Monday 6 July 2015

Varoufakis’s questionable “surplus recycling mechanism”.

Keynes realised that countries which run persistent surpluses can do harm: they suck up too much of the World’s money which necessarily means other countries have less money, which in turn means the latter countries spend less, which tends to cut demand and raise unemployment. That’s just one example of what Keynes called the “paradox of thrift”.

Same applies in the Eurozone: Germany and some other core countries run persistent surpluses which necessarily means other countries both in the Eurozone and elsewhere must run external deficits.
However, the idea that countries that are persistently in surplus necessarily do harm (an idea that Varoufakis seems to back) is crucially dependent on the assumption that the total amount of money is limited, or at least not flexible enough to counteract the latter unemployment raising effect.

However, as MMTers, Positive Money and others have long pointed out, there is no limit to the amount of money that a government and its central bank can create and spend into its economy. That means that if some group wants to hoard money (and one large group of that sort at the moment happens to be corporations) that shouldn’t be a problem: the central bank just needs to create and spend enough to counteract the deflationary effect of that hoarding. That point applies as much to the ECB in Europe, as it does to the World as a whole and its banker, the US.

Of course, the idea that the US is the World’s banker is not 100% accurate: the World actually has several central banks, with the US Fed being the biggest. That is, the Swiss Franc, the Euro, Pound Sterling and other currencies all act to some degree as international currencies.

To summarise, if central banks and their governments just create and spend enough to keep inflation near 2% (or whatever the target is), then we can forget about surplus recycling, which in any case would be a bureaucratic and politically fraught process. And where inflation exceeds the target, it will be necessary to run the occasional SURPLUS as opposed to a deficit.


P.S. (28th July 2015): There is more on Varoufakis's questionable ideas here.


  1. Our community could have a young couple that liked to borrow money from the community bank for the simple reason that they liked to spend more than they could earn.

    If this couple was very likable, they might be able to borrow more than they earned every year for many years.

    In fact, they could do this until the bank said "NO MORE LOANS!".

    A "NO MORE LOANS" decision would be a paradigm change. It would be a change in the annual way of running the local economy.

    How might the economy change if, after many years of lending to the (formerly) young couple, the lending stopped? Those businesses that received the annual loan proceeds (the couple always spent the loan money) would see fewer sales and need fewer workers. This because less money each year would be spent.

    Now if the bank also required the (formerly) young couple to repay the loan, there would be an additional effect that we might call as second paradigm change. The couple would need to work harder to earn money. Working harder would entail producing products already made by other workers which would increase sales competition. The economic effect of loan repayment is the opposite of initial loan creation.

    I think we can consider that Greece has been this (formerly) young couple. Now the loans are being denied. Do we really want them to repay the loans?

    1. Roger, In the simple case of a single country that issues its own currency, then yes: if people repay loans that has a deflationary effect. Unemployment will rise, all else equal. But there’s no good reason for all else to be equal. That is, the state can perfectly well counteract that deflationary effect with any of the well known forms of stimulus: interest rate cuts, deficits, QE, etc.

      Same sort of point applies to Greece in the EZ. If we ignore the slight problems involved in just one country repaying debts, while others don’t, then Greece repaying debts would have a deflationary effect, but that’s easily countered by EZ wide stimulus.

  2. Ralph,

    I decided to upgrade my comment into a blog post. The post can be found at

    I make one typo correction ('call as second' to 'call a second') and add some beginning and ending expansion.

    Thanks for your many posts.

  3. Greece is not monetarily sovereign to be the monopoly supplier of its own currency, therefore MMT does not apply. MMT applies for the EU as a whole towards other currency unions.


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