Optimal Debt and Sustainable Debt: a New Dilemma à la Triffin

The purpose of this text is to show that the distinction between optimality and sustainability leads to the identification of a new paradox for the management of public debts, which is called the pseudo-paradox of Triffin. It is based on three observations. First, the status of safe assets or international store of value allows low real financing costs for the public debts of developed countries, even with inflation now high. Then, the international increase in demand for safe assets over the past twenty years has led to an increase in public debt to benefit from low interest rates in the face of new spending. Finally, the return of macroeconomic shocks can suddenly cause the status of safe assets to be lost. The paradox is based on the increase in optimal short-term debt and the decrease in sustainable long-term debt. We present this paradox and develop the implications for the European framework.