Wednesday, 12 December 2012

S*d the debt and deficit: Keynes said as much.

Far too many economists are still stuck with the notion that national debts are comparable to household debts. That is, that national debts should ideally be paid off, or that there should be some target for reducing the deficit and/or debt.
Ideas of the latter sort are UNMITIGATED HOGWASH. They are total and complete nonsense. Cr*p. Bu**shit. I’ve run out of words.
Here is quick guide to debts and deficits for the poor benighted folk who still don’t get Modern Monetary Theory.
1. As Keynes pointed out (and as is indeed little more than common sense) if the private sector saves an increased amount of money, it must ipso facto SPEND LESS MONEY, all else equal. That is demand declines, and unemployment rises.
Ergo, given the above increased saving, government must run a deficit. And conversely, if the private sector runs too much of a deficit (i.e. “dissaves”), then government may well have to run a SURPLUS.
2. Any country that issues its own currency has a choice as to what rate of interest it pays on its debt. E.g. it can always cut that rate essentially by funding more government spending via tax rather than borrowing.
However it’s not QUITE THAT easy (but very nearly that easy). The above “tax more and borrow less” is probably deflationary: it’s liable to increase unemployment. But that niggle is easily dealt with: just fund some of the debt reduction or reduced borrowing from newly created money. The latter has a stimulatory / inflationary effect. So as long as the latter simulatory effect equals the above deflationary effect, demand and GDP remain unaltered. I.e. the only net effect is that interest on the debt declines.
3. That raises the question as to what the best rate to pay on debt is. Well that’s a complete no-brainer: the best rate is nothing at all!!!! And government debt on which no interst is paid is virtually the same as money (or monetary base, to be exact).
I’d guess that’s why Milton Friedman and Warren Mosler (amongst others) have advocated that government should issue no liabililties in the form of interest paying debt: the only liability they should issue is money.
 4. Having said that governments should aim to pay a zero rate of interest on their debt, there is another technical niggle: should that be “zero” in nominal or in real (i.e. inflation adjusted terms? However that’s a technicallity I basically won’t address here, except to say that a zero or slightly negative rate in real terms is probably best.
5. There might seem to be a problem arising from the zero interest rate policy, namely that it rules out or severely hinders interest rate adjustments by central banks. My answer to that is, “I couldn’t care less”. For reasons given here and here, interest rate adjustments are a nonsense.
6. So what’s the ideal size for the deficit / surplus? Well having some sort of “target”, e.g. aiming to “halve the deficit in three years” is nonsense. Moreover, the widely accepted target, that is aiming to balance the books over the economic cycle is equally nonsensical.
The ideal size of the deficit / surplus is simply:

the size that maximises employment without exacerbating inflation too much and at a zero rate of interest on the debt.

Or as Keyes put it: “Look after unemployment, and the budget will look after itself”.
Got it?
Just to make sure, I’ll repeat that in bold red letters.

Look after unemployment and the budget will look after itself.


  1. It isn't that simple. Money is issued in one place. At that one place they have to decide how much to issue.

    Unemployment, however, is not the same everywhere. Many types of unemployment are not due to monetary matters, but are cultural,ideological, caused by bad weather or bad luck.

    Look what the single source money did to Europe's divergent economies..

    1. I'm well aware of that point. That is, I wasn't trying to suggest that interest rate cuts or printing and spending new money by the government/central bank machine will deal with geographical areas suffering particularly high unemployment levels.


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