Tuesday, 27 September 2011

What’s the optimum long term debt to GDP ratio?

The answer is easy. Advocates of Modern Monetary Theory (MMT) answered that question long ago. Though the question still seems to puzzle some authorities. For example Brad de Long (who I normally greatly respect) says:

“As to what is the appropriate debt-to-GDP ratio to pursue in the long run, that is a difficult empirical question….”

As one of the leading MMTers, Warren Mosler has pointed out (2nd last paragraph), there is no point in government debt rising to the point where government has to pay any interest on such debt. I.e. government should not issue interest paying debt.

Put another way, most of the alleged and popular reasons for government borrowing are bunk, as I point out here.

The only reason for having government issue liabilities is to ensure that the private sector has sufficient net financial assets to ensure that the private sector spends at a rate which brings full employment. Indeed, the latter point is simply a re-statement of Keynes’s “paradox of thrift” point. That is, if the private sector is intent on saving money, rather than spending it, the result will be excess unemployment unless government prints enough money to satisfy the private sector’s savings desires.

Just Google the phrases “private sector net financial assets” and “savings desires”. You’ll find MMTers grossly over-represented in the first ten or twenty items that Google finds.



  1. And in terms of 'government cuts' you have to wonder why the pointless interest payments on bonds aren't first against the wall.

    That would literally save billions (in their mindset), yet they never mention it.

    So we have the ludicrous situation of cutting front line public sector staff, while paying wealthy people not to spend their money.

    You couldn't make this up.

  2. I buy bonds for my coming retirement. I'm not wealthy. I just want to have a couple of bucks in my old age so I can raise Hell on the Internet.

    P.s are you recommending we rob the retirees?

    I didn't think so.

    You want to improve the economy simply send everyone on the tax rolls a big check and the consumer will fix the problem.

    Hey it worked for Wall Street!


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