Monday, 26 October 2020

Thomas Picketty makes a couple of mistakes.

That’s in his article entitled “What to do with Covid debt?”

His first para claims that the large amount of money printed to deal with Covid will eventually have to be withdrawn and in particular that it’s the rich who should bear most of that burden. As he puts it, “Sooner or later, the wealthiest will have to be called upon.”

Well, like most people, I’ve no objection to the rich paying relatively high rates of tax, but actually the above stock of money will only need to be withdrawn if the private sector’s new found stock of money (base money to be exact) proves inflationary. If not, there’s not need to withdraw it!

Indeed, the latter point is entirely in line with one of the main claims of MMT, namely that the size of the debt doesn’t matter, as long as it doesn’t cause excess inflation or an excess rise in interest rates.

And it’s quite possible there’ll be no need to withdraw if the West moves in what might be called a “Japanese direction”. That is the Japanese public debt to GDP ratio is more than DOUBLE that of the US and UK as of 2020, but that does not seem to be a problem.

Incidentally, you may have noticed that I’ve treated base money and govt debt as the same thing and that is not unrealistic: there is no sharp dividing line between short term government debt which pays a near zero rate of interest and base money (aka reserves) on which the central bank pays a near zero rate of interest. When the latter “short term” is say one month, then there’s almost no difference.


The second mistake.

Then Piketty says in his last para that, “It was by resorting to exceptional levies on the better-off that the large public debts of the post-war period were extinguished and that the social and productive pact of the following decades was rebuilt. Let’s bet that the same will be true in the future.”

Well that certainly wasn’t the case in the UK. That is, the UK’s public debt to GDP ratio declined from around 250% of GDP in 1945 to around 50% in the 1990s entirely thanks to a combination of real economic growth and inflation eating away at the real value of the debt.

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