by This is my take on Rogoff’s “Modern Monetary Nonsense” Rogoff: “A number of leading US progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.” Rogoff’s use of the expression “as a cash cow to fund” ignores the fact that the Fed is already the “cash cow” that makes all economy’s payments possible. The Fed lends to banks when they purchase banknotes, when they buy Federal Treasuries, or when they pay taxes on behalf of their clients. All “base money” needed to make payments comes from the Federal “cash cow” Reserve. Rogoff then quotes, in agreement, Powell: “The idea that deficits don’t matter for countries that
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This is my take on Rogoff’s “Modern Monetary Nonsense”
Rogoff: “A number of leading US progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.”
Rogoff’s use of the expression “as a cash cow to fund” ignores the fact that the Fed is already the “cash cow” that makes all economy’s payments possible. The Fed lends to banks when they purchase banknotes, when they buy Federal Treasuries, or when they pay taxes on behalf of their clients. All “base money” needed to make payments comes from the Federal “cash cow” Reserve.
Rogoff then quotes, in agreement, Powell: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong”.
Yet again, where is the exception? All countries whose institutions are politically stable are capable to borrow from residents in their own currency (This, by the way, is made possible by a loan of the central bank to the banks). Residents may then sell their Treasuries to foreigners, and the foreign sector may be willing to accumulate a stock of Treasuries if they desire to hold that particular currency. The consequence will be a higher value of that currency than otherwise, not any kind of enhanced ability of the government to borrow …
Rogoff continues: “If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either.”
Yes, but to put it more precisely, and with reference to national (federal) public debt and not to regional administrations’ debt (so this does not apply to the euro area), foreigners’ willingness to hold a country’s debt depends on their willingness to hold its currency. Holding public debt is the safest way to hold any currency.
We all knew Kenneth Rogoff had problems with basic math and using Excel … but obviously, those are not the only knowledge lacunae this Harvard economist has to cope with.