Wednesday, 29 May 2013

Hello professional economists: did you know governments can print money?

I’ve lost count of the number of times I’ve seen articles and papers by so called professional economists which assume that increasing the deficit means increasing the debt.
As Keynes and Milton Friedman pointed out, and as I’ve pointed out a trillion times on this blog, a deficit can be funded by debt OR BY NEW MONEY.
The latest high profile economist I’ve noticed who doesn’t get the latter very simple point is Carmen Reinhart. But then given the nonsense than emanates from her and Kenneth Rogoff, that’s not surprising.
In this letter to Paul Krugman, she asks Krugman, “What is the foundation for your certainty that as peacetime debt hits new records in coming years, the United States will be able to engage in  forceful countercyclical fiscal policy if hit by a large unexpected shock?  Furthermore, do you really want to find out the answer to that question the hard way?”
Well the “foundation of my certainty” is that a monetarily sovereign country like the US can simply print money to fund “countercyclical fiscal policy” if no one wants to lend it money.
Now the knee jerk response to that from the assortment of clots, idiots and thickos that infest Planet Earth is “inflation”. And the answer to that is that as long as the amount of money created and spent is enough to escape a recession, but no so much as to cause excess unemployment, then “problem solved” as they say.

Why borrow?
Moreover, there’s not even any point in borrowing something you can produce yourself for free is there? That’s one reason why Milton Friedman and Warren Mosler have suggested that governments should NOT BORROW AT ALL!!!!!  That is, the only liability they should issue is money (monetary base to be exact).

What’s the relevance of “peacetime”?
Moreover, noticed a bit of trickery in Reinhart’s question: that word “peacetime”?
US debt relative to GDP is still nowhere near HALF the level that existed in the UK just after WWII (well over 200%). Now that doesn’t suite the Rogoff and Reinhart thesis, namely that high debts are some sort of disaster. So they try their best to confine the discussion to periods other than those just after wars.
But even that won’t wash: the UK’s debt during the 20th century AVERAGED around 100% of GDP: above the 90% threshold which R&R claim to be a big problem.
Pathetic, ins’t it?


  1. It's also worth pointing out that Germany, the USA, the UK (and I think, Japan ... need to check on that) ran large deficits in the immediate post-war decades, probably the most prosperous decades in living memory, leading to Japan's "economic miracle", Germany's "Wirtschaftswunder", Britain's "you've never had it so good" (and we hadn't!), and the USA did pretty well also.

    (Germany also has the largest current deficit (and debt) in the Eurozone, although it is also probably the largest economy in the Eurozone ...but the point is....deficits aren't necessarily bad (although debt isn't particularly good either....).

    1. Just to be accurate, those countries had record DEBTS during the post war years, but not particularly high DEFICITS. They actually paid down their debts during those years which means they must have been running surpluses, or at least relatively small deficits.


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