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December 05, 2013

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TickyW

Elegant.

Far more elegant than my brutal and clumsy take here:

http://theuxbridgegraduate.wordpress.com/2013/06/02/public-debt-growth-and-fiscal-multipliers/

Agog

Justification 4. They think Labour (or Lab/Lib) will be stupid enough to match this aim, run a surplus early in the next parliament, and induce a recession.

Roy Lonergan

Chris

So we can run a sustainable primary budget deficit at any debt/GDP ratio so long as g>r. Which means I guess that the effect of running a smaller deficit or a surplus compared to the sustainable deficit is to reduce the nominal debt or to spend on HS2 or whatever (buy bitcoins or tulip bulbs perhaps).

If there is a swifter increase in r then it doesn't change the story too much unless r is close to g and I assume that increasing r would tend to go along with increasing g anyway? But even then I just need to balance the budget rather than run a surplus.

Is that right?

Roy

Boffy

"printing money to buy government debt might be a way to hold interest rates down, if this is necessary (though this raises other issues)."

Printing money to buy debt might at best hold the yield down on those bits of debt that are bought, but would probably cause the yield on other debt to rise instead. We see that with the steepening of the yield curve in the US currently.

But, money printing devalues the money that is printed, thereby causing inflation. There has been little inflation in commodity prices, because there has been a massive rise in global productivity over the last 30 years, that has reduced the value of commodities. Instead, there has been a massive inflation of asset prices.

If commodity price inflation rises as a result of the money printing - now likely as productivity gains weaken - then bondholders will fear that the real value of the debt they hold will fall, so they sell it, causing yields to rise.

My guess is that state bureaucrats know that whatever commitment Carney, Yellen or other central planners give about keeping interest rates low, its not in their gift, but a matter of the demand and supply of money-capital. In fact, whenever, Carney has committed to keeping interest rates frozen, market rates have risen as he was speaking!

Interest rates are heading much higher.

Boffy

@Roy,

"If there is a swifter increase in r then it doesn't change the story too much unless r is close to g and I assume that increasing r would tend to go along with increasing g anyway?"

r may rise because g increases causing the demand for money-capital to rise. But, r may rise because the supply of money-capital falls to its demand. That would be because the rate of profit, for example, falls.

If r rises, and a lot of the debt is owned by foreigners, then there will be a flow of money-capital out of the economy, which means aggregate demand may also fall. So, rising r may go along not with rising g, but with declining g.

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