Friday, 22 August 2014
Milton Friedman mocked “secular stagnation” 75 years ago.
Further to my foul mouthing of secular stagnation a week ago, I’ve just stumbled across an beautiful passage by Friedman in 1948. I say “beautiful” first because he criticises what he calls secular stagnation, a phrase he uses in much the same sense as it’s used nowadays.
Second, the same passage is very much Modern Monetary Theory compliant: indeed you could even say it summarises MMT.
The passage is just before the conclusion of his paper “A Monetary and Fiscal Framework for Economic Stability”. It reads as follows.
“I do not put much credence in the doctrine of secular stagnation or economic maturity that is now so widely held. But let us assume for the sake of argument that this doctrine is correct, that there has been such a sharp secular decline in the demand for capital that, at the minimum rate of interest technically feasible, the volume of investment at a full-employment level of income would be very much less than the volume of savings that would be forthcoming at this level of income and at the current price level. The result would simply be that the ' equilibrium position would involve a recurrent deficit sufficient to provide the hoards being demanded by savers. Of course, this would not really be a long-run equilibrium position, since the gradual increase in the quantity of money would increase the aggregate real value of the community's stock of money and thereby of assets, and this would tend to increase the fraction of any given level of real income consumed. As a result, there would tend to be a gradual rise in prices and the level of money income and a gradual reduction in the deficit.”
The second half of that quote, translated into MMT parlance would go something like: “Given inadequate demand, create and spend fiat (and/or cut taxes). That will result in the build-up of private sector net financial assets which will ultimately result in less of a deficit being required”.