Here is
simple set of rules for optimising the size of the deficit and debt. It’s more
or less Modern Monetary Theory compliant, but not 100% compliant.
1. If
unemployment is excessive, then expand the deficit (or reduce the surplus).
Incidental
point: as Keynes made clear, a deficit can be funded either by borrowing or by
simply printing money. Quite what the point of borrowing is, is a bit of a
mystery. First, borrowing has a deflationary or anti-stimulatory effect (if it
has any effect at all). Now what’s the point of doing something
anti-stimulatory when you’re trying to impart stimulus? Darned if I know. Isn't
that evidence of schizophrenia?
Second,
what’s the point of borrowing money when you can print the stuff? The naughty
people who have their own back street printing presses for turning out forged
£20 notes don’t borrowing money: when they need money they just crack up their
printing presses (so I’m told). Their understanding of economics is clearly
superior to that of professional economists and finance ministers.
2.
However, if a deficit IS FUNDED via borrowing, and the rate of interest demanded
by creditors starts to rise too far, there is an easy solution: tell the
creditors to get lost.
That is,
as debt matures, instead of rolling it over, just print money and pay off the
creditors. That may well be too inflationary, in which case just raise taxes
and/or cut public spending so as counter the inflation.
Note
that the latter increased tax / reduced public spending would not, repeat not
reduce living standards (at least not to the extent that an economy is a closed
economy – i.e. to the extent that it doesn’t have dealings with other countries).
Reason is that the only purpose of said increased tax / reduced public spending
is to cut inflation. Put another way, there is no reason to assume any big
effect on REAL GDP.
Of
course, to the extent that an economy is OPEN, i.e. to the extent that it
borrows from abroad, obviously if foreigners can no longer get a nice rate of
interest by buying the debt of a given country, then those creditors will seek
yield elsewhere. And that will necessisate a devaluation of the currency of the
country concerned, which in turn will lead to a cut in its standard of living.
But that’s
just another reason for abstaining from borrowing, isn't it? See No.1 above.
That is, when a household borrows from some external source, that temporarily
raises the household’s standard of living. Then the household has to do some
work, earn some money and pay back the debt: that cuts its standard of living.
Same goes for countries.
Borrowing
makes sense if you don’t have cash to hand and if you have spotted an
investment that covers the cost of the interest. But that’s not what’s involved
when a country runs a deficit funded by borrowing.
3. The
above advocated “no borrowing” policy implies that interest rates are not
deliberately adjusted. Does that matter? The answer is “no”: a recent Fed study
showed that interest rate adjustments don’t work: at least it showed there is
little relationship between interest rates and investment spending. Moreover,
the optimum rate of interest is presumably the free market rate. I.e.
artificial adjustments to the rate will presumably lead to a misallocation of
resources.
4. The above rules are also Positive Money compliant, as I understand PM's policies.
4. The above rules are also Positive Money compliant, as I understand PM's policies.
_________
P.S.
(same day). Rule No.5. If inflation is excessive and it looks like demand pull
inflation rather than cost push inflation, then cut the deficit / increase the surplus.
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