Why governments should run deficits

10 February, 2017 at 11:09 | Posted in Economics | 10 Comments

 

Lynn Parramore: Do you think there are lessons in what has happened in the Eurozone for students of economics and the way the subject is taught?

darling-let-s-get-deeply-into-debtMario Seccareccia: Yes, indeed. Ever since the establishment of the modern nation-state in the late eighteenth and nineteenth centuries, the creation of the euro was perhaps the first significant experiment in modern times in which there was an attempt to separate money from the state, that is, to denationalize currency, as some right-wing ideologues and founders of modern neoliberalism, such as Friedrich von Hayek, had defended. What the Eurozone crisis teaches is that this perception of how the monetary system works is quite wrong, because, in times of crisis, the democratic state must be able to spend money in order to meet its obligations to its citizens. The denationalization or “supra-nationalization” of money with the establishment that happened in the Eurozone took away from elected national governments the capacity to meaningfully manage their economies. Unless governments in the Eurozone are able to renegotiate a significant control and access money from their own central banks, the system will be continually plagued with crisis and will probably collapse in the longer term.

Lynn Parramore

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10 Comments

  1. As soon as a government wants to reduce the size of its national debt and chooses to do so by issuing more money or its equivalent, then the value to the money currently in circulations goes down. The government should not have got into debt in the first place.

    • Yes, the value of the money goes down like It did in Japan after QE, In US and in Europe?

      Might help to check the reality.

    • The government issues money to reduce its national debt? What does that even mean?

      • He means replacing positive yielding inherently risk-free sovereign debt with 0% yielding inherently risk-free* sovereign debt – an obvious moral necessity* – thought he apparently does not think so.

        The Austrians have almost everything upside down and reversed. 😦

        *except for physical fiat which can be lost, stolen, etc. Otoh, account balances at the central bank are risk-free.

        **at least as far as replacing existing sovereign debt as it comes due. And, btw, 0% should be the maximum yield on inherently risk-free sovereign debt and that for the LONGEST maturity (e.g. 30 year Treasury Bond); shorter maturities should have NEGATIVE yields with on-demand account balances at the central bank costing the most.

      • What does it mean? Where’ve you been the last 5 years. “It” equals QE!!!

      • @Ralph

        QE is not about the government issuing ‘more money or its equivalent’ to reduce its debt, I think you know that.

      • QE is not about the government issuing ‘more money or its equivalent’ to reduce its debt … Alex Heche

        Correct. QE is an asset swap of new reserve balances at the central bank for assets with no increase in bank deposits UNLESS the assets are owned by the non-bank private sector and NO DECREASE in the National Debt either.

        One can argue that QE INCREASES the National Debt since reserves (fiat account balances at the central bank) are part of the National Debt too except they are balanced with central bank assets and supposedly* can be sterilized given positive central bank equity.

        *However, since QE has bought non-sovereign debt (e.g.MBS), that’s debatable.

    • As soon as a government wants to reduce the size of its national debt and chooses to do so by issuing more money or its equivalent, then the value to the money currently in circulations goes down. David Chester

      Not necessarily because:

      1) The population is not even allowed to use fiat except for physical fiat (bills and coins). Thus the demand for fiat is artificially low. We should fix that by allowing all citizens to have inherently risk-free accounts at the central bank itself alongside those of depository institutions and by abolishing government provided deposit insurance. Then the problem is likely to be TOO LITTLE fiat.

      2) Since “loans create deposits”, loan repayment destroys deposits. Hence spending by the monetary sovereign can counter that destruction for no net increase in purchasing power.

      The government should not have got into debt in the first place. David Chester

      Then there’d be no money since even the contents of your wallet are part of the National Debt. The problem is positive yielding sovereign debt since sovereign debt is inherently risk-free and should yield at most 0%. Otherwise we have welfare proportional to wealth, not need.

      • “We should fix that”. No need to. “The population” already has access to base money: it’s just that they access it via their commercial banks. In fact about 20% of the US money supply is now base money according to Fed figures I looked at yesterday. The idea that “the population” cannot access that money is clearly unrealistic.

        Moreover, in the UK (and I imagine other countries) people can by-pass commercial banks and have accounts at National Savings and Investments, which is effectively a government run bank. NSI does not issue cheque books or plastic cards, but account holders can get their money out within about 48 hours.

      • “The population” already has access to base money: it’s just that they access it via their commercial banks. Ralph Musgrave

        Oh yeah, as if unsafe, inconvenient physical fiat, bills and coins, can compare with inherently safe, convenient accounts at the central bank itself. Pull the other one, Ralph.

        Besides, government insurance of private liabilities, including privately CREATED liabilities (“loans create deposits”), must go for ethical reasons. Then what, the mattress for the population’s deposits?

        “Their commercial banks”? Not so long as they are privileged by government. Then they are enemies of all but the rich, the most so-called worthy of what is then the PUBLIC’S CREDIT but for private gain.


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