth rate. While in the dynamic version of the neoclassical regime the (natural) growth rate is determined by the (exogenously given) growth rates of the labour force and technical progress, the dynamic version of the Keynesian Regime is determined by the investment rate given by the «animal spirits» and the capital-output ratio or capital productivity, allowing for inflation and secular stagnation. Therefore, a literature review is undertaken to discuss general and specific reasons for low (or even negative) real interest rates, stressing excess savings and a shift in the investment schedule, resulting in what C. C. von Weizsäcker and H. Krämer call «the great divergence» in their book Saving and Investment in the Twenty-First Century: The Great Divergence. The paper comes to the conclusion that, given the low (real) interest rates, public debt fulfils an important task in bringing the (natural) rate of interest out of the negative zone and thus bringing the economic system out of the dangers of permanent under-utilization of resources (or unemployment).