This is hilarious.
On the
subject of the UK’s government run savings bank, “National Savings and
Investments”, a government spokesman said, according to this Guardian
article, “The
government's policy is to encourage saving in the medium and long term.”
Noticed the self-contradiction
there? No? Well it’s as follows.
The NSI invests just in government
debt (Gilts in the UK). But the debt is bad, bad, bad according to almost
everyone, including economically illiterate economists (in particular Kenneth
Rogoff). So if amounts saved at NSI rise, then all else equal, the national
debt rises!!!!!!
Oooh gosh.
So is it desirable for the national debt and amounts saved at NSI to rise or
not? Well if you’ve got more brain than the average “professional” economist,
the question you’ll be asking is: “What’s the OPTIMUM amount of national debt?”
Yes,
O-P-T-I-M-U-M: that’s a concept beyond the comprehension of Kenneth Rogoff and
many professional economists.
Advocates
of Modern Monetary Theory (MMT) have of course worked out the answer to the
latter question, and the answer is as follows.
National
debt is an ASSET as viewed by debt holders (e.g. those who save at NSI). And
the larger those holdings, the more those holders are likely to spend. So the
OPTIMUM is what? (Scroll down if you haven’t go the answer).
.
.
.
.
It’s the
amount that induces the private sector to spend at a rate that brings full
employment, or gets the economy up to capacity.
And if you
understood that, your grasp of debt and related matters is superior to that of
half the economics commentators writing for newspapers and half the
professional economists in the country.
Congratulations.
There are
of course various related matters, like what rate of interest should be paid on
the debt. As more than one MMTer has pointed out, a country can pay any rate of
interest it likes (a point which is way beyond the comprehension of most
economists). And some advocate the rate should be zero or near zero. The yield
on Japanese debt is near zero.
Warren
Mosler (leading MMTer) argued that the rate should be zero, as did Milton
Friedman. And in that scenario, debt becomes the same thing as money, or base
money to be exact.
"So the OPTIMUM (government debt) is what?...It’s the amount that induces the private sector to spend at a rate that brings full employment, or gets the economy up to capacity. "
ReplyDeleteThese sentences confuse government DEFICIT and DEBT, resulting in an unintended inconsistency with MMT and Lerner's 1st and 2nd laws of functional finance.
Lerner's 1st law of functional finance assigns the task of achieving full employment to fiscal policy (government spending and taxation), i.e. the government DEFICIT (n.b. NOT debt).
Lerner's 2nd law assigns monetary tasks, e.g. achieving target interest rates, to government operations in financial markets, e.g. the issuance or repurchase of government DEBT (ie. bonds).
See http://bilbo.economicoutlook.net/blog/?p=27644
Fair point. There are actually two effects here. First running a deficit has an effect as almost everyone agrees: not just Lerner enthusiasts. But second there is the fact that as long as the deficit lasts, the debt piles up. I.e. “private sector net financial assets” (to use MMT parlance) pile up. And the more PSNFA expands, the higher will private sector spending be, all else equal.
DeleteEventually the “PSNFA” effect dominates the deficit effect.
Of course I’m assuming “all else equal” there: i.e. exports remain constant, and irrational exuberance (or lack of) remains constant. I’m also assuming zero inflation, to keep it simple.
In effect, I glossed over the deficit above for the sake of brevity. But you’re right: the deficit effect is there and it’s important.