« Paradoxes of control | Main | Comfortable? »

September 28, 2015

Comments

Luis Enrique

but the fiscal charter is about running a surplus during good times? And in good times, surely a government surplus is the counterpart of individual decisions to borrow and spend?

Bob

In that link to a post you say Ricardian Equivilance and "crowding out" are problems for government borrowing.
Govt borrowing is really printing. You print Gilts. This increases savings.
There is no financial crowding out. It is a myth.
Government spending can crowd out real resources though.
As to RE, I have never seen any evidence for it, and plenty against it. Could you show me a good example of RE in practice?

Britonomist

I don't agree that interest rates are indicative of financial market participants not being concerned about the debt, just indicative that they're aware that the central bank can and will always intervene to keep interest rates where they want them.

But interest rates are the elephant in the room, how much will debt interest servicing costs explode if the central bank decides to raise rates back to historically average levels? What will this mean for government expenditure? I think it's vitally important we stop costs and expenditure getting out of control, for the sake of sustainability.

serenis.cornelius

Thank you for these "salutary reminder" which evokes for me a clear "kalecki-Keynes-Vickrey tradition".There are sadly too few people who understand this approach of the deficit. I add that the multiplication of the bubbles and krach ├ępisodes is also a "measure" of the miscomprehension of what the deficit really is.
Best regards.
serenis cornelius

reason

It seems to me that there is another story hear.

I think the big error that "Austrians" make is in thinking that savings is directed (i.e. people know what they want to use the savings for). Savings are mostly contingent (i.e. a form of insurance). People don't know what they will spend their savings on, they don't even know what their choices will be, or what their preferences will be at a later date. People want to build financial assets as a buffer stock.

Financial assets are of two basic types - equity (shares in income streams from real assets) or debt (promises of income stream from other people or institutions). Complicating the issue is that money -(that lubricant for modern economies) is almost all created as debt, but not all debt creation creates money.

I think that the higher the proportion of money that is created via private borrowing, the more unstable the economy will become. Money creation via government spending, however makes the private sector more resilient (because financial wealth is increased without a corresponding increase in private debt). Private financial wealth creation should be concentrated in real asset purchases or lending to governments, not in private borrowing.

reason

P.S. I think that means that in general there is an optimal long term stock of government debt, that increases as GDP increases (i.e. paying off the debt is a big mistake). I think that the "Washington Consensus" policy mix of tight fiscal policy and loose monetary policy is 100% wrong - fiscal policy should be looser (especially if the new debt is used for public infrastructure investment) and monetary policy tighter to reduce private borrowing. And this combination should push down asset prices (less leverage) and push up yields (hence excessive private leverage is a lot of the explanation of low interest rates).

Matt M

Nail on the head - massive overseas surpluses are from mostly plutocratic states: Saudi Arabia, China, many SE Asian countries, Central Asia etc.

Basically the elites in these countries can't recycle funds to generate returns in these places so need to dump it into the west causing distortions.

In a way, the distortions empower the elites here too to do the same political things causing reverb effects. Eventually the capital can't go anywhere.

I always believed Marx was correct in his analysis of capitalism as inherently unsustainable as plutocrat returns plummet naturally causing more and more extreme behaviours/policies/laws to be put in place to sustain them - abolishing borders for immigrants, cutting pensions, privatisations etc.

Funny how it was elites in feudal states that inadvertently took down the middle class in advanced countries.

In a sense, it was the welfare state and regulation that saved capitalism from itself by forcing plutocrats to recycle funds.

Bob

"I think that the higher the proportion of money that is created via private borrowing, the more unstable the economy will become. Money creation via government spending, however makes the private sector more resilient (because financial wealth is increased without a corresponding increase in private debt). "
This is MMT's "net financial assets."

Anders

Chris - would that low bond yields told an unequivocal story about deficits being acceptable. I fear Osborne would say it's precisely the anti-deficit rhetoric, and the cuts to public services, which are keeping a lid on gilt yields.

Neil Wilson

"And in good times, surely a government surplus is the counterpart of individual decisions to borrow and spend?"

Only if you have no external sector.

You need to adopt 'functional' finance, not sound finance. Ignore the numbers and concentrate on unemployment and price stability.

Keep unemployment low, prices stable and savings well distributed and let the budget fall where it may.

Neil Wilson

"But interest rates are the elephant in the room, how much will debt interest servicing costs explode if the central bank decides to raise rates back to historically average levels?"

That's a political choice. There is no need for the government to pay interest at all to any third party not under its control. It can do it all internally within its own and controlled entities.

The whole political debate should be about why the government needs to pay money to savers, particularly overseas savers when it patently doesn't have to.

reason

Neil Wilson
Yes, definitely for countries with their own currency.

Benoit Essiambre

" I stress around the world: the counterpart to government borrowing is now an overseas deficit - which is to say net savings by the rest of the world."

Of course the third alternative is an increase in net aggregate investment, that is creating more new capital. This requires real interest rates to go sufficiently low, possibly quite negative.

The comments to this entry are closed.

blogs I like

Why S&M?

Blog powered by Typepad