Thursday, 11 February 2010
Nonsense from Niall Ferguson.
Niall Ferguson has an article in today’s Financial Times, unfortunately endorsed by George Washington. The central claim of the article is that large government debts worldwide will lead to permanently higher interest rates, which in turn will seriously impede economic growth.
It’s all doom and gloom according to Ferguson: “Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.”
But we are not in a situation where interest rates on government debt are high (or higher than they might otherwise be) because of need to damp demand. We are in situation where rates and debt are high because governments for a series of daft reasons have chosen to go into debt rather than collect tax to cover their spending.
Governments have gone into debt because they THINK that collecting taxes would be deflationary; plus they THINK that Keynsian “borrow and spend” is reflationary. But as I point out here, Keynsian borrow and spend is clap trap. It should be abandonned.
But we are where we are: with governments deeply in debt. Is this a problem? No. Deficits and national debts are high, but this doesn’t preclude boosting demand to the maximum level consistent with acceptable inflation AT THE SAME TIMES AS reducing deficits and national debts. The best way to do this in the circumstances would be to stop rolling over government debt (or only partially roll it over). That would increase the money supply. If the latter boosted demand too much – no problem. We can just bump up tax, i.e. confiscate some of this new money and extinguish such money.
Note that this additional money supply would probably NOT be all that inflationary. Reason is that bond holders regard said bonds as SAVINGS: that is, a chunk of their wealth they do NOT intend spending on consumption. Likewise, they would not spend the cash obtained by selling such bonds on consumption.
Economic Neanderthals need to understand that money collected in tax is not necessarily spent: it can be simply extinguished. Likewise, the money that government – central bank machines spend is not necessarily collected in tax or borrowed: such money can be created out of thin air.
A healthy level of demand combined with a declining government debt really isn’t too difficult to arrange.
Afterthought (18th Feb 2010).
Seems I'm not the only one with a dim view of Ferguson's article.