Comment 88292

By kevlahan (registered) | Posted April 30, 2013 at 21:40:45

The following is a good discussion of the limits of the "hard money" approach to debt. Essentially, governments issuing their own floating currency do not need to take the view that money has "intrinsic" objective value, unlike individual households and businesses:

http://neweconomicperspectives.org/2012/...

"Governments, and in particular ones that issue a non-convertible, floating exchange-rate currency, have greater influence in determining the value and quantity of money when public spending is applied to maintaining and increasing overall social wealth. MMT theorists point out that monetarily sovereign governments are not constrained in issuing currency and can, if necessary, afford any goods and services sold in their currency. While currency-issuing governments cannot in their spending ignore international perceptions of the value of their currency, they can at any time spend money to support the national interest, though nations with economies in which many critical goods are produced abroad are most vulnerable to depreciation of the exchange rate of their currency in these situations and therefore to economically damaging inflation."

(MMT stands for Modern Monetary Theory, the theory of fiat money http://en.wikipedia.org/wiki/Modern_Mone...

It is also a good idea to represent Krugman's ideas accurately (he is not claiming governments should always run up debts!). Here is how he recently summarized his argument: http://krugman.blogs.nytimes.com/2013/04...

  1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.

  2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.

  3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.

  4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.

  5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.

Comment edited by kevlahan on 2013-04-30 21:55:20

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