Thursday, April 12, 2012

OECD says there’s too much debt, and the IMF says there isn’t enough!!!

The OECD wants less the debt. Meanwhile the IMF says there is a SHORTAGE of quality government debt.

Bill Mitchell regularly tears strips off the IMF and I nearly always agree with him. His latest bout of “strip tearing” is here.

I also drew attention some time ago to the IMF and OECD’s failure to understand the basic nature and characteristics of national debts. See first few pages here.

The above mentioned study by the IMF claiming there is a shortage of quality debt also claims that if governments WERE to increase their national debts, creditors would then have increased doubts as to whether the debts would be repaid. Well that’s just brilliant: we apparently have a shortage of quality debt, but if we expand the amount of debt, the quality declines. Thank you IMF for that illuminating suggestion as to the way forward.

Anyone with half a brain will by now be asking what the OPTMUM amount of debt is for a monetarily sovereign country to issue. I’ll repeat that in bold red letters for the benefit of any IMF or OECD staff reading this.

The important question is:


Well those acquainted with Modern Monetary Theory will know the answer to this one, so they needn’t read further. For the rest…..

The first point to grasp is that it is STARK RAVING BONKERS for a monetarily sovereign country to borrow any money. Such a country can produce any amount of money itself at no cost anytime. The only apparent advantage of such borrowing is that to the extent that money is borrowed from foreigners, it enables the country to enjoy a temporary standard of living boost, which it will then have to pay for later when the debt is repaid (never mind the interest). But what is the point of that? Absolutely none. So this “advantage” is no advantage at all.

There is however a merit in the government / central bank machine (GCBM) issuing liabilities (i.e. debt or money): those liabilities are private sector assets. And sometimes the private sector goes into “saving mode”: i.e. it does not spend enough to bring full employment. Indeed, that is exactly where we are right now as a result of private sector deleveraging. I.e. we have “paradox of thrift” unemployment.

In this situation it’s desirable for gcbm to run a deficit and let the private sector accumulate assets (debt or currency).

As to the INTEREST that ought to be paid on any such debt, there is no point in paying any significant interest. And debt which pays no interest is cash. In other words governments might as well forget about debt and just issue cash, as suggested by Milton Friedman.

That is not to say that central banks should not from time to time wade into the market and offer to borrow money (or lend money): the latter activity is one way of implementing stimulus or deflation. But long term, government debt is pointless.

Moreover, government debt is effectively debt owed by the less well-off to the better off. And the interest on that debt is for the most part a payment by the poor to the rich. It is totally immoral to force or induce the less well-off to go into debt and pay interest on that debt. In contrast, if someone (rich or poor) decides off their own bat to go into debt, that is their business.


P.S. (same day). Forgot to put a conclusion to the above post. The conclusion is thus.

Interest paid on national debts should be around zero. Whether that should be zero in nominal terms or real termsis debatable. But there is certainly no great harm in making it zero in nominal terms, which (per Friedman) makes debt the same thing as cash. As to the OPTIMUM amount of debt (and or cash / monetary base) that a government should issue, the amount should be such as to induce the private sector to spend at a rate that brings full employment.

Also: hat tip to Warren Mosler re the article about the OECD’s concern about debts.


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