Nick Rowe has a silly question for those who oppose austerity. Actually he really means it is a question involving silly numbers: would you still advocate fiscal stimulus in a liquidity trap (with interest rates stuck at some lower bound - the ZLB) if government debt was ten times annual GDP?
It is not a silly question for two reasons. First, thinking of this kind of unimaginable extreme is often a useful way of clarifying ideas, which is what Nick is trying to do. Second, this is a variant of question I was actually asked in No.10 Downing Street half a dozen years ago. What follows is a better version of the answer I gave on that occasion. To make things easier, let’s assume GDP is 100, so government debt is 1000, but the negative output gap is near 10%, so GDP could be 110. Let’s also assume that the government does not want to default, and that it is willing and able to service or even reduce that huge debt once the output gap is closed. Finally, and this is critical for the answer I give, assume government debt is in the currency that is issued by the country’s own central bank.
One way I like to frame this issue is to think about different time frames. A large output gap is an immediate problem which can be dealt with quickly using fiscal stimulus if interest rates are at the ZLB. A high level of government debt is a medium to long term problem, which is much less costly to solve when interest rates are not at the ZLB.  So it is not a matter of trading off two conflicting objectives (see this recent post for example). You can satisfy both objectives by doing stimulus now and austerity later.
Does debt being ten times GDP change this logic? There are four main potential costs associated with high government debt. The first is that, by generating high real interest rates, it crowds out private capital. However at the ZLB long term real interest rates are likely to be low, not high. Second, paying the interest on that debt requires higher distortionary taxes. (In macro terms it is the distortion that matters here - if the debt is owned domestically the money is just being circulated.) However if there is an output gap the possibility that people are not supplying labour because income taxes are too high is not a current problem either.
A third issue with debt is the ‘burden on future generations’. How real that is or not, dealing with excessive debt is going to screw the current generation (who have to suffer the higher taxes or lower spending to get debt down), so asking them to also suffer continuing unemployment is hardly fair.
The final problem is that the markets might suddenly take fright that the tax burden implied by the debt is too large in political terms, and as a result the government may default. So the funding that enables the government to roll over the 1000 in debt might dry up. Now imagine two scenarios. In the first, the government eliminates the 10% output gap by means of a fiscal stimulus worth 10% of GDP, say. That increases the debt from 1000 to 1010, but GDP rises to 110, so the debt to GDP ratio falls from 10 to 9.2. In the second, there is no stimulus but austerity instead, involving a budget surplus of 10% of GDP. So debt falls from 1000 to 990. Even if we make the outlandish assumption that austerity on this scale does no further damage to GDP, which stays at 100, the debt to GDP ratio falls to 9.9. Which scenario is going to worry the markets more?
Suppose, despite this, the funding does dry up. You have your own independent central bank, so you print the money to cover the stimulus and any debt rollover required. That might require a lot of money creation - perhaps as much as central banks have actually undertaken as a result of Quantitative Easing (QE)! Just as with QE, the world does not fall in. Will that not lead to massive inflation? No, for exactly the same reason QE does not. The moment the output gap has been eliminated, and interest rates are off the ZLB, you can start the austerity programme that begins to roll back money creation. That stops the output gap becoming positive and therefore stops inflation.  People sometimes throw in an exchange rate crisis at this point, but as Paul Krugman has repeatedly pointed out, this does not change the basic logic.
So I think the answer to Nick’s question is not the answer he thinks. The logic is that every time and whatever the numbers you first eliminate the output gap and get off the ZLB. Only when that is done do you start taking action to reduce deficits.
 Various contributors to this blog tell me this is the key contribution of MMT. The fact that I do not describe it as such is simply because I also think this is what mainstream macro implies.
 As I like to point out to market monetarists, what they call monetary offset has always been central to the anti-austerity argument.