Die ‘Schwarze Null’ wackelt

10 Aug, 2019 at 09:45 | Posted in Economics | 1 Comment

 

Yes indeed — the government’s penny pinching is insane.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

No matter how much confidence you have in the policies pursued by authorities nowadays, it cannot turn bad austerity policies into good job creating policies. Austerity measures and overzealous and simple-minded fixation on monetary measures and inflation ​are not what it takes to get our limping economies out of their present-day limbo. austerity22They simply do not get us out of the ‘magneto trouble’ — and neither does budget deficit discussions where economists and politicians seem to think that cutting government budgets would help us out of recessions and slumps. In a situation where monetary policies have​ become more and more decrepit, the solution is not fiscal austerity, but fiscal expansion!

We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean​ increased deficits — and calls for even more austerity. And so on, and so on …

1 Comment

  1. Government debt is treated as a liability and the other side of the ledger is ignored. Aside from the insanity of infinite growth models on a finite planet with huge environmental and climate problems, debt is somebody’s asset. The studies from economists should focus on whose asset is it and is that the right mix? Arguments that the market will decide the right mix are blatantly wrong and both reality and empirical data show that.

    Schauble said to Varoufakis that politics should not alter economic policy. Varoufakis claimed that was good news for the Chinese to hear because they believe that too. We know that the FIRE sector in North America (and EU?) are getting most of the gains from economic activity, driving up housing costs and increasing homelessness. How to fix that? Hudson has argued for a debt jubilee-type response.

    Graham Towers, the first governor of the Bank. Of Canada pointed out to parliamentarians concerned about the growth. In the debt during WW2 reassured them that the debt was not a problem because it was a private sector asset. J.L. Ilsley, the Liberal Finance Minister, ruminated in parliament about how to make the debt an asset of the people.

    Was he right then and is that a good question for now?


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