Niall Ferguson has a talent: concentrating so many flawed arguments into each paragraph that it takes a large amount of time to rebut it all. Dean Baker and Simon Wren-Lewis have dealt with some of Ferguson's material.
I’ll deal with just two of Ferguson’s points.
First, he argues that since inflation in the UK was above the 2% target for the first half of the recent recession, the UK should not have applied the level of stimulus that it did. Well the answer to that is that (amazing as this might seem) the Bank of England did actually notice that inflation was above target. After all, one of the main jobs of the BoE is to keep inflation near the target.
However, the BoE thought that much of that inflation was cost push, to which extent there wouldn’t have been much to gain inflation-wise from holding back on stimulus. And as it’s turned out, the BoE was right: that is, DESPITE applying a fair amount of stimulus when inflation was above target, inflation in the event actually declined. Indeed, for the first time in about fifty years, inflation is actually NEGATIVE in the UK at the time of writing.
The debt in 2040.
Second, Ferguson claims that if current and/or recent increases in the debt were to continue, by 2040 we’d have a debt to GDP ratio of five (which is way above the current Japanese “two” or 200% ratio).
Well the flaw in that argument is so elementary that it’s EXTREMELY BORING for me to have to set it out. Apologies to readers who are bored stiff by the next paragraph or two, but it’s not my fault.
The answer to Ferguson’s above boring deficit/debt point is that deficits and hence debt growth have been high in recent years and as a result of attempts to deal with the recession. And obviously if those deficits were to continue, then the debt would be very large by 2040.
However, it is a fact of history (and Ferguson claims to be a historian so he should know this) that recessions do not last for ever: regular as clockwork economies return to normal, and moreover experience booms or bouts of “irrational exuberance” from time to time (at which point SURPLUSES rather than deficits become appropriate).
Thus Ferguson’s assumption that the deficit will continue at anywhere near its present or recent rate is nonsense.
Would a 500% debt:GDP ratio matter?
And not only that, but would it really matter if the debt:GDP ratio DID RISE to 500%? Well the answer to that will be second nature to advoctes of Modern Monetary Theory, but way beyond the comprehension of Naill Fergson (and indeed others at Harvard, e.g. Kenneth Rogoff).
The answer is that there isn't much difference between base money and national debt at low rates of interest as recently pointed out by Martin Wolf in the Financial Times*. And if the private sector is determined at accumulate state liabilities (base money and debt) even at low rates of interest, there is not much that the state can do about it.
If the state DOES NOT supply the private sector with the state liabilities that the private sector wants, the private sector will simply try to save (save money that is), and as Keynes pointed out, saving money instead of spending it tends to raise unemployment. Keynes called that the “paradox of thrift”.
But long before 2040, it could go the other way, that is, the private sector’s desire to save could decline: i.e. the private sector might try to spend away its stock of national debt and base money. In that case demand and inflation might easily become excessive, in which case it would make sense for the relevant government and central bank to run a surplus, i.e. grab money off the private sector and “unprint” it (and/or cut public spending).
At the extreme, the national debt might decline to some record low figure, like 30% of GDP. We just don’t know. And it really doesn’t matter whether the debt is 30% or 300% of GDP as long as interest on the debt is kept down. Personlly I’m happy with any old rate of interest as long as its NEGATIVE in real terms, i.e. negative after adjusting for inflation. That way the relevant country profits from it’s creditors! What’s not to like about that?
* As Wolf put it, “Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year Japanese Government Bonds yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…”