Whoopeee: the IMF is back in schizophrenic mode..!!

 

 

For about the last ten years, the IMF, OECD and others have been utterly schizophrenic on the subject of government debts. Like every economic illiterate, they have been worried about the degree to which debts have been rising. On the other hand they don’t want to advocate big tax rises so as to cut debts because that would cause too much austerity.

So what have the IMF etc done? Well they’ve published any number of articles making the near useless claim that countries should implement enough stimulus to keep unemployment down, at the same time as aiming to cut stimulus and raise taxes with a view to cutting the debt. They might as well have told everyone to stand on their heads and stand on their feet at the same time. But never mind: doubtless the pay at the IMF is good, and I’m sure they have generous early retirement arrangements and good pensions for IMF staff, as long as said staff write enough nonsense.

Anyway, seems the IMF is back in full schizophrenic mode, if a recent article in the Telegraph by Ambrose Evans-Pritchard is any guide. The Title of his article is “Ballooning global debts need to be restructured before it is too late.”

Evans-Pritchard’s third para reads: “On the one hand, the IMF hints at austerity. It urges governments to head off the risk of runaway debt spirals before it is too late. On the other, it calls for more stimulus to prevent an economic relapse once the sugar rush from reopening has faded."

So what’s the solution to this allegedly horrendous debt problem? Well the answer in a nutshell is “Step forward MMT”. That is, as MMTers have been trying to explain for years, and as I’ve explained many times on this blog, the government of a country which issues its own currency has complete control over the rate of interest it pays on its debt, but it CANNOT control the SIZE OF the debt at a given rate of interest. That is, if the private sector goes into savings mode and decides it wants to hold more debt at let’s say a 1% rate of interest, government and its central bank will just have to run a deficit and let the private sector have what it wants. If government and central bank don’t do that, then the private sector will try save with a view to acquiring that extra debt, and as Keynes pointed out in his “paradox of thrift” point, saving up money raises unemployment, all else equal.

I.e. the debt will come down if and when the private sector goes into what might be called “spendthrift” mode and decides it wants to hold LESS debt.