Lesson on debt for economically illiterate economists.

This is hilarious.

On the subject of the UK’s government run savings bank, “National Savings and Investments”, a government spokesman said, according to this Guardianarticle, “The government's policy is to encourage saving in the medium and long term.”

Noticed the self-contradiction there? No? Well it’s as follows.

The NSI invests just in government debt (Gilts in the UK). But the debt is bad, bad, bad according to almost everyone, including economically illiterate economists (in particular Kenneth Rogoff). So if amounts saved at NSI rise, then all else equal, the national debt rises!!!!!!

Oooh gosh. So is it desirable for the national debt and amounts saved at NSI to rise or not? Well if you’ve got more brain than the average “professional” economist, the question you’ll be asking is: “What’s the OPTIMUM amount of national  debt?”

Yes, O-P-T-I-M-U-M: that’s a concept beyond the comprehension of Kenneth Rogoff and many professional economists.

Advocates of Modern Monetary Theory (MMT) have of course worked out the answer to the latter question, and the answer is as follows.

National debt is an ASSET as viewed by debt holders (e.g. those who save at NSI). And the larger those holdings, the more those holders are likely to spend. So the OPTIMUM is what? (Scroll down if you haven’t go the answer).

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It’s the amount that induces the private sector to spend at a rate that brings full employment, or gets the economy up to capacity.

And if you understood that, your grasp of debt and related matters is superior to that of half the economics commentators writing for newspapers and half the professional economists in the country.

Congratulations.

There are of course various related matters, like what rate of interest should be paid on the debt. As more than one MMTer has pointed out, a country can pay any rate of interest it likes (a point which is way beyond the comprehension of most economists). And some advocate the rate should be zero or near zero. The yield on Japanese debt is near zero.

Warren Mosler (leading MMTer) argued that the rate should be zero, as did Milton Friedman. And in that scenario, debt becomes the same thing as money, or base money to be exact.