An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Monday, December 2, 2019
Clint Ballinger — Austerity in a Time of Plenty: : The “domestic default” bogeyman = More bad statistics from Reinhart & Rogoff
The basic flaw in Rogoff & Reinhart’s argument can be set out in far fewer words than Ballinger uses. The flaw is thus.
R&R claim that given a larger than usual debt, what they call “financial repression” will have to be used to pay down the debt at some point. (You can tell they’re desperate for an argument by their use of emotive phrases like “financial repression”. Another emotive phrase is “debt overhang” instead of just using the word “debt”.)
Financial repression consists of robbing the population somehow, e.g. implementing a big rise in taxes or organising a big rise in inflation so as to reduce the real value of the debt.
The answer to that, as most MMTers probably know, is that there is nothing wrong with leaving a larger than usual debt in place, long as it is not inducing the private sector to try and spend away that relatively large stock of savings, and thus cause excess demand and inflation, and as long as interest rates are not pushed upwards too much as a result.
But if the latter undesirable effects ARE EVIDENT, then of course a countervailing deflationary effect can easily be imposed by raising taxes and “unprinting” the money collected.
That will not, repeat not cut real living standards for the population. Reason is that the SOLE purpose of that extra tax is to cut demand to the level where there is no EXCESS DEMAND: i.e. to cut demand to the level where GDP and numbers employed are as high as is consistent with acceptable inflation.
Thus the entire “financial repression” idea is bullshit.
Austerity for thee, tenure for wee...
ReplyDeleteYo US govt spending is up big again YoY....
ReplyDeleteFrom Mike's latest report:
ReplyDelete"Total spending through Nov 22, $754.8 bln, up $37.3 bln y-o-y and growing at 5.2%."
Where is the "austerity!"?????
The basic flaw in Rogoff & Reinhart’s argument can be set out in far fewer words than Ballinger uses. The flaw is thus.
ReplyDeleteR&R claim that given a larger than usual debt, what they call “financial repression” will have to be used to pay down the debt at some point. (You can tell they’re desperate for an argument by their use of emotive phrases like “financial repression”. Another emotive phrase is “debt overhang” instead of just using the word “debt”.)
Financial repression consists of robbing the population somehow, e.g. implementing a big rise in taxes or organising a big rise in inflation so as to reduce the real value of the debt.
The answer to that, as most MMTers probably know, is that there is nothing wrong with leaving a larger than usual debt in place, long as it is not inducing the private sector to try and spend away that relatively large stock of savings, and thus cause excess demand and inflation, and as long as interest rates are not pushed upwards too much as a result.
But if the latter undesirable effects ARE EVIDENT, then of course a countervailing deflationary effect can easily be imposed by raising taxes and “unprinting” the money collected.
That will not, repeat not cut real living standards for the population. Reason is that the SOLE purpose of that extra tax is to cut demand to the level where there is no EXCESS DEMAND: i.e. to cut demand to the level where GDP and numbers employed are as high as is consistent with acceptable inflation.
Thus the entire “financial repression” idea is bullshit.
"the level where GDP and numbers employed are as high as is consistent with acceptable inflation."
ReplyDelete10,000 retiring here every day Ralph...