Seems the Financial Times has now got to grips with MMT, i.e. the idea that given any sort of recession, government and central bank should simply create money and spend it up to the point where inflation looms. Plus the actual amount of money printed (or, pretty much the same thing, the resulting increase in the national debt) is irrelevant.
My only criticism of that FT article (written by the “editorial board” of the FT) is the popular claim (para starting "Recent QE programs...") that it is hard to unwind QE and revert to the higher interest rates that prevailed prior to the 2007 bank crisis. Actually the latter is easy to do: just raise the deficit to a level higher than it need be and counter the resultant excess increase in demand with higher interest rates. I look forward to the economics profession tumbling to that one.
But the MMT response to the latter idea is that the optimum rate of interest on government debt is zero. Milton Friedman thought likewise – see his para starting “Under the proposal…” in his American Economic Review article ("A Monetary and Fiscal Framework...")
So on that basis, it would not even be a good idea to return to the pre 2007 set up. At least that's certainly the correct conclusion assuming all government spending is CURRENT rather than CAPITAL spending.
It is of course often claimed that governments should borrow to fund capital spending, but Friedman didn’t seem to go along with that idea, and I criticised the idea yesterday on this blog.
Incidentally my above claim that government debt is pretty much the same as simple straightforward cash needs qualifying. Certainly SHORT TERM government debt which pays a near zero rate of interest is very close to cash. In contrast, longer term debt which pays significantly above zero is not the same, and I do not favour a deficit which is so large that government and central bank then have to counter the resultant excess demand by artificially raising interest rates to an excessive extent.
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P.S. 26th Aug 2021. On second thoughts, my above claim that it is easy to revert to the higher interst rates that existed prior to QE would be easy, is not too clever. At least that would be difficult for an INDIVIDUAL country to do since all sorts of problems would arise from its intereset rates being out of line with that of other countries. In contrast, if every country or at least a majority of large countries went for that higher interest rate policy, that would be more manageable.
Financial Times very slow on the uptake to figure out over the centuries Parliament legislated for the government and licenced banks to create money from nothing. The BoE effectively explained all this in their 2014 paper if you read it carefully!
ReplyDeletehttps://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
Yes: the Boe explained it in that article, but the cognoscenti have been aware of the point for centuries. David Hume referred to it, as did the governor of the BoE in the 1920s, Josiah Stamp, as did Keynes and last but not least, Positive Money in the years just prior to the above BoE article.
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