Here’s some ignorance of truly staggering proportions from Fama, the
recent Nobel prize winner. (H/t Warren Mosler).
He
says, “Government bailouts and stimulus plans seem attractive when there
are idle resources – unemployment. Unfortunately, bailouts and stimulus plans
are not a cure. The problem is simple: bailouts and stimulus plans are funded
by issuing more government debt…. The added debt absorbs savings that would
otherwise go to private investment….”
Complete nonsense: as Keynes pointed out, and as little more than common
sense, a government deficit can be funded by, or accumulate as EITHER more
debt, or more money (monetary base to be exact).
As Robert Mugabe has worked
out (though this seems to beyond the comprehension of many so called
professional economists) the government / central bank machine can print and
spend as much money as it wants: i.e. there is no physical law known to mankind
that stops a government cranking up the printing press. (Amazing that I need to
spell this out isn't it?)
Independent central banks.
But as it happens under the institutional arrangements that exist in most
countries (but not Zimbabwe) there is a clear separation between treasuries and
central banks: the separation is there SPECIFICALLY to bar politicians from direct
access to the printing press (amongst other reasons).
Thus if a treasury thinks there is room for stimulus, it will borrow and
spend more (and/or collect less tax). And that, as Fama rightly suggests, will
raise interest rates and crowd out private investment. But . . . . assuming a
treasury is RIGHT in thinking there is room for stimulus, then the central bank
will think likewise. Thus the central bank won’t let interest rates rise: it
will print money and buy government debt
in sufficeint amounts to PREVENT an interest rate rise. Indeed: it will quite
likely go even further: print and buy enough government debt to ensure that
interest rates ACTAULLY FALL.
The net effect is that the “government / central bank machine” deals with
the recession by printing and spending money (and/or cutting taxes). So in
short, Fama’s claim that there is some sort of deflationary effect imposed on
the private sector when government goes for stimulus is COMPLETE HOGWASH.
Moreover, even if a central bank DIDN’T print money and buy government debt, the net effect of the treasury borrowing and net spending would be stimulatory TO THE EXTENT THAT government debt and monetary base are similar in nature or merge into each other. That is, there is little difference between SHORT TERM government debt and monetary base. To illustrate, what’s the difference between $10k worth of $100 bills and a promise by the US government to pay you $10k in two week’s time? Not much difference is there?
Moreover, even if a central bank DIDN’T print money and buy government debt, the net effect of the treasury borrowing and net spending would be stimulatory TO THE EXTENT THAT government debt and monetary base are similar in nature or merge into each other. That is, there is little difference between SHORT TERM government debt and monetary base. To illustrate, what’s the difference between $10k worth of $100 bills and a promise by the US government to pay you $10k in two week’s time? Not much difference is there?
And remember that when a treasury borrow and net spends, there is a NET INCREASE in what MMTers call "private sector net financial assets". That is, the net effect of a treasury borrowing and spending $X is that the private sector is $X better off. Think about it: treasury borrows $X, spends that back into the private sector, so the private sector is back where it started, PLUS the treasury gives bonds worth $X to those it has borrowed from. Hey presto: the private sector is $X up!!!
And finally….
If you (or any economics Nobel laureates) want the above spelled out using
monosyllabic words and shorter sentences, you only have to ask in the comments
below, and I’ll be happy to oblige.
__________
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