True, as Furman and Summers point out, the CBO has been consistently wrong about the future path of interest rates, overshooting repeatedly since 1990. True, any forecasts beyond a 10-year time horizon are subject to great uncertainty.

Even so, my Hoover Institution colleague John Cochrane has history on his side when he expresses concern. As he argued in National Review last week, the situation is very different today from the situation in 1945, the last time the U.S. had a debt mountain this big. “By 1945, the war and its spending were over. For the next 20 years, the U.S. government posted steady small primary surpluses, not additional huge deficits. Until the 1970s, the country experienced unprecedented supply-side growth in a far less regulated economy with small and solvent social programs. … [Today] we are starting a spending binge with the same debt relative to GDP with which we ended WWII.”

In any case, as noted above, around three-quarters of this year’s deficits have been financed by Fed money creation in the form of excess bank reserves. “When the economy recovers,” Cochrane argues, “people may want to invest in better opportunities than trillions of dollars of bank deposits. The Fed will have to sell its holdings of Treasury securities to mop up the money. We will see if the once-insatiable desire for super low-rate Treasury securities is really still there. If not, the Fed will have to raise rates much faster than their current promises.”

This goes to the heart of the matter. A debt mountain doesn't matter only so long as interest rates remain low. That implies that there could very well be a key role for monetary policy if market participants anticipate higher inflation and start selling their holdings of Treasury bonds. The Fed has a new framework now, which states that inflation above its 2% target is just fine, after 12 years mostly below that level, as long as it averages out around 2%. But that clearly means a prolonged period of negative returns on government bonds, made worse for foreign investors if the dollar continues to slide against other major currencies.

If market rates start to rise, the Fed will be put to the test. Will it behave as it did in World War II, intervening to keep rates low in order to avoid a rapid rise in government debt-servicing costs? There is a widespread belief that it will and that Japanese-style “yield curve control” lies ahead. But in 1945 that was a wartime expedient and it was ended with the Fed-Treasury Accord of 1951, which restored the separation of monetary policy from debt management.

Another way of thinking about this is to contrast the likely trajectory of the post-pandemic economy with the sluggish path of recovery after 2008-9. A financial crisis originates in overstretched balance sheets — in the case of the 2008-9, those of banks, shadow banks and subprime mortgage borrowers. It took the better part of a decade for balance sheets to be repaired, which was one reason for the slow pace of recovery in the Obama years — the background against which secular stagnation seemed the right diagnosis.

The post-pandemic economy will be very different — and this is the bad good news. This year, thanks to Covid-19, the U.S. household savings rate has had its most volatile year since modern data began in 1948. In the second quarter, it jumped to an unprecedented 26%, compared to 7.3% a year before. As lockdowns and other restrictions were relaxed, the rate declined to 16% in the third quarter.

To expect such high rates to persist into 2021, as the OECD does in its latest Economic Outlook, is surely wrong. This was forced saving of income boosted by government handouts, prompted by a supply-led shock (lockdowns), not balance-sheet repair as after 2008-9. According to our estimates at Greenmantle, U.S. households are now sitting on roughly $1 trillion of excess savings as a result. Many are itching to spend a large chunk of that money as soon as they can.

The best analogy for the Covid-induced economic slump is not a normal recession but a war. With vaccine distribution in sight, society is now preparing to demobilize. As World War II wound down, many esteemed economists — notably Alvin Hansen, who coined the term “secular stagnation” — wrongly predicted an enduring economic crisis. Instead, the gradual removal of wartime restrictions led to a boom in consumption. Something similar seems in prospect next year.