Ralph Musgrave — What's The Optimum Debt/GDP Ratio, And What's The Optimum Interest To Pay On That Debt?

Summary

This article deals with the differences between Modern Monetary Theory and what Simon Wren-Lewis (Oxford economics prof.) calls the "consensus assignment" (which more or less equals the conventional wisdom).

I argue below that if the best of MMT and the best of SW-L's ideas are combined, one ends with the ideal system and that involves two important elements. First, it results in a national debt that pays the optimum rate of interest: zero or near zero. Second, it results in the optimum debt/GDP ratio. But since the interest on that debt is zero or near zero that so-called debt isn't really debt at all: it's more like money (base money to be exact).
Martin Wolf pointed to the similarities between "low-interest national debt" and money.

And Milton Friedman supported the "zero interest" idea. Moreover, at a near-zero interest rate, government is, by definition, not influencing or interfering with the free market rate of interest, i.e. a genuine free market rate of interest is obtained under the above "ideal" system, and that presumably maximises GDP.

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What's The Optimum Debt/GDP Ratio, And What's The Optimum Interest To Pay On That Debt?

Ralph Musgrave