MMT cautions us against reacting to such headlines

Fed said to have emergency plan to intervene if U.S. defaulted on debt

WASHINGTON | BY SARAH N. LYNCH AND JASON LANGE

Reuters, Markets | Mon May 11, 2015 6:59pm EDT

http://www.reuters.com/article/2015/05/11/us-usa-debt-idUSKBN0NW1YS20150511

RICARDIAN EQUIVALENCE: IT SOUNDS SO PROFOUND IT MUST BE TRUE

In a recent piece, Tarun Ramadorai of the Said School of Business, Oxford University, has evoked upon Ricardian Equivalence (RE) to base his argument for optimal debt management.

Does economic theory offer any guidance about the optimal management of government debt?

One of the fundamental concepts in thinking about government debt is Ricardian Equivalence. David Ricardo posited in the 1800s that since debt must eventually be repaid by governments, it is essentially equivalent to future taxation (and will be perceived as such by taxpayers). Essentially all work in economics on public debt management relies on this concept in one way or another.

If debt and future tax policy are two sides of the same coin, the obvious step is to think through the role of debt in the context of sensible tax policy. 

His article can be found at:

http://www.livemint.com/Opinion/RJDJPFZ7X65Kqa4DlbSZPK/Public-debt-management-back-to-school.html


Without examining what he says about this, it is interesting to see how economists evoke RE to build upon their arguments.  RE simply does not hold true in a world of fiat currency.  Ricardo's principle perhaps held true in a world of commodity currency but economists seem indifferent to this changed reality.

The fundamental flaw with RE have been examined in this piece by Auerback and should be read.

https://www.creditwritedowns.com/2010/07/why-ricardian-equivalence-is-nonsense.html

But what interests me is how economic jargon and hi-sounding terms like RE find their way into popular discourse and are swallowed by general readers.

Decentring Fiscal Deficit Target Numbers

You can find my article in the Economic & Political Weekly of 09-05-2015.  Or follow this link:

independent.academia.edu/SashiSivramkrishna

The article questions the obsession with fiscal deficit traget numbers like 3.1% of GDP or 3.6% or 3.9%. Does it really matter?  Should it be the goal of macroeconomic policy??

This is what MMT is weary about ....

Union Budget 2015: FM Arun Jaitley hints at more cuts in spending

Ahead of the Budget 2015-16 to be unveiled later this month, Jaitley hinted at a stable tax regime, saying that 'no unfair effort' will be made by states and the Centre to mop up revenues.

Having already crossed the fiscal deficit target in November, Finance Minister Arun Jaitley today hinted at more cuts in spending so as to contain it within limits for the current fiscal, saying he does not believe in living on borrowed money.

"We're trying to rationalise expenditure as far as the government is concerned because we do not want the government to live on borrowed money indefinitely," he told a gathering of industrialists and planners here via video conferencing.

"The whole concept of spending beyond your means and leaving the next generation in debt to repay what we are overspending today is never prudent fiscal policy," he said. The additionally hinted spending cuts would be over and above 10 percent that the government has already announced to meet the budgeted 4.1 percent fiscal deficit target which was crossed in November itself -- four months ahead of the end of the financial year on March 31. 

…..

Read more at: http://www.moneycontrol.com/news/economy/fm-arun-jaitley-hints-at-more-cutsspending_1294457.html?utm_source=ref_article

Exogenous v/s. Endogenous Money Theory!

I found this statement by Raghuram Rajan in the Deccan Herald of December 29, 2014 (p.13):

"Some budgetary incentives for household savings could help ensure that the country's investment is largely financed from domestic savings ... Domestic demand has to be financed responsibly, as far as possible through domestic savings."

The conventional circular flow and endogenous money

Once again a report in the Livemint of 27-11-2014 caught my attention;

“Perhaps the reason we have been so willing to protect the borrower against the creditor is that the hated moneylender looms large in our collective psyche. But the large borrower today is not a helpless illiterate peasant and the lender today is typically not the sahukar but the public sector bank. In other words, we are the lender,” said Rajan in his speech on Tuesday, adding that when the large promoter defaults wilfully, he is essentially robbing the taxpayer and making it costlier to fund new investment in the economy.*

This sounds so much like the conventional circular flow reasoning - that deposits come before lending.  Endogenous money questions this view; loans create deposits.

I am not questioning the fact that growing NPAs are a cause of concern but simply raising the point that economists still cling to the conventional view that banks use savings to lend just like the moneylender.


* Read more at: http://www.livemint.com/Money/TaNyxECKa6pbuWYuS7vAaN/RBI-ready-to-give-more-flexibility-in-recasting-distressed-l.html?utm_source=copy

Here is some conventional macroeconomic rhetoric, extracted from an article in the Livemint of Friday, Nov.7, 2014.  MMTers can obviously see through the anxiety that is being raised here.


... “Given the sluggish growth of tax revenues in (the) first half of 2014/15, meeting the disinvestment target would be crucial to ensure that the fiscal deficit remains in line with the budgeted level,” said Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody’s.

... Officials worry that a shortfall in proceeds from share sales and lower tax collections due to the weak economic recovery could force them to cut budgeted spending again.

... “The situation is not as bad as last year, but we may need expenditure cuts, maybe of Rs20,000-25,000 crore,” said the first source, adding there could be savings in capital spending as some ministries were unable to spend allocated funds.

Read more at: http://www.livemint.com/Politics/fUvEGpLThR9rVAtYvpDinN/Govt-may-fall-short-of-its-95-billion-privatisation-target.html?utm_source=copy