At the limit, this may even lead to a dislocation of inflation expectations, as financial markets start to expect that part of the national debt will be simply “inflated away” – that is, it will be eroded via higher inflation 18 – with a resulting increase in interest rates. By definition, preventing a dangerous build-up of national debt requires keeping budget deficits under control.
When this is especially difficult because of the sheer magnitude of the recession, governments should – at the very minimum – provide financial markets with a clear “re-entry plan”, carefully specifying both the timeframe within which the deficit will be brought under control, and the specific measures the particular government intends to take.