Saturday, April 27, 2013

The IMF is still mesmerised by “consolidation”.

This recent IMF publication repeats over and over the idea that countries need to “consolidate”, i.e. reduce their deficits and national debts. They say for example:

“the top priority for the U.S. is to . . . .  agree on a credible medium-term fiscal roadmap to bring down debt.” (p.1).
“Japan needs to balance upfront stimulus with more ambitious plans to bring down debt…”. (p.1)
“Medium-term fiscal consolidation remains key.” (p.6).

Here (for the umptheenth time) is why aiming for any specific amount of consolidation is nonsense.
National debt is an asset for the private sector, i.e. for those who actually hold such debt. Moreover, that debt is not greatly different to money (monetary base to be exact). That is, both national debt and monetary base are a kind of liability of the government / central bank machine.
If the private sector is in saving mode, rather than in “irrational exuberance” mode, it will try to accumulate national debt or monetary base. And if the public sector or “government / central bank machine” does not supply the savings that the private sector wants, then demand declines and unemployment rises, and for the well known “paradox of thrift” reason pointed out by Keynes.
It is therefor nonsense to “consolidate” as long as the private sector is in savings mode.
Moreover, it is near impossible to predict what the private sector will be doing in one, two or three years time: the private sector may have a fit of irrational exuberance in two years time, or it may not.
Ergo any “consolidation” needs to REACT TO whatever the private sector is doing. Put that another way, it is nonsensical to make any sort of long term plan as regards deficit reduction or “consolidation”.
As for trying to work out how much consolidation to do in ten or twenty years time – something you will see attempted over and over in Peterson Institute publications - that is just moronic.
And that’s it. It’s desperately simple.

Hat tip to Mike Norman’s blog for alerting me to the above IMF publication.


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