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A better answer may be that the same psychological forces that lead to private sector deleveraging cause the private sector to "go on strike" until the government sector subsequently delevers. That is, to the extent that the private sector has become allergic to too much debt, it is allergic not only to an overabundance of private sector debt but to debt altogether. In that case, the private sector would attempt to compensate for government budget deficits by increasing its savings — keeping the total borrowing and spending at the desired levels. Government borrowing would drive private sector deleveraging, rendering fiscal policy futile. John Carney
Very implausible. The increased prices during a recovery would make saving a relative loser wrt investment and perhaps an absolute loser wrt consumption (negative real interest rates, such as is typical in housing). The problem of excess deficit spending by the monetary sovereign is price inflation, not private deleveraging.
Also, Ole John is not up to speed yet since he apparently believes deficit spending by the monetary sovereign requires borrowing.
Just another variation on Ricardian equivalence. Seems psychologically implausible to me. However, to the extent that individual agents in the private sector have a variety of crackpot theories about how the economy works, there is no telling how they will respond to the government failing to act in accordance with said crackpot theories.
However, to the extent that individual agents in the private sector have a variety of crackpot theories about how the economy works, there is no telling how they will respond to the government failing to act in accordance with said crackpot theories.
Sums it up. The politics is crackpot theories addressing expectations based on crackpot theories, although I think that John gets this, too.
"Also, Ole John is not up to speed yet since he apparently believes deficit spending by the monetary sovereign requires borrowing."
Under our current institutional arrangements, deficit spending does require borrowing. We can change these arrangements. But until we do, we shouldn't pretend that deficits don't entail borrowing.
John Carney Under our current institutional arrangements, deficit spending does require borrowing. We can change these arrangements. But until we do, we shouldn't pretend that deficits don't entail borrowing.
It is not incorrect to say that when when govt taxes, it "saves," and when it deficit spends under a tsy issuance deficit offset regime, it "borrows."
However, most people are unaware of the huge difference between "saving" and "borrowing" by the issuer of a sovereign currency and saving and borrowing by currency users.
MMT describes that difference operationally, showing that "borrowing" by a currency sovereign is simply a reserve drain rather than an operational requirement for funding or financing. The source of this is Warren Mosler's "Soft Currency Economics" (1996). This is fully explained there.
John Carney Yes. I think this is kind of crackpot Ricardian equivalence. But that doesn't mean it doesn't accurately describe how people behave.
yes, and if one is trading, perceptions are a huge factor in market action. The advantage lies is in recognizing where the perceptions are wrong, so that expectations based on them won't be met factually.
When such perceptions result in enough discrepancy between actual or "fundamental" value and market price, price will eventually shift in the direction of reality. But "the market can say irrational longer than most can stay solvent."
7 comments:
A better answer may be that the same psychological forces that lead to private sector deleveraging cause the private sector to "go on strike" until the government sector subsequently delevers. That is, to the extent that the private sector has become allergic to too much debt, it is allergic not only to an overabundance of private sector debt but to debt altogether. In that case, the private sector would attempt to compensate for government budget deficits by increasing its savings — keeping the total borrowing and spending at the desired levels. Government borrowing would drive private sector deleveraging, rendering fiscal policy futile. John Carney
Very implausible. The increased prices during a recovery would make saving a relative loser wrt investment and perhaps an absolute loser wrt consumption (negative real interest rates, such as is typical in housing). The problem of excess deficit spending by the monetary sovereign is price inflation, not private deleveraging.
Also, Ole John is not up to speed yet since he apparently believes deficit spending by the monetary sovereign requires borrowing.
Just another variation on Ricardian equivalence. Seems psychologically implausible to me. However, to the extent that individual agents in the private sector have a variety of crackpot theories about how the economy works, there is no telling how they will respond to the government failing to act in accordance with said crackpot theories.
However, to the extent that individual agents in the private sector have a variety of crackpot theories about how the economy works, there is no telling how they will respond to the government failing to act in accordance with said crackpot theories.
Sums it up. The politics is crackpot theories addressing expectations based on crackpot theories, although I think that John gets this, too.
"Also, Ole John is not up to speed yet since he apparently believes deficit spending by the monetary sovereign requires borrowing."
Under our current institutional arrangements, deficit spending does require borrowing. We can change these arrangements. But until we do, we shouldn't pretend that deficits don't entail borrowing.
Tom and Dan,
Yes. I think this is kind of crackpot Ricardian equivalence. But that doesn't mean it doesn't accurately describe how people behave.
John Carney Under our current institutional arrangements, deficit spending does require borrowing. We can change these arrangements. But until we do, we shouldn't pretend that deficits don't entail borrowing.
It is not incorrect to say that when when govt taxes, it "saves," and when it deficit spends under a tsy issuance deficit offset regime, it "borrows."
However, most people are unaware of the huge difference between "saving" and "borrowing" by the issuer of a sovereign currency and saving and borrowing by currency users.
MMT describes that difference operationally, showing that "borrowing" by a currency sovereign is simply a reserve drain rather than an operational requirement for funding or financing. The source of this is Warren Mosler's "Soft Currency Economics" (1996). This is fully explained there.
John Carney Yes. I think this is kind of crackpot Ricardian equivalence. But that doesn't mean it doesn't accurately describe how people behave.
yes, and if one is trading, perceptions are a huge factor in market action. The advantage lies is in recognizing where the perceptions are wrong, so that expectations based on them won't be met factually.
When such perceptions result in enough discrepancy between actual or "fundamental" value and market price, price will eventually shift in the direction of reality. But "the market can say irrational longer than most can stay solvent."
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