Tuesday, 4 July 2017

Richard Murphy, the national debt and MMT.

Richard Murphy recently wrote an article entitled “Why we need more national debt”. It’s a good article. My main complaint is that few of his ideas are original, but he should be congratulated for repeating them, because they need repeating. I’ll summarise the article below and list a few of the people who have expressed the same ideas before.

His first two large paragraphs (starting “First some facts..”), say there is no essential difference between national debt and money (base money to be exact). Warren Mosler (founder of MMT) made that point a good ten years ago. And I’ve repeated the point ad nausiam on this blog over the years. Plus Martin Wolf (chief economics commentator at the Financial Times) made that point a couple of years ago.

MMTers sometimes refer to the sum of debt and base as “Private Sector Net Financial Assets” (PSNFA). I’ll use that phrase below.

Murphy then makes five numbered points. The first is that inflation whittles away the value of PSNFA, thus on the not unreasonable assumption that the value of PSNFA needs to be maintained (especially relative to GDP), then the stock needs to be topped up. And that can only be done via a deficit.

I’ve been making that point for YEARS. Richard Murphy is one of the very few people on planet Earth I’ve come across who gets that point as well. Simon Wren-Lewis (Oxford economics prof) is another. And I do spend several hours a day reading what economists are saying. Though obviously I can’t cover everything. So congratulations to Richard Murphy for that.


His second claim is that pension funds need safe assets to invest in, and PSNFA fulfills that role. Actually if pension funds do not have assets to invest in, they can always go for the “pay as you go” option. That’s how most state pension systems work: i.e. there are no pension fund investments because today’s fund contributors pay for today’s pensions.

But to the extent that pension funds don’t want to or can’t do that, their demand for PSNFA is clearly part of the overall demand for PSNFA.

His third point is that demand for safe assets (to over-simplify a bit) also comes from non-bank firms: clearly also true.

His fourth point is that if the nominal rate of interest on government debt is low enough and inflation is high enough, then the REAL rate of interest is negative: i.e. the creditor subsidizes the borrower (government). Again, that’s a point I’ve made at least a dozen times on this blog.

His fifth point is that interest on the debt is not a huge problem in that it gets recycled into the economy: e.g. interest is paid to pension funds. Well that’s pretty obvious, but that point fails to address an elephant in the room, namely the question as to what the OPTIMUM rate of interest on the debt is. As MMTers often point out, a country which issues its own currency can pay any rate of interest it likes on its debt.

Milton Friedman and Warren Mosler advocated a zero rate. I.e. the said in effect that PSNFA should consist entirely of base money. I think that’s right, or at least nearly right. Possibly a very low rate of interest should be paid (something between zero and the rate of inflation, as rather suggested by Murphy). A merit of that is the debt, i.e. bonds, are not as liquid as cash. Thus in the event of the private sector going mad and trying to spend the whole stock of PSNFA at once and causing hyperinflation, the inflation would be muted somewhat.

Murphy’s final point is to criticize the idea that the debt needs to be repaid. Correct: in practice the debt (as a proportion of GDP) normally gets whittled away by a combination of inflation and rising real GDP. Also a point I’ve made over and over on this blog.


A final criticism is that Murphy’s article could be taken to be suggesting a LARGE rise in the debt (or to be more accurate, in PSNFA). Given that (as pointed out by Warren Mosler) the interest on the debt tends to rise with a rise in the size of the debt itself, and given that interest on the debt is currently within the bounds suggested by Murphy himself (i.e. between zero and the rate of inflation),  it is not obvious why we need a HUGE increase in the debt.

A GRADUAL rise to take account of inflation and real growth is fine by me, but there is no argument for a LARGE rise.

To summarize, I’m awarding nine out of ten to Richard Murphy, though none of his points are original. MMTers like me have been making the above points for a long time. In short, if you’re a member of the 1% of the population interested in original ideas, keep  an eye on what MMTers are saying and on this blog – untill I become so old and confused that I can’t think, which may be quite soon…:-)


Post a comment.