Now we have a glimpse of the theory, we can ask practical questions:
- Is it right to continue with Keynesian economics?
- Does Modern Monetary Theory (a recent economic fashion) affect the private sector debt burden?
When Keynes devised his general theory, private sector debt was trivial. I found some data for the United Kingdom showing that private sector debt was 12% of GDP in 1945. Seventy-five years of Keynesian economics has generated an unrecognised overhead. Yet when I put the concept that debt resulting from stimulus is dragging economies down to a leading Keynesian economist in London, I was told that people who could not afford their own debts should go bust. This was hardly what Keynes wanted as a solution to the 1930s depression. Then I was told that net debt is zero, because debts and credits balance out. This misses the point, that some of those people with debts are struggling to afford a decent living standard because they are paying interest above the rate of inflation. The end result of all the decades of Keynesian stimulus is a serious debt affordability problem, as bad in Australia as it is in the United Kingdom and United States.
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Modern Monetary Theory (MMT) seeks to explain the way public borrowing works: governments that control their own currency can create more credit to repay previous borrowing, to meet interest on their debt, and to spend as they like. However, describing how the system works does not legitimise MMT. MMT ignores the cost of the much higher level of private sector debt. To the extent that government credit creation encourages banks to lend more, MMT brings the financial system limit closer, burdening economic performance.
Some economic pundits have indeed recognised that there are flaws in the debt-based economic system and proposals appear occasionally as to how to resolve them. I discuss ten such putative solutions in my book and show that there are three general reasons why every one is inadequate, namely that they:
- make the problem worse by increasing the cost of interest paid by the private sector;
- create conflict between different groups in society;
- have inherent flaws that prevent them succeeding.
The weight of private sector debt is deflationary. All attempts to 'inflate the way out lead back to the financial system limit. Australia's debt problems are not unique, because this is a global policy failure. The separation of debit and credit invented by the early Italian bankers has reached end of life and a new financial construct needs to emerge.
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