Public debt — a macroeconomic necessity

19 Mar, 2019 at 21:40 | Posted in Economics | 3 Comments

The problem stems from the fact that the affluent, which include successful entrepreneurs and capital owners, save relatively more than average or poor households … For this to work out, additional​ demand would have to be created …

dirk2The implication of this is that there’s a macroeconomic requirement to run public deficits, founded on a demand gap that arises from households and firms wanting to set aside savings in the form​ of money … This demand gap cannot be closed but by an increase in government spending and hence debt.

Private debt could close it only temporarily​ since it cannot rise forever. Household debt to GDP ratios have risen substantially in many countries over the last decades, but people will not accept​​ mortgage payments in the range of 50-100 per cent of their​ disposable income …

A permanent public deficit is not a pathological symptom, but a macroeconomic necessity in order for private households to be in a position to save money.

Dirk Ehnts


  1. The private sector creates new dollar-denominated financial assets that are future implied claims on the central bank. Those new NFAs comprise most of private savings. Deficits are not really involved.

  2. According to Ehnts:
    “This demand gap cannot be closed but by an increase in government spending and hence debt.”
    1. A demand gap can also be closed by lower taxes and various other measures to stimulate private consumption, investment, exports and import substitution.
    2. If a larger government deficit is required, there is no need for an increase in the public debt through bond issues.
    3. It is unclear whether there is any problem like that alleged by Erhardt – it could be just a theoretical chimera.
    With demand managed to achieve steady growth at full employment there might well be no long term mismatch of savings and investment.

  3. Except only so much risk-free fiat saving (e.g. for liquidity needs) is legitimate; beyond that it is risk-free fiat hoarding and should be punished with negative interest (on currency and account balances at the Central Bank) and negative yields (on longer maturity debt of a monetary sovereign). Christians might consider Matthew 25:14-30, “The Parable of the Talents”, as confirmation of this.
    Nor should ANY amount of risk-free fiat saving have a positive yield or interest since this would constitute welfare proportional to account balance and would violate equal protection under the law.

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