Wednesday, 30 March 2016

Cutting the national debt may do no good.

I like this picture from Lars Syll’s blog. It summarises much of Modern Monetary Theory.

In particular, government debt is an asset, as viewed by the private sector. The more paper assets the private sector has, the more it will tend to spend and the lower will unemployment be, all else equal.

So think twice before advocating a cut in the debt. If REAL interest on the debt (i.e. interest on the debt after adjusting for inflation) is around zero, the just leave it alone. In contrast, if government is paying any significant amount of REAL interest on the debt, then fair enough: reduce it.

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