Sunday, 20 September 2015

Watch the UK’s finance minister struggle with the idea that government debt is a private sector asset.

George Osborne is the UK’s finance minister. Like most people in high places, his knowledge of the subject on which he is supposed to be an expert leaves much to be desired, to put it politely.

The above video clip starts with a question (lasting a minute or two) from Lord Turnbull (fellow with grey hair), followed by Osborne's answer.

Marvel as Osborne struggles with the idea that government debt (held by private sector entities) is a private sector asset.

Marvel as he confuses the debt of monetarily sovereign countries (i.e countries that issue their own currencies) with those of non monetarily sovereign countries (e.g. EZ countries).

Marvel as he tries to argue that a debt/GDP ratio for the UK of 100% would be a problem. (It was 250% just after WWII and that does not appear to have been a problem).

Marvel as he tries to argue that a high debt/GDP ratio is a bar to implementing stimulus. If you’re interested on a few details on the latter point, see the section entitled "High debt...." below.

Of course it would be naive to assume that Osborne is speaking the truth - after all, he's a politician. As Lord Turnbull suggests, Osborne's debt fetish is quite probably a huge charade: that is, it's a cover for cutting the size of the state. 

High debt does not prevent stimulus.

Say a country like the UK already has a fairly high debt/GDP ratio and as a result, the interest on that debt is rising. And the country needs to do stimulus. The daft thing to do would be to borrow and spend: why borrow when interest rates are high? Much better is to “print and spend” (as suggested by Keynes).

Would that be inflationary? Not as long as the amount of printing was enough to give the country full employment without going so far as to cause excess demand and hence excess inflation.

And if those dreaded (but largely incompetent) bond vigilantes think printing will result in excess inflation, then let them think that. All they can do is mark down the market price of UK debt. That in  turn raises the interest that has to be paid on new debt, as suggested just above, but (to repeat) why incur new debt when interest rates are high?

(H/t to Richard Murphy)

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