Saturday, 8 April 2017

Nonsense from the World Economic Forum.

A recent World Economic Forum publication claims everyone in any given country would have to “contribute” something if that country’s national debt was to be paid off. Er – no they wouldn’t because (to over-simplify a bit) for every dollar of so called debt, there is someone with a dollar of a financial asset called “government bond” or similar. (“Treasury” in the case of the US or “Gilt” in the case of the UK for example).

Thus in the simple case of where a country’s national debt is held entirely by residents of the relevant country, the national debt could be wiped out by for example by simply having government announce it no longer owed anything to anyone. Debt holders would lose $X, while others would be relieved of the obligation to repay $X to debt holders, thus the average “contribution” per citizen would be zero.

A more subtle and less dramatic way of doing the same thing would be some sort of tax on debt holders combined with tax cuts and/or increased social security payments for the less well off. But the end result would be the same: a zero net “contribution” per citizen.

Of course in the real world, most countries’ debts are to some extent held by foreigners. But that makes little difference if the amount of country A’s debt held by citizens of country B is balanced by the amount of country B’s debt held by country A.

And so far as the World as a whole goes, the same applies as in the above example of where all of a country’s debt is held by natives of that country: that is, debts and financial assets in the form of government bonds net to nothing for the World as a whole.

In contrast to the above sort of “net to nothing” scenarios, a country can of course be left in debt to other countries after all the above “netting off” has been done. Such a country clearly has a problem, maybe a serious problem, maybe not: depends on the size of the debt.


 Kenneth Rogoff.

This is all reminiscent of the nonsense spouted by Kenneth Rogoff, Carmen Reinhart and other economists at Harvard luniversity. According to Rogoff, what he calls “financial repression” has to be endured for a country to pay off its national debt. And “financial repression” according to Rogoff is bad, bad, bad and horrible.

In fact, as MMTers have pointed out ad nausiam, a country which issues its own currency has total and complete control of the rate of interest it pays on its debt. Thus it can perfectly well organise things so that the REAL or “inflation adjusted” rate of interest on its debt is zero or even negative. In the latter scenario, national debt is not any sort of burden: in fact in that scenario, if anything, it’s the debtor who rips off the creditor rather than vice-versa.

But that does not mean it’s a good idea to let debts rise for ever (relative to GDP). The time to cut the debt is when the economy has a fit of Alan Greenspan’s “exuberance” and inflation looks like getting uppity. In that scenario, taxes can be raised and some of the debt can be paid off. But note that that DOES NOT constitute any sort of Rogoff type “standard of living reducing repression”: the object of the exercise is simply to control inflation – there is no effect on GDP or average incomes.

Indeed, given that excess inflation imposes various real costs on the country, a rise in tax (given excess inflation) far from being any sort of “repression” equals an all-round benefit for the country.

Kenneth Rogoff’s “financial repression” is pure, unadulterated bullshit.
And the final important point to understand about national debts (as pointed out over and over by MMTers) is that national debts are self limiting. That is, debt (to repeat) is a financial asset as viewed by the private sector, and the more such assets the private sector holds, the more it will spend, all else equal. If someone gave the average household a million dollars worth of debt, what would the average household do? It wouldn’t just sit on it! Doubtless it would save or “sit on” some of it. But at the same time it would try to sell and spend away a significant proportion.

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