Deficits, debt and deflation after the pandemic | Michael Roberts Blog

• source
• [[covid-19]] [[capitalist crisis]]

Notes on article

• [[IMF]] predicts that [[government budget deficits]] will reach 10% of GDP, in the US it will be 15.4% of GDP
  • This is the highest public sector debt level seen in 150 years
• There’s no doubt that this is necessary, but, like in [[2008]], there could be a backlash against government spending
• Probably due to the fact that there’s a pandemic occurring, no one is calling for reigning in public spending

  • I think this is somewhat contestable: Republicans in the US have denied support for programs that would alleviate some of the worst aspects of the economic impact citing “responsible government spending” (source?)

  • The following is an interesting take from a Goldman Sachs economist:

    As former Goldman Sachs chief economist, and hedge fund manager Gavyn Davies recently put it: “Even more notable has been the unanimity among macroeconomists that massive fiscal and monetary stimulus is the appropriate response to a “wartime” economic emergency. Almost no one seriously disputes that policy should be doing “whatever it takes” to overcome the shock from the virus. This agreement reflects a key conclusion from public finance theory: that higher government debt is the correct shock absorber for the private sector in the face of unpredictable, temporary economic crises. It avoids the distortions that would follow the big variations in marginal tax rates that would otherwise be needed to finance a surge in public spending over a short period.” So the public sector is there to bail out the private (capitalist) sector when it goes into ‘unpredictable, temporary crisis’.

    Davies goes on: “Most New Keynesian economists, including Paul Krugman and Lawrence Summers, believe high debt levels will not in themselves be a problem for advanced economies. They even suggest further rises in debt would be desirable, as that would help reverse the trend towards secular stagnation in Europe and the US.” A key reason for their optimism is that the annual cost of servicing the debt will be below the nominal growth rate in the economy and the central banks seem set to keep it there.

• [[MMTers]](“extreme Keynesians”) argue that debt levels do not matter
• Accoridng to Roberts, calculating whether debt service is sustainable involves several key numbers:
  1. The level of debt
  2. Average interest rate on the debt
  3. Fiscal deficit
  4. Size and growth of public expenditure
  5. Expansion rate of the economy
• The longer the debt maturity, the lower the impact of debt and deficits will be
• “excessive” debt is when government debt is so high that it eats into corporate profitability through higher taxes
  • Therefore, the [[Keynesian]] method is not sustainable long term
• If governments just print money to pay debt, it will reduce their currency’s purchasing power and drive up inflation
• Pandemic slump [[began with a “supply shock”]], “demand shock” came in when consumer spending dropped. Third leg of crisis will be a “financial shock”, i.e. the looming specter of corporate debt
• The way the US is handling the crisis is similar to how Japan handled their slowing economy
  • (When? How?)
• Inflation will likely rise over the course of the next year by between 3% (Roberts’ conservative estimate) and 6% (an estimate linked to by Roberts)