Friday, March 21, 2014

British Treasury has plan to reduce the debt by 2035. LOL.

This article by Martin Wolf in yesterday’s Financial Times has a great little chart showing the Treasury and Office for Budgetary Responsibility’s projections for how the debt relative to GDP might fall in the years up to 2035. Plus there are of course related passages in the article. (The chart appears in the hard copy edition but not the internet edition).
Advocates of Modern Monetary Theory, and others with a grasp of economics will be laughing in the aisles because deficits and hence debts are HIGHLY UNPREDICTABLE.
It seems to have escaped the notice of the Treasury and OBR that we experienced a dramatic rise in the deficit and debt over the last four years a so, and that no one in the five years or so before the crunch would have predicted this rise.
And quite apart from the fact that Treasury and OBR don’t seem to be aware of what’s going on right under their noses as pointed out in the paragraph just above, there is a very simple theoretical point about deficits and debts which the latter two illustrious (?) bodies don’t seem to have grasped. It’s a point made by Keynes and which is not much more than common sense.
It’s the point that given the gyrations in private sector spending, the public sector has to counteract those gyrations by running a deficit in a recession and cutting the deficit, or even running a surplus in a boom.
And booms, or outbreaks of Alan Greenspan’s “irrational exuberance” are as unpredictable as recessions. Thus it’s quite on the cards that the debt, far from gradually declining in the years up to 2035 as per Treasury and OBR predictions, will suddenly decline in three years’ time. Or it could be seven years’ time. Or thirteen or fifteen. And I’ll bet that before 2035, we have another recession, so the debt will shoot up again, and then down again. All of which will make the Treasury and OBR ideas about a slow gradual decline up to 2035 look very silly.
Or as Keynes put it, “Look after unemployment, and the budget looks after itself”.
And at this point in the argument any economic Neanderthals will chirp with something like, “But we can’t just leave the debt at it’s currently elevated level. Creditors might start demanding higher rates of interest. Then we’re scuppered.”
Well I’ve been thru that argument a dozen times before on this blog, so I’d ask the Neanderthals to do a bit of Googling (if they know how) if they want the latter question answered.
And now I’m off to do something more intellectually stimulating than dealing with debt-phobes: talking to the hibernating snails in my garden, to be exact.

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