Differing viewpoints on the role of debt in the economy
The following appeared within an article in the Jul-Aug 2014 issue of the ERA Review
The respective positions of the orthodox (neoclassical) and heterodox (mainly Post-Keyensian and MMT) viewpoints as they pertain to the role of debt in the modern economy differ profoundly, and may be summarised as follows:
- The economy tends towards a stable equilibrium configuration.
- Private borrowing, spending and saving decisions are always driven by “rational expectations”.
- Banking and money flows don’t affect economic performance.
- Private debt growth does not affect economic performance.
- Public debt (deficit spending) must be minimised since it leads to rising inflation and rising interest rates.
- The economy generally operates far from equilibrium.
- The idea of rational expectations is a fiction unsupported by evidence.
- Banking and the creation of new money by banks matter because they contribute to purchasing power and economic performance.
- Private debt growth (relative to GDP or a genuine progress indicator) must be restrained, because if excessive it will set the economy up for a crash.
- Sovereign government debt (aka Treasury securities) should be allowed to rise to whatever level is required for the operation of a healthy economy.