Tuesday, 1 April 2014

BNP Paribas could do with a better chief economist.

Advocates of Modern Monetary Theory (and indeed anyone with a grasp of economics) will be splitting the sides at this phrase uttered by Ryutaro Kono, BNP Paribas’s chief economist: “Because fiscal stimulus borrows income from the future for immediate consumption, such policies only compound Japan’s already huge public debt..”  The quote comes from this Financial Times article.
What’s going on in Kono’s brain is plain as a pikestaff: like a significant proportion of the World’s elite, he doesn’t get the difference between macro and micro. That is, he is treating government debt like that of a microeconomic entity like a household.
And of course when a household borrows, it normally pays back at some time in the future: i.e. the household’s standard of living is boosted now at the expense of it’s standard of living during the period in which it cuts down on consumption so as to repay the loan. So the “borrowing income from the future” idea applies.
But governments are totally different. Fiscal stimulus consists of the government / central bank machine borrowing $X, spending that sum into the economy and giving $X worth of bonds to those it has borrowed from. Note that the private sector’s net paper assets rise by $X. In fact given that base money and government debt are very similar in nature (they are both liabilities of a sort of the government / central bank machine) let’s really simplify matters, and assume they are identical.
On that assumption, fiscal stimulus consists simply of government printing bits of paper worth $X and spending them. Indeed, Keynes pointed out that it doesn’t make much difference whether stimulus is funded by borrowing or simply printing money.

Now comes the dreaded payback – or does it? Well assuming the economy just continues to chug along at more or less full employment, there’s no point in paying back the debt (or having government grab back those bits of paper worth $X that it issued). As to interest on the debt, that’s less than 1% in the case of Japan – or more generally, as long as the REAL or INFLATION ADJUSTED rate of interest is zero or negative, then the above so called “borrowing” costs government nothing in real terms.
On the other hand if the private sector’s newly boosted stock of paper assets induces it to spend excessively and boost inflation, then certainly government needs to raise tax and grab some of those bits of paper. But there is no loss of “income” as Kono suggests. That is, assuming government grabs just the right amount of money back from the private sector, GDP will just continue to chug along at the full employment level.
And finally it could be claimed that the above argument ignores borrowing from the external sector – from foreigners – and that when government borrows from abroad, the effects are different to borrowing from domestic entities. Well fair enough, but in the case of Japan, about 95% of government debt is held by Japanese entities, not foreigners.

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