From Martin Wolf in the FT this morning, and important pre-the budget:
One cannot get out of debt by taking on more debt. How often have you read such remarks? It is a cliché. As the McKinsey Global Institute study points out, it is also false.
The benign story unfolds like this: a big increase in leverage ends in a huge financial crisis; the government promptly restructures the financial system; excessively indebted private borrowers reduce their obligations by slashing spending; central banks cut interest rates; the resulting collapse in activity and profits pushes the government into huge fiscal deficits, which also support the economy; finally, the economy recovers, helped by exports, and the government begins its fiscal retrenchment.
Thus the temporary rise in fiscal deficits helps protect the economy from the forced private retrenchment. The alternative would be a depression, in which mass bankruptcy, not repayment, lowers debt.
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If it’s their intention to create a neofeudal society with 99% serfs and 1% overlords then they aren’t hopeless at all. In fact,they’re doing great, if that’s what they want and let’s face it, since it’s only privilege that’s got them where they are in the first place why wouldn’t they want exactly that, with themselves reinforced in their positions at the top?
In a debt-based economy, a government needs a deficit! Unless we have a surplus possibly created by oil or gas fields, there is no way an economy can be run without a deficit.
For many years, tax on its own has been woefully insdequate to pay for government needs. Without a deficit, industry, consumenrs and business would be forced to carry these debts on there own, meaning prices and taxation would go through the roof.
Government borrowing effectively puts money into the economy that does not have to be borrowed bt consumers, industry and business, money that is effectively debt-free. This takes much of the pressure of debt from the private sector and thus circulates money into the economy that can be captured by business to get the economy moving!
Every attempt to cut the deficit has almost always resulted in recession. That is plain to see at the moment!
Stevo!!
I sort of agree, though not quite for the reasons you’ve given. Government deficit-cutting impedes the private sector in its desire to cut its own debts, which I happen to think in a highly-leveraged economy like the UK’s is rather important. And government deficit-cutting sucks money from the private sector (businesses and households), which makes it more difficult for people to save, more difficult for businesses to invest, and can even lead to people struggling to meet essential bills because more of their income has to go on things that previously would have been State-funded. There are more ways of meeting State expenses than direct taxation!
But governments can be, and are, successfully run without deficits. I would argue that persistently running a surplus (as the Netherlands does, for example) is in effect overcharging for State services, so is iniquitous – either it should be spent in ways that benefit people or it should be returned to them so that they can spend it themselves. But – pace MMT believers – I’m not comfortable with persistently running a deficit either, because it is in effect a subsidy to the private sector. A government deficit is essential in economic downturns when you want to support the private sector so it can repair its finances and start to expand again – which is the present situation, as Richard observes – but not so good when the economy is booming.
There is little argument I can think of for a deficit in a boom
But remember, deficits have to take into account the capital cycle