Monday, 4 May 2015
What’s the optimum amount of national debt?
The combination of national debt and monetary base is often referred to by MMTers as “Private Sector Net Financial Assets”. The more PSNFA, the higher will private sector spending be (essentially the point made by Andrea Terzi recently). And ideally it needs to be at a level that gives us full employment. So that tells us in principle what the optimum amount of PSNFA is. But it doesn’t tell us what the optimum SPLIT as between debt and base is.
One disadvantage of base is that it can be spent, thus a large base means the private sector might suddenly go mad and try to spend away a large portion of the base, which would be inflationary. I.e. a large base would exacerbate any “irrational exuberance”. (Incidentally, debt is also a TYPE OF money: its actually used in the world’s financial centres in lieu of money. But you can hardly go shopping at the supermarket with it, or use it to buy a car.)
But the larger the debt, the higher the interest charged by debt holders. So (roll of drums) the optimum amount of debt is the amount that produces a small positive rate of interest on the debt.
I suggest that should be something between zero and the rate of inflation: that means a NEGATIVE real rate (inflation adjusted rate). And that in turn means governments so called “creditors” have to pay for the privilege of lending to government. In particular, foreigners have to pay for the privilege of lending to us.
Having said that the base might exacerbate irrational exuberance, it’s possible that’s not true. In that case the optimum (as suggested by Milton Friedman and Warren Mosler) is no debt at all. I.e. PSNFA should be made up entirely of base.