Re: Re:Much ado about nothing?

Dear Peter and John

>We have been increasingly bemused by the controversy about whether a
>government can "finance" a deficit by
>"printing money" rather than by borrowing. Surely any one who has passed a
>first year Macroeconomics course
>which included money and banking knows, as Trond and Bill have said that "a
>deficit simply means that more high
>powered money is created in the period than destroyed." The reason the
>controversy has lasted this long and not
>produced as much light as it should is that participants seem to us to
>skate between what a government can do and
>what is desirable for it to do. The topic of discussion should be: under
>what circumstances is it desirable for a
>government to borrow, not whether it needs to.

While you may be bemused the issues are extremely important for progressive
economists to agree upon. Another way of thinking about using your first-year
macroeconomics theme is that Government spending belongs in a chapter
on Fiscal Policy while debt issuance belongs in a chapter on Monetary policy.
I suspect that many progressive economists still wheel out debt issuance in
the fiscal
policy lectures within a GBC framework and rehearse the impacts of alleged
"government financing"
(tax, printing and debt) that dominates most textbooks. If they are doing
that then they
are doing the students a major disservice and training them in the wrong
paradigm.

Until we acknowledge that and see debt issuance in that light ... as interest
rate support in an endogenous money framework we are always going to be
debating
spending and debt together as if they are functionally related.

Further, I have made a case that in this context (of monetary policy) there
is no
reason for any government debt to be issued - EVER. We can achieve the same
goals
with current RBA support policy without any of the other negative effects
that I have
identified with debt issuance. That conjecture has yet to be discussed in
this forum (that is
challenged).

So what can government do:

(a) spend as much as it likes whenever it likes up to the real constraints
imposed by the willingness of the private sector to sell goods and services
to it without a
regard to debt issuance.

What is desirable for it to do:

(a) spend enough to maintain full employment given the desire of the
non-government sector to save.
(b) use fiscal policy to achieve this aim with passive monetary policy
characterised by a zero interest rate
policy run by the RBA.
(c) close the RBA and merge it with an enlightened Treasury Department.

best wishes
bill
Received on Sun Feb 2 08:07:18 2003