New thread: Problems with Goodley's recommendations...

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

I am sure many of the list recipients also receive the Levy Institute newsletter and have read Wyne Goodley's recommendations to triple Bush's proposed tax cut. For a long time I have had a deep seated uneasiness about the direction taken by several people affiliated loosely around the Chartalist theory of money. Now I think I have finally figured it out. Here are my thoughts which I may yet attempt to turn into a paper. I'd appreciate any feedback or comments-especially those in defense of Goodley's position. I'll try to be brief:

 

As I understand it, the Chartalist view of money is that money need not be backed by anything other than government taxation. Money is complete endogenous and requires no savings on the part of the public to back money creation. Rather, the public needs the government's money to spend. At present, the government is not supplying enough of its money due to the too high level of taxes as evidenced by the surpluses. Goodley proposes a return to a deficit position through a massive tax cut and appears to say this will have no impact on the rate of inflation, nominal or real interest rates (though it will stave off a recession).

 

My problem with this is that it ignores the fact (or what i regard as a fact at any rate) that government debt must be backed by credible promises to pay timely interest and principal. Granted, this government debt can be rolled over-but it cannot be rolled over indefinitely. As I hope I have shown in my forthcoming paper on the Russian financial crisis, government debt can indeed become effectively a form of Ponzi financing (someone at the PK conference I don't remember who, raised the issue as to whether or not this can be so but I did not have a chance to follow up this interesting comment). Under normal circumstances, I agree that government debt is not either speculative or Ponzi financed, though it can be speculated against by bond funds that take long and short positions. However, under abnormal circumstances, when governments run persistent BOP deficits, or when they are faced with a sudden BOP deficit and a dramatic and unexpected drawdown in international reserves, and/or when they must issue more short term debt to meet existing debt obligations, then government finance is subject to being classified as Ponzi financing.

 

Thus, large and persistent fiscal imbalances are potentially problematic, and more so, when accompanied by current account and/or capital account deficits. Either the government must resort to higher taxation to retain confidence or it must take other steps. Thus failure to correct persistent fiscal imbalances, or a sudden move from a surplus position to a deficit position that might result in long run persistent fiscal imbalances, will require 1) higher real and nominal interest rates on government securities to fund the fiscal imbalance through international bond sales or 2) a massive devaluation of the currency in real terms-a policy that depends on Marshall Lerner conditions being met 3) attempts to attract private international capital.

 

The U.S. has been able to escape some of these problems by credible fiscal policies allowing the U.S. government securities to play the role of a riskless (or near riskless asset). I am not proposing eliminating this debt. But, the existence of the debt requires taxpayers to pay a portion of taxes in payments of interest (effectively a transfer of wealth from taxpayers to domestic and foreign bondholders). The second factor behind the U.S. is its status as hegemonic power. However, a return on the part of the U.S. to long term structural fiscal imbalances is potentially destabilizing.

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