Friday, 16 December 2011

Economics Professors who don’t realise central banks can print money.

This might sound bizarre, but there are numerous so called professional economists who don’t understand that central banks can print money.

To be more exact, these economists, if asked “Can central banks print money?” would probably answer “Yes”. But they then proceed to write articles based on the assumption that central banks CANNOT print money. It’s weird. (I’ll deal with their articles in detail below.)

Indeed, Modern Monetary Theory (MMT) is little more than an attempt to push the above point, namely that given excess unemployment, it’s a good idea for a government / central bank machine to print money and spend it. As Abba Lerner, arguably the founding father of MMT rightly pointed out, “Fundamentally the new theory, like almost every important discovery, is extremely simple. Indeed it is this simplicity which makes the public suspect it as too slick......What progress the theory has made so far has been achieved not by simplifying it but by dressing it up to make it more complicated and accompanying the presentation with impressive but irrelevant statistics.”

Quite. In addition to the “public”, universities are full of academics who won’t believe anything unless a hundred words are used where one will do. Those academics don’t like simple solutions to problems: that might put them out of work. And their own job security takes precedence over reducing unemployment or reducing poverty.

Article No 1: Financial Times leader.

This leading article in the FT argues that Britain’s debt ought to be reduced, or at least the rate of increase slowed down. And the reason given is old shibboleth that doing so impresses “investors” (3rd para) and enables Britain to borrow at relatively low rates.

As regards borrowing and spending for stimulus purposes what's the problem if "investors" don't want to lend? Whence the assumption that a monetarily sovereign country needs to borrow when it can perfectly well print money? See what I mean? The article assumes it is not possible to print.

As Keynes and Milton Friedman pointed out, a deficit can be funded EITHER by borrowed OR printed money.

And as regards the structural deficit/debt, much the same applies: that is a monetarily sovereign country can just print its way out of trouble. Of course the printing could prove too inflationary, but that’s no problem: all that is needed is some sort of DEFLATIONARY measure, like increased taxation, to counter the inflationary effect. Net effect: zero. That is, the debt comes down, while demand and employment remain unaffected.

2. Jeffrey Sachs.

At the end of the second paragraph of this article by Sachs, he claims, “Keynesian thinking presumes that the financial markets will readily buy government bonds to finance the stimulus.” Complete bo**ocks! Keynes made it perfectly clear that deficits can be funded EITHER BY BORROWED OR PRINTED MONEY!!!!!

Re Keynes, see 2nd half of 5th paragraph here.

And Sachs was the youngest ever “Professor of Economics” at Harvard. Apparently studying economics is not a requirement for the latter post.

3. Willem Buiter.

In this article, Buiter makes the bizarre claim that “The U.S. like every country that has independent monetary authority, when it has an unsustainable fiscal situation, has two options. One is default, right, and the other . . . . is inflation.

Bo**ocks again! There is a third option: just stop borrowing and go for whatever combination of 1, increased tax / reduced public spending, and 2, printing is suitable.

Buiter is actually half aware of the fact that central banks can print when he says, “Permanent monetisation of the vast deficits anticipated in the US and the UK would be highly inflationary.” Well of course! But that’s just a man of straw argument. It takes the print idea to an absurd extreme.

In contrast, the above mentioned COMBINATION of printing and tax increases would not, if implemented in a competent manner, cause excess inflation.

4. Jared Bernstein.

In this article, Bernstein claims, “As I’ve stressed throughout, debt is not just important—it is an essential tool of economic growth.”

NO IT IS NOT. Friedman set out a monetary system in which there is NO GOVERNMENT DEBT AT ALL!!!!!!! Warren Mosler advocates a similar system.

Re Friedman, see paragraph starting “Under the proposal…” (p.250) here.

Bernstein sits on the Congressional Budget Office's advisory committee, but as far as I can see from the summary of his career on Wiki, he has never studied economics. As I said above, a knowledge of economics does not seem to be an essential requirement when appointing people to jobs where you’d think a knowledge of the subject is essential. And the poor and unemployed pay a heavy price for this.

Bernstein incidentally also trots out the old myth that if government makes worthwhile investments, that justifies the borrowing needed to fund such investment. Bo**ocks again. Bernstein needs to read a paper by Kersten Kellermann on this subject.


Afterthought – 17th Dec.   Re the final paragraph above, perhaps I should have added that the most fundamental reason that any entity borrows to make an investment is that it does not have the necessary cash available. E.g. if you want a £15k car and have well over £15k in the bank it probably won’t make sense for you to borrow £15k.

And governments have an almost limitless source of cash available: the taxpayer. Thus the most basic reason for borrowing to make an investment does not make sense in the case of governments. But of course there are other relevant points to consider, as Kellermann explains. 

Afterthought (22nd Dec). There is another example of the “central banks can’t print” thinking in an article by Robert J. Samuelson in the Washington Post.

Samuelson is not a professional economist, but he is influential all the same. He claims in his article that “Standard Keynesian remedies for downturns — spend more and tax less — presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates.”

Afterthought, 6th March, 2012. Here is another example of a “Prof.” claiming that government must either borrow or tax in order to spend. It’s John Cochrane, professor at the University of Chicago Booth School of Business.

See paragraph starting “But where did the money come from?



  1. Can someone explain the macro-economic theory that says we can print and tax AND not screw up the production structure?

    Until we have good reason to think that this is possible, all talk of "well, we could just drop money and tax the excess" is about as credible as "well, we could just drop 50 pound lead weights and tax the excess."

  2. Marris, “Print and tax” is what a government needs to do to escape a structural deficit/debt, as I explain here:

    In particular see p.4, passage starting with the heading “Structural debt”.

    If anything “screws up” an economy, it’s INCURRING a structural debt rather than disposing of same (not that I greatly object to national debts as long as the real rate of interest paid is negligible).


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