Far too many economists are still stuck with the notion
that national debts are comparable to household debts. That is, that national
debts should ideally be paid off, or that there should be some target for
reducing the deficit and/or debt.
Ideas of the latter sort are UNMITIGATED HOGWASH. They
are total and complete nonsense. Cr*p. Bu**shit. I’ve run out of words.
Here is quick guide to debts and deficits for the poor
benighted folk who still don’t get Modern Monetary Theory.
1. As Keynes pointed out (and as is indeed little more
than common sense) if the private sector saves an increased amount of money, it
must ipso facto SPEND LESS MONEY, all else equal. That is demand declines, and
unemployment rises.
Ergo, given the above increased saving, government must
run a deficit. And conversely, if the private sector runs too much of a deficit
(i.e. “dissaves”), then government may well have to run a SURPLUS.
2. Any country that issues its own currency has a
choice as to what rate of interest it pays on its debt. E.g. it can always cut
that rate essentially by funding more government spending via tax rather than
borrowing.
However it’s not QUITE THAT easy (but very nearly that
easy). The above “tax more and borrow less” is probably deflationary: it’s
liable to increase unemployment. But that niggle is easily dealt with: just
fund some of the debt reduction or reduced borrowing from newly created money.
The latter has a stimulatory / inflationary effect. So as long as the latter
simulatory effect equals the above deflationary effect, demand and GDP remain
unaltered. I.e. the only net effect is that interest on the debt declines.
3. That raises the question as to what the best rate to
pay on debt is. Well that’s a complete no-brainer: the best rate is nothing at
all!!!! And government debt on which no interst is paid is virtually the same
as money (or monetary base, to be exact).
I’d guess that’s why Milton Friedman and Warren Mosler
(amongst others) have advocated that government should issue no liabililties in
the form of interest paying debt: the only liability they should issue is
money.
4. Having said that governments should aim to pay a
zero rate of interest on their debt, there is another technical niggle: should
that be “zero” in nominal or in real (i.e. inflation adjusted terms? However
that’s a technicallity I basically won’t address here, except to say that a
zero or slightly negative rate in real terms is probably best.
5. There might seem to be a problem arising from the
zero interest rate policy, namely that it rules out or severely hinders
interest rate adjustments by central banks. My answer to that is, “I couldn’t
care less”. For reasons given here and here, interest rate adjustments are a
nonsense.
6. So what’s the ideal size for the deficit / surplus?
Well having some sort of “target”, e.g. aiming to “halve the deficit in three
years” is nonsense. Moreover, the widely accepted target, that is aiming to
balance the books over the economic cycle is equally nonsensical.
The ideal size of the deficit / surplus is simply:
the
size that maximises employment without exacerbating inflation too much and at a
zero rate of interest on the debt.
Or as Keyes put it: “Look after unemployment, and the
budget will look after itself”.
Got it?
Just to make sure, I’ll repeat that in bold red
letters.
Look after unemployment and the budget will look after
itself.
It isn't that simple. Money is issued in one place. At that one place they have to decide how much to issue.
ReplyDeleteUnemployment, however, is not the same everywhere. Many types of unemployment are not due to monetary matters, but are cultural,ideological, caused by bad weather or bad luck.
Look what the single source money did to Europe's divergent economies..
I'm well aware of that point. That is, I wasn't trying to suggest that interest rate cuts or printing and spending new money by the government/central bank machine will deal with geographical areas suffering particularly high unemployment levels.
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