Martin Wolf is my favourite economics commentator. His articlein yesterday’s Financial Times (“Hair of the dog risks a bigger hangover for Britain”) rightly criticises the absurd idea that raising private debts so as to boost housing prices is supposedly good, whereas raising public debt so as to boost government spending or indeed private spending is allegedly bad. The “boost private debt” idea has of course been adopted enthusiastically by the UK government with its “Help to Buy” scheme, and other schemes designed to encourage all and sundry become indebted to commercial banks.
As everyone apart from the inmates of mental hospitals knows, it was excessive private debt that sparked off the crisis. So it rather looks like Britain is ruled by people who have recently escaped from mental hospitals.
But Martin Wolf isn't perfect. He rather goes off the rails in his last paragraph. He says “Is there a way out? Export-led growth would be one, though that only shifts the credit growth abroad. A far more radical possibility is monetary financing of government deficits. That is unthinkable now…”
Why? He doesn’t tell us.
Both Positive Money and MMTers advocate that if extra demand is needed it should be effected by having government and central bank create money and spend it, and/or cut taxes. Assuming the economy really does have significant spare capacity, that won’t be inflationary.
Of course the additional money in private sector hands MIGHT PROVE inflationary in a year or two. But then even if the amount of base money in private sector hands were half it’s present level, an outburst of irrational exuberance is still possible and might be inflationary.