I’ve
lost count of the number of times I’ve seen articles and papers by so called
professional economists which assume that increasing the deficit means increasing
the debt.
As
Keynes and Milton Friedman pointed out, and as I’ve pointed out a trillion
times on this blog, a deficit can be funded by debt OR BY NEW MONEY.
The
latest high profile economist I’ve noticed who doesn’t get the latter very
simple point is Carmen Reinhart. But then given the nonsense than emanates from
her and Kenneth Rogoff, that’s not surprising.
In this letter to Paul Krugman, she asks Krugman, “What is the foundation for your
certainty that as peacetime debt hits new records in coming years, the United
States will be able to engage in
forceful countercyclical fiscal policy if hit by a large unexpected
shock? Furthermore, do you really want
to find out the answer to that question the hard way?”
Well
the “foundation of my certainty” is that a monetarily sovereign country like
the US can simply print money to fund “countercyclical fiscal policy” if no one
wants to lend it money.
Now the
knee jerk response to that from the assortment of clots, idiots and thickos
that infest Planet Earth is “inflation”. And the answer to that is that as long
as the amount of money created and spent is enough to escape a recession, but
no so much as to cause excess unemployment, then “problem solved” as they say.
Why
borrow?
Moreover,
there’s not even any point in borrowing something you can produce yourself for
free is there? That’s one reason why Milton Friedman and Warren Mosler have
suggested that governments should NOT BORROW AT ALL!!!!! That is, the only liability they should issue
is money (monetary base to be exact).
What’s
the relevance of “peacetime”?
Moreover,
noticed a bit of trickery in Reinhart’s question: that word “peacetime”?
US debt
relative to GDP is still nowhere near HALF the level that existed in the UK
just after WWII (well over 200%). Now that doesn’t suite the Rogoff and
Reinhart thesis, namely that high debts are some sort of disaster. So they try
their best to confine the discussion to periods other than those just after
wars.
But
even that won’t wash: the UK’s debt during the 20th century AVERAGED
around 100% of GDP: above the 90% threshold which R&R claim to be a big
problem.
Pathetic,
ins’t it?
It's also worth pointing out that Germany, the USA, the UK (and I think, Japan ... need to check on that) ran large deficits in the immediate post-war decades, probably the most prosperous decades in living memory, leading to Japan's "economic miracle", Germany's "Wirtschaftswunder", Britain's "you've never had it so good" (and we hadn't!), and the USA did pretty well also.
ReplyDelete(Germany also has the largest current deficit (and debt) in the Eurozone, although it is also probably the largest economy in the Eurozone ...but the point is....deficits aren't necessarily bad (although debt isn't particularly good either....).
Just to be accurate, those countries had record DEBTS during the post war years, but not particularly high DEFICITS. They actually paid down their debts during those years which means they must have been running surpluses, or at least relatively small deficits.
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