Tuesday, September 27, 2011

What’s the optimum long term debt to GDP ratio?

The answer is easy. Advocates of Modern Monetary Theory (MMT) answered that question long ago. Though the question still seems to puzzle some authorities. For example Brad de Long (who I normally greatly respect) says:

“As to what is the appropriate debt-to-GDP ratio to pursue in the long run, that is a difficult empirical question….”

As one of the leading MMTers, Warren Mosler has pointed out (2nd last paragraph), there is no point in government debt rising to the point where government has to pay any interest on such debt. I.e. government should not issue interest paying debt.

Put another way, most of the alleged and popular reasons for government borrowing are bunk, as I point out here.

The only reason for having government issue liabilities is to ensure that the private sector has sufficient net financial assets to ensure that the private sector spends at a rate which brings full employment. Indeed, the latter point is simply a re-statement of Keynes’s “paradox of thrift” point. That is, if the private sector is intent on saving money, rather than spending it, the result will be excess unemployment unless government prints enough money to satisfy the private sector’s savings desires.

Just Google the phrases “private sector net financial assets” and “savings desires”. You’ll find MMTers grossly over-represented in the first ten or twenty items that Google finds.


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