Friday, 28 October 2016

Warren Mosler and Matthew Forstater said “the natural rate of interest is zero”.

Their point (at least as I see it – they might not agree with my interpretation of their thinking) is that it makes no sense for the state to issue so much money that it then has to pay interest to “money holders” (i.e. the private sector) to induce it not to spend some of that money, and with a view to curbing inflation. I.e. why not just issue less money and pay no interest to anyone? I agree with that.

Having said that, there’s a slight complexity here, namely that the state acts in at least two capacities: 1, issuer of money, and 2, investor in infrastructure. And there are some arguments (pretty feeble ones) for funding infrastructure via interest yielding bonds. (Milton Friedman and Warren Mosler opposed ANY SORT of government borrowing, and quite right, I think).

But if it is accepted that infrastructure is funded via borrowing rather than via tax and money printing, there’s a glaring self contradiction there as follows. The conventional economic wisdom is that when stimulus is needed, demand should be increased by cutting interest rates, and that’s done by having the central bank print money and buy back the above bonds. But that amounts to funding infrastructure (after the event so to speak) via money printing, which contradicts the above idea that infrastructure should be funded by borrowing!

In short, the conventional economic wisdom is in a muddle on the subject of borrowing to fund infrastructure. So let’s so to speak leave advocates of the conventional wisdom to wallow in the mess they’ve made for themselves, and return to Mosler and Forstater’s basic point, as I see it, which is:

The state as money issuer should issue enough money to bring full employment, but not so much that the state needs to borrow some of it back and hence artificially raise interest rates. That’s not to say that interest rate adjustments should NEVER be used: they’re a useful tool to have in reserve. But the AIM should always be Mosler and Forstater’s zero rate.

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