Saturday, 13 September 2014

Rebecca Strauss on the debt.

Ms Struass has just written an article for the Council on Foreign Relations which Tom Hickey describes as “moronism”. Tom is right. However, the site where Tom expressed his opinion is a Modern Monetary Theory site and is read mainly by MMTers who will immediately grasp why Ms Strauss’s article is flawed.
So for the benefit of those not acquainted with MMT let’s run thru the EXACT REASONS why the Strauss article, and indeed hundreds of similar articles are flawed.
Strauss type articles start by claiming that the debt is too high and/or it WILL BE too high given current levels of tax, government spending, etc. Exactly what constitutes “too high” and why, is never spelled out with any precision in Strauss type articles. But never mind: let’s assume that the debt is, or will be “too high”.
That means, according to Straussies, that what are normally called “painful choices” have to be made: e.g. government spending on roads, welfare or whatever allegedly has to be cut. Indeed, Ms Strauss uses the phrase “painful choices”. But there’s a problem there, as follows.
If government spending is cut, that will raise unemployment. Now what’s the point of that? I.e. what’s the point of having the economy run at less than capacity or the full employment level? Absolutely none!
So Straussies are in a fix: they think they have the choice of continuing with a too high or escalating debt, or alternatively causing unnecessary unemployment and unnecessarily reducing GDP.
Got to be something wrong there. So what’s the solution?
Well it’s easy: do something which has been implemented BIG TIME over the last few years, namely QE. That is print money and buy back some of the debt (or cease rolling it over).
As I’ve pointed out about a thousand times on this blog, that  will have a stimulatory or inflationary effect. But the latter effect can be countered by raising taxes. And assuming the deflationary effect of the latter tax hike exactly equals the former stimulatory effect, aggregate demand stays the same, as does public spending, but the debt comes down!
And not only does the debt decline, but the interest paid on it also declines: reason is that if you tell your creditors you’re not interested in borrowing any more, they’ll offer you loans at a rate of interest below the previously rate.
Magic! Problem solved! And there is no need for those “painful choices” referred to by Straussies.

There is just one fly in the latter ointment, which stems from the fact that a proportion of any country’s debt is held by entities in other countries. And if a country cuts the amount it borrows, then some of the relevant funds will seek yield elsewhere in the world. That will tend to depress the value of the relevant country’s currency on forex markets, which means a standard of living hit for the relevant country. But currencies gyrate in value on forex markets all the time. Indeed, the pound sterling was devalued by 25% in 2008, and no one I know turned a hair, though doubt less there were exporters and importers who were inconvenienced and people taking foreign holidays who were not too thrilled.

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