Thursday, 3 October 2013

Ken Rogoff on UK austerity

Ken Rogoff’s article in the FT today is a welcome return to sanity in the austerity debate. None of the nonsense about opponents of austerity believing growth would never return, or that austerity would have no impact on output. Instead Rogoff focuses on what was always the critical debate: was austerity necessary because financial markets might have stopped buying government debt. (See this post on the many justifications for austerity.)

As critical pieces go, you couldn’t have a friendlier one than this. First, Rogoff agrees that it was a mistake to cut back on public sector investment. He writes “Such projects, if done at a reasonable cost, pay for themselves. Governments should have done more ...”. He says that austerity critics “have some very solid points on their side”. When discussing key arguments, his comment after putting the austerity critics’ case is “perhaps” or “maybe”. In that sense this is a reasoned argument rather than a piece of advocacy.

The argument here is all about insurance. The financial markets are unpredictable beasts, and who knows what they might have done if – in particular – the Euro had collapsed. As Rogoff acknowledges, they might have run for cover into UK government debt, but I also agree that they might have done the opposite. His article is all about saying the UK is not immune from the possibility of a debt crisis, so we needed to take out insurance against that possibility, and that insurance was austerity.

In spirit of Rogoff’s article, I want to acknowledge a couple of points. First, it is clearly too easy to argue that the Euro did not collapse, or that the UK had no problem funding its debt (quite the opposite), and so precautionary austerity was unnecessary. You have to look at the risks ex ante, and not at what happened ex post. Second, it would also be dangerous to argue that somehow UK history meant we were immune from these risks. Others more knowledgeable can argue over the extent to which the UK government has defaulted in the past, but they should never lead us to assume that the UK is immune from a market panic.

So let us agree that it was possible to imagine, particularly in 2010, that the markets might stop buying UK government debt. What does not follow is that austerity was an appropriate insurance policy. No one sensible disagrees that the government needed to have a credible long term plan for debt sustainability, and I personally have argued that a good plan should involve reducing net debt very gradually to levels below those observed before the recession. I hope Rogoff would agree that in the absence of any risk coming from the financial markets, it is optimal to delay fiscal tightening until the recovery is almost complete. The academic literature is clear that, in the absence of default risk, debt adjustment should be very gradual, and that fiscal policy should not be pro-cyclical. So the insurance policy involves departing from this wisdom. This has a clear cost in terms of lost output, but an alleged potential benefit in reducing the chances of a debt crisis.

Seen in this light, the first point to note is that – unlike most insurance – the benefits are partial and ill-defined. Austerity might make the markets less likely to turn on you, but it clearly does not guarantee that they will not. It is also quite reasonable to suggest that – to the extent austerity delays the recovery – it might make markets more rather than less worried about long term debt sustainability. So this is an insurance policy with a large cost, and a very unclear benefit.

What the Rogoff piece does not address at all is that the UK already has an insurance policy, and it is called Quantitative Easing (QE). QE means that the monetary authority is committed to keeping long term interest rates low, so they will buy any government debt that cannot be sold to the financial markets. Rogoff says that, if the markets suddenly forsook UK government debt “UK leaders would have been forced to close massive budget deficits almost overnight.” With your own central bank this is not the case – you can print money instead.

Now pretty well everyone agrees that printing money to cover unsustainable budget deficits is inflationary. But that is not what we are talking about here. We are talking about a government with a long term feasible plan for debt sustainability, faced with an irrational market panic. In those circumstances, printing money will be purely temporary, for as long as the panic lasts. As it is taking place in the depth of a recession, it will not be inflationary. So, as I argued long ago, Quantitative Easing is our insurance policy against a debt crisis. We never needed the much more costly, far inferior and potentially dubious additional insurance policy of austerity.



  1. Simon,

    As you rightly say, Rogoff hasn’t tumbled to the fact that for a monetarily sovereign country, refusal by anyone to buy it’s debt is a non-problem, because the country can print money.

    If he doesn’t get that point, he is totally clueless. Why is he still a professor of economics at Harvard? Why does the FT publish his articles?

    I sussed the fact the he’s a charlatan well before his Excell spreadsheet error was publicised, and said so on my blog.

    1. Ralph

      Rogoff is no charlatan, but one of the best academic macroeconomists around. Anyone can make Excel errors (and they probably do, but they go unnoticed). It is because he is such a good economist that I would love to know what his response to my point would be, and perhaps he has addressed this in some place I have not seen.

      I can imagine some argument along the lines that a debt crisis would be accompanied by a sterling crisis, and that UK banks would be vulnerable in these circumstances. But maybe there is some other response. It would be good to find out.

    2. Ralph,

      Even Paul Krugman, who had a major falling out with R&R after he savaged their paper on debt and growth earlier this year, doesn't think their views are all bad: this taken from his blog of 21st June 2013.

      "Just in case anyone asks why they are there: I start by emphasizing the uses of history in the current crisis, and you can’t do that without giving credit to R&R for This Time Is Different. At the same time, you can’t bring up R&R without mentioning their unfortunate debt and growth paper — which is not in TTID, not of the same quality, and unfortunately, was the only thing most policymakers wanted to hear about. So I give credit for the (extremely) good stuff and acknowledge the bad stuff. I really didn’t know how else to handle it."


    3. Not right about Krugman. Here is his 'The Simple Analytics of Invisible Bond Vigilantes':

      "So what would an attack by invisible bond vigilantes look like for a country like the United States (or for that matter the UK)? As far as I know, none of the people issuing dire warnings have actually tried to write down a model of what an attack would look like. And there is, I suspect, a reason: it’s quite hard to produce a model in which bond vigilantes have major negative effects on a country that retains a floating exchange rate. In a simple Mundell-Fleming model (M-F is basically IS-LM applied to the open economy), an attack by bond vigilantes has very different effects on a country with a fixed exchange rate (or a shared currency) versus a country with a floating exchange rate. In the latter case, in fact, loss of confidence is expansionary."

      And, "You can elaborate on all this, in particular by making a distinction between long-term and short-term interest rates. But it’s really hard to create a scenario in which the bond vigilantes actually cause a contraction rather than an expansion when they attack. Things will be different if you have large debt denominated in foreign currency – but we don’t. So what are the fiscal fear types thinking? Basically, they aren’t. But to the extent that they do have a model, it’s Figure 1 – they’re imagining that American macroeconomics are just like those of a country on a fixed exchange rate with no independent monetary policy. If there’s something more going on here, I’d like to hear about it."

    4. I find it difficult to characterize what he did as a simple "spreadsheet" mistake that anyone can make. That spreadsheet mistake fueled zealots bent on the destruction of every social program in the US. At the point where your work has been given rock star status you are there are no innocent mistakes.

    5. Well, not only that, but the spreadsheet error was the least important of the glaring mistakes (if we may call them so. I had all the signs of a study that was very keen to reach its conclusion at any costs, though of course that cannot be proven). Long before that issue came to light, how poor a study it was had been heavily documented, starting from presenting correlation as a causation when there was a known causation in the other way.
      Of course, it got a lot worse when it became clear that inconvenient data points were simply removed, that averaging was done in an outrageous way, that an average in the category "90% and above" was presented as 90% being a major threshold triggering immediate effects...

      Still, remove the spreadsheet error, and it should still be failed as an undergraduate analytical homework -especially in conjunction with the conclusions they pretended to derive from them. So the defense that everyone makes Excel errors is very, very kind to them. I do not dispute that they have most of the abilities of great economists, but then you have to wonder if they have intellectual integrity.

    6. As Cyrille says, it has become the standard defence of Rogoff amongst economists to talk about "an Excel error" - and conveniently ignore both the dropping of inconvenient data points and strange averaging choices.

      In other disciplines, notably science and psychology, professors have been disciplined for playing loose with the data in that way. It's to the shame of the economics profession that most academic economists cannot even admit that these questions should be examined.

    7. Simon/Metatone

      As an engineer, I'm acutely aware that if I make seriously erroneous decisions based on data that includes simple Excel errors, the best case scenario is that I lose my job and the worst case scenario is that people die and I end up in court.

      As a result, my profession has detailed and careful checking procedures on data before any data leaves the office and interacts with the wider world.

      I find it breathtaking that the world's leading academic economists, whose conclusions have similar if not greater consequences on society, do not apply the same standards and suffer the same consequences.

    8. I get the impression on this topic Rogoff seems to be a hired gun to advance to most defensible pro-austerity argument to the "serious academic" set will take as serious at that time.
      Now there are other hired guns in this debate that hit other demographics that are less sophisticated with completely discredited I guess yes "Rogoff is an OK guy" who is fighting a great rear guard action for a discredited long as Pete Peterson and his ilk can finance the campaign.

    9. Anyone can make an Excel error, but they were claiming a discontinuity/cliff in the relationship between growth and debt, and the location of the Excel error was right at the location of that very discontinuity. No excuse whatsoever not to have caught it.

      That their conclusion was also entirely due to one data point of their sample is what makes it really damning. I think GMAN is right on the money, so to speak.

  2. Simon,

    Clearly the dynamics are different for a country with a sovereign currency. But whereas such a country need never face a run on its public debt, isn't the corollary that it can face a run on its currency? QE is not going to help with that - in fact it's likely to make it worse.

    I'm not saying that this is a risk that cannot be addressed. It just seems to me that the potential risk from debt vigilantes for the UK is on the currency not public debt, so addressing the public debt issue is missing the point.

    1. Nick

      Note that Rogoff does not make this argument, but instead just implies that lack of market funding implies immediate austerity, so I do not think I can be accused of missing the point here.

      But it is a good point. The argument might go as follows. Markets do not think long term fiscal plans are sustainable/feasible, so they think any QE will be permanent, not temporary. That implies future inflation, which in turn implies a future nominal depreciation, so markets bring about a depreciation today. That seems logical. Note also, however, that my assumption is that fiscal plans are sustainable/feasible, so the depreciation is as temporary as the market panic.

      It is not at all clear to me why this would be a problem in a recession. Instead, the depreciation would bring about the export led recovery everyone would like. Any overheating that might occur could be dealt with using conventional monetary policy. So, once again, no need for austerity until the recovery was complete.

    2. Your reply to Ralph crossed with this comment of mine, but I think it addresses my point as well.

    3. And I was typing that last one as you replied to mine..

      And apologies - I didn't mean to accuse you specifically of missing the point. It was a more general observation, as I often see the bond vigilante issue dismissed for countries with sovereign currency with no mention of the exchange rate issue.

      I think I'd agree that a depreciation is manageable, but I don't think it's straightforward. Recent UK experience suggests that a weak currency can generate quite a lot of inflationary pressure even in a recession, and once inflationary expectations take hold that adds to downward pressure on the exchange rate. There is at least a potential for a downward spiral. Add in the impact on real wages and maybe a quite low price elasticity of exports and it's not obviously a neat fix.

      So, again, I think I'd agree that a depreciation would be manageable and even beneficial, but I don't think it's a risk that can be dismissed out of hand.

    4. "That implies future inflation, which in turn implies a future nominal depreciation, so markets bring about a depreciation today. "

      It doesn't imply anything of the sort, but people may believe that.

      What a depreciation does mean is appreciation for *every* other currency pair with your currency in existence.

      Appreciation affects a country's export markets and takes them into 'nosebleed' territory. The central bank of that country then steps in and halts the rise to prevent damage to their own economy running an export-led policy.

      Just as the Japanese have done with the US dollar, the Swiss have done with the Euro, and the Chinese do with everything.

      It only takes one export-led nation to consider your economy important for any depreciation of your currency to be halted. So the bigger the economy and the more gross imports you have, the more space you have for manoeuvre - particularly as the threat of inflation is actually completely illusionary.

      If you have a model that treats the external sector as some Deus Ex Machina, you miss all that.

    5. "Instead, the depreciation would bring about the export led recovery everyone would like."
      In Britain? I would agree on basically any other country, but I just can't see that happening in Britain, at least not to the extend that would be needed.
      1. There just aren't that many actual British products left. R&R PLC doesn't produce a final product. R&R cars are actually German. Mini is German, the cars are even designed in Germany. Can those even be considered actual British exports? How much is it worth in the long run to just build the cars?
      2. Jaguar Land Rover is still somewhat British. So let's take them as an example that depreciation would probably not lead to much of a boom. Let's say they are able to sell more cars than they can produce. They want to build a new factory. Every machine that is needed has to be imported, but the investment has become much more expensive due to the depreciation. So the decision to build a new factory is much more risky. British companies would possibly be even less likely to invest in such a scenario.
      3. For less complex products it seems unlikely that Britain would become competitive with eastern Europe

      Japan on the other hand does have a functioning industrial sector. The productivity (new production facilities and machines) could easily be increased with their own industry, so the potential exports increase while the cost for the investment remains largely the same. I think that is a very different situation.
      In less developed countries the investment does not have to be as high since the wages are lower, so they need less automation and are more competitive at selling less complex products.

      So I am having a hard time imagining a export led recovery in such a scenario in Britain that goes beyond just increasing capacity utilisation.

  3. Simon,

    My less than flattering remarks about Rogoff don’t stem from his Excel mistake. It strikes me he was talking nonsense about debts, deficits, etc long before that.

    E.g. and as regards his failure to understand that government can print money, he has been making that mistake for a long time: e.g. see this article (starting at paragraph which begins “But who is being naïve..).

    And he makes another blunder in that paragraph when he trots out the popular idea that “It is quite right to argue that governments should aim only to balance their budgets over the business cycle…”.

    In fact, given 2% or so inflation, national debt and the monetary base will shrink in real terms by 2% a year. Thus if those two are to remain constant relative to GDP in the very long term (which is crude, but approximately correct assumption) then a CONSTANT deficit will be needed so as to top up the national debt and monetary base. And yet more deficit will be needed if real GDP is expanding in real terms.

    I agree with Krugman, who said “So where does Ken’s call for short-run austerity come from? As best I can tell, it comes from a generalized sense that debt is dangerous…”

    That sums up Rogoff. The man on the street makes the understandable error that the national debt is bad because the word debt has “iffy” overtones: bankruptcy, bailiffs, etc. I expect better from Harvard economics professors.

    1. Dear Mr. Musgrave,

      I just wanted to agree with your suspicion that Rogoff might be a charlatan. At least, I think he is either very overrated or has been bought by certain interests in 2008. I have read "This time is different" and the articles that formed the basis of that book. Personally, I believe his works leave a lot to be desired. They disguise themselves as more scientific than they actually are, there's no publication of the raw data, arbitrary division of the data into sub-categories (that foreshadows the 90%-debt limit and the poor averaging), his argument and the provided charts do not result in a satisfying complete picture. There is a missing emphasis on the difference between public and private debt. The book is his introduction into his "the government is always to blame"-argument. Even the subtitle of the book (8 centuries of financial follies) is misleading because only a tiny minority of the country data he actually uses has that kind of historical range. Most of the country data is from the 20th century. He doesn't include the effects of wars which constitute a big part of his inflation years and years of financial distress....
      It is not a good work.

  4. QE only gives more room. It is in no way an 'absolute' guarantee what many make of it.
    Just have a look at the taper thingy.
    1. The present situtation looks to give more or less the max room to CB. Deleveraging, Zero stuff, combined with fears for everything and bubbles in a lot of assetclasses. Unlikely that that will repeat itself the same way the next time. Next time (if there is one) room likely will be less.

    2. Clear from the taper discussion that the CBs can not hold the fort in absolute ways. Basically when present gov bondholders go selling you have a problem and a huge one.
    Looks to work as far as only new issues get to the market.
    Of course also not in absolute term but with a lot of room.
    Working with longer term negative real yields as basically Japan wants to do is simply not sustainable. You drive into the high uncontrolable debt wall if it doesnot work or there will be international alternatives if it does. However at the end of the day present bondholders are almost certain (longer term) to sell. A situation the CB is likley unable to control, but longer in Japan than in the UK.

    3. Probably works better in the US (reserve currency) and Japan (local culture) than in the UK. And in the UK better than in a lot of other countries with a 'national printer'.

    4. If you look at the US for instance, the present deficit situation can hardly be explained as a temporary stimulus. It is simply a combination of an overextenced welfarestae with not the ability and the will to get tax revenue to cover the expenditure. It takes probably a decade or longer to close the present gap. Leading to debtlevels that looks highly dangerous.
    In no way the situation Simon describes and the basis of the present farce.
    Markets however seem to accept it at least for the time being.
    With as large complicating factor if lateron investors go for the exit it is party over. No way you can correct that in days (that is what markets will give) you need years (that what is politically required). There are not enough muppets in the universe to buy all that will be offered. A lot of the now called smart money would simply be stuck with the the stuff, with all consequences.
    It is also not a panic (at least not yet). Yields without QE would also likely be low at least until now.

    5. It looks to work in other countries than the US because it works in the US. Where it works for a large part because of the 'perfect storm' combined with reserve currency status. A lot of countries that make the USD the reserve currency are however now clearly looking for alternatives.
    Important to watch the US (for the UK). If the reserve status goes, likely USD and UST will go with it. And GDP and UK bonds with that.
    Also on the present budgetceiling theatre if that would run out of control problems in the UK might not be far away. FED can extremely likely not hold the fort when thiungs go out of control on the budget. And if QE fails in the US countries like the UK will very likley be the next target what ever the reason for the problem (even when without no real UK links in that respect, but simply because the US failed).

    1. Given the consensus of the thread is the real risk is not to the bond mkt as Rogoff asserts but the currency mkt if makes the case for QE at least in the case of the US even more compelling.
      Given the diverse nature of the US economy and the fact that it has run large and persistent trade deficits..what is not to like about a little run on the $? The bottom 80% of US pop should almost welcome it.

  5. This is a public issue now and a public that basically doesnot know $h!t about the issue.
    The present situation is now known as austerity (while Western governments are spending more than ever). Simply because that is how it is presented to the general public and there are discussions about cuts.
    The same would apply if it was presented as the opposite. People in general would see it is continued overspending (while financially it would be the same thing).
    A situation we possibly will see now. Stimulus in words but not in deeds. And certainly not effective one just keep paying for the welfarestate with a lot more passengers than usual and unable to get real grip on the situation.

    Anyway when the rhetorical stimulus would fail it would almost certain be largely blamed upon guys like Simon/Krugman. You simply donot talk yourself out of it by saying that it was not enough.
    Bit like the present slight move into positive economic territory. For the public it shows that present policies work. Simple as that. Basically because Europe is a much bigger mess and the theory like above is much to complicated and looks to have failed one time too many.

    Donot connect your name with it might be bad policy.
    Pick your battles carefully. This simply doesnot look like a good one.

    Fighting against simple facts on the ground is as well a no go. The more you do it the more in the eyes of the general public you look not only like an idiot but even worse one that perseveres in his/her mistakes. This is a public domain issue for the largest part. No academic discussion and no specialists (markets) stuff. Adjust to the rules of that game or get butchered.

    A sightly more positve note for Simon and Co. Osborne is selling much more (recovery) than very likely will happen. And with all the noise he is making this will likely get a 'return to sender' (adress unknown,no such number, no such zone). The public at least large parts of it, likely expects a recovery to pre-crisis normal. Totally unlikely with alot of deleveraging still to take place, Europe in a mess and lower growth in EMs. But he is connecting his name with that and is already spending proceeds that are not yet there (if they ever arive), simply unprofessional.

  6. The greatest discovery of any generation is that a human being can alter his life by altering his attitude. William James

  7. Simon,
    in an economy with highly efficient payments system (close to the cashless limit often used in modern Keynesian analysis), the ability to create seignorage due to having you own currency must be limited (equivalently most reserves are excess reserves that need to pay interest and they're de facto short run government debt). High debt levels+expectations of no formal default/restructuring can create significant runups in inflation (the gist of the fiscal theory of the price level). Which is good on one hand if you get higher expected inflation and you still think the central bank can keep control of short run nominal interest rates. But on the other hand high inflation at that point may no longer be neutral in terms of transaction costs and distortions (see Latin America, Israel etc...).
    Furthermore, if inflation gets persistently very high so low nominal rates would imply highly negative real interest rates (in the extreme circumstances Rogoff was contemplating we'd be talking about much more negative real rates than what we have now), then the Fisher relation may very well kick in and the the central bank may lose the ability to arbitrarily set a low nominal rate in the market for its reserves and simultaneously affect short run rates in other financial markets (central bank rates and market rates may become segmented in an environment which no longer satisfies the basic assumptions underlying modern sticky price Keynesian theory). This may all sound too extreme, but then I think Argentina was a very normal economy in many ways in the 1950's, Israel wasn't completely extraordinary before its inflation bout (the fiscal burden of military spending has some similarity conceptually to the aging related fiscal burdens affecting advanced economies today). There's nothing special about Britain that says it is immune to certain problems. Rogoff is talking about tail events that did not happen in the observed 2010-... equilibrium. But peso events can't be ignored, e.g they're one of the most promising explanations for the large equity premium.

    1. Are we talking at cross purposes here? I assume that fiscal policy is sound, but just that markets think otherwise for some finite period of time. In which case the ability to finance deficits by printing money is important - in exactly the same way that a central bank can deal with a bank run against a solvent bank.

  8. I think it's time we stopped being respectful of Rogoff's academic work when reading his articles in the press.

    Contra Ralph, I don't think Rogoff is a charlatan, that implies that Rogoff doesn't know what he's doing. Rather, given the sharp divergences in tone and certainty about debt between his academic work and his public pieces, I think it's time to be honest about what he's doing: He has a political agenda and he is misleading everyone in support of it.

    (I know that will be hard for Simon to come to terms with, because as an eminent practitioner I'm sure he has plenty of interaction with Rogoff and his work in academic settings where all seems honest and straightforward.)

    That's why we shouldn't be taking him seriously - he's throwing millions of unemployed under the bus for his ideology and using his academic reputation to disguise the fact that he has no evidence or model to back up his views.

    The great sadness about economics as an academic discipline is that this kind of thing goes on a lot, but the profession has no "discipline" to it - there is no come back. Rogoff can help destroy our economy with no evidence, logic or model involved and the profession will continue to worship at his altar.

  9. The other troubling point from Prof. Rogoff''s article is that it seems to assume that the market is neutral with regard to growth. I don't think this is the case. The market knows what everyone else knows - the best insurance against debt default (or devaluation) is GDP growth. An austere pro- cyclical "insurance policy" is therefore self defeating - even in its own risk averse terms.

  10. Professor,

    Your point - that QE means we need not worry about a run on UK government debt - was addressed in a recent paper by Corsetti and Dedola:

    They show that the "bad" run equilibrium can still exist as the central bank cannot credibly print enough money in case of a run (as this would be inflationary). Hence the central bank cannot always use money printing to rule out runs on sovereign debt, even that issued in domestic currency.

    1. I had a quick look at that paper. It’s about 20,000 words and I don’t have time. Any chance of you summarising the authors’ reasons for scepticism about printing? My twopence is as follows.

      I can think of various extreme scenarios (serious political upheaval, etc) where printing is no solution. A more likely scenario (in the case of the US) is a reduced willingness to buy US debt because the current irresponsible behaviour by the US government continues and/or there is an increased desire by Asians to invest at home rather than in US debt. In that case interest demanded for holding US debt would rise. But the US needn’t pay that increased interest. Assuming there’s a recession, the US can just print. And that printing shouldn’t be inflationary because in recessions there is plenty of spare capacity.

      At least one MMTer has pointed out that the rate of interest a country pays on its debt is entirely a matter of choice. And taking that point even further, Milton Friedman and Warren Mosler have advocated that the only liability the government / central bank machine should issue is cash: i.e. countries should issue no debt at all. I’m 90% sure that’s a good idea.

    2. Rogoff: Austerity is insurance - it convinces the market that there is the political will in the UK to balance the books in the long term, and hence prevents a "run" on UK gvt debt (a large rise in UK interest rates as market participants stop buying UK debt).

      Wren-Lewis (and Krugman): you don't need austerity as insurance if the central bank (here the BoE) prints money in case of a such a run. In fact, if this is true, then no run would occur in the first place.

      Corsetti & Dedola: printing money is not credible in such a scenario, as it would lead to much higher inflation. So even if there was a run on UK gvt debt, the central bank would not print money. Knowing this, a run is possible.

      Note that QE thus far hasn't led to inflation - *but* this is consistent with the idea that QE is temporary (Sargent and Wallace showed in a famous paper in 1981 that temporary money printing may not be inflationary; but a permanent increase in the supply of money would be). For QE to act as insurance against a run we need a permanent increase in the money supply to be credible.

      Professor - apologies if I have mischaracterised your views! And my first post didn't thank you for your thoughtful response to Rogoff's piece, which was amiss. So thank you!

    3. To elaborate - the key assumption regarding whether QE removes the need for "austerity as insurance" is whether the increase in the money supply would have to be permanent or not.

      If there are two equilibria ("run" and "no run") there's no reason to think that the "run" equilibrium can only be temporary. It's true that many examples of "runs" or "panics" are temporary, but that's because they normally instantly provoke default. In the case of a sovereign with access to QE that is not the case - the sovereign can permanently avoid default by increasing the size of the monetary base without limit - but that involves a permanent increase in the money supply (by definition) and hence will lead to higher inflation.

      Further, there are examples of sovereigns choosing to default on their domestic debt rather than monetise it. One example is the Russian crisis of 1998, I believe Reinhart and Rogoff's book contain more.

    4. Wouldn't a nice sized uptick in inflation under current conditions be a feature not a bug?

    5. @GMAN - depends on the size of the "uptick".

      If the government had to print money to cover all maturing debt and additional borrowing the increase in the monetary base would be large relative to pre-QE levels.

      As argued above, if this increase was perceived to be permanent this would lead to a large increase in inflation. This would almost certainly have larger costs than benefits.

    6. My discussion of Corsetti and Dedola is here
      I think the paper is more complex than you suggest. But remember the thought experiment here is that this is a temporary market panic, because the government finances are sound. So printing money is also temporary, just like QE.

    7. I guess one can always worry about the rains that may end a drought turning into a flood..the Japanese have been seeding the clouds for 25yrs?!?

  11. Simon,

    Nick Rowe responds here:

  12. Incentives matter. Rogoff does have lucrative relationship with Pete Peterson funded organizations. It is hard to make a man understand something if his job depends upon NOT understanding!
    Krugman has recently added "you can't always assume people are arguing in good faith"

  13. Rogoff is a liar. See this Huffington article:

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  15. What world do some of you folks live in that you expect constant growth indefinitely? this isnt possible. Some of you also consider it hitting the poor to have austerity, yet this debt by its nature is a MAJOR boon to big banks who takes a cut out of this from a few angles. Then of course all the money going to interest could be covering spending, instead you take a constant bite out of the economy. Study the IMF folks, what they say versus what happens. What international media or your countries media say versus local media in the countries in question. Al,ost all countries who deal with them end up worse off, and the debt is used to then subvert said peoples. The third world has many issues but debt helps keep them down, and forces them to sell off assets such as is happening in greece. Now we have first world nations at the point debts are getting to danger levels and most of you seem to think we can just grow forever out of this? Its an entirely false paradigm. This ken fellow may indeed be a charlatan as well, but krugman was mentioned as if he was sane let alone describing a long term viable paths. The US was also mentioned as a trigger for issues in the UK. You guys realize there is already movements against the dollar as reserve currency right? BRICS nations calling for it for years, IMF already making plans, and trade starting to emerge bypassing the dollar. I mention the IMF because its pretty clear that with the same logic displayed here the IMF is a front for international power players that use the same logic in the comments above to push people into debt that when it fails leave them at the whims of these players, with many fewer options. So many of you think youll hurt the little guy by austerity, but since it cannot be sustained both historical and contemporary examples show us clearly it cannot be sustained indefinitely and when it does eventually fail it will be the less fortunate who are devastated as the wealthy buy up assets at a fraction of their costs in a healthy economy. So you are literally playing right into the super wealthy players hands if you stay on that track. I mention studying the imf in depth because it then becomes clearer how this rhetoric/mindset and eventually debt is such a great tool for them. It apears the first world is already on its knees, not much more to drain from them so now the sights are on the first world. The parasite is eating the mother hosts. Wake up folks, we need to end this scam on a global scale while we still have options. Or keep pretending you will be the first country in history to grow forever, set up so close to the red line that the economy doesnt even need to shrink for major issues but simply slow growth. That is playing with fire to put it mildly.

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  16. Professor Wren-Lewis, it'd be interesting to get your take on this post by Scott Sumner on UK austerity- he makes some points that I believe you've refuted in the past so it'd be nice to get an opposing view. Here's the link:

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  18. "Now pretty well everyone agrees that printing money to cover unsustainable budget deficits is inflationary."

    Ah, the inflation bogeyman.

    By definition no budget deficit is unsustainable if you have your own currency, since you can print money to fund the budget deficit indefinitely. The argument is therefore not about unsustainable budget deficits, but whether budget deficits are in fact inflationary, in the first place.

    The simple answer to that is who cares? What's wrong with some inflation. In fact, you need some level of inflation for capitalism to function properly. Furthermore, on an absolute basis inflation is meaningless since incomes would also rise to meet the higher expenses. I'm always perplexed why inflation is always argued from a cost perspective, but people fail to realize that inflation also effects income.

    I guess the real fear is a bout of hyperinflation, ala Weimar. But, there has never been a case in the history of capitalism of hyperinflation in a sovereign simply due to budget deficits and as everyone knows Weimar was a unique situation (they had debt in foreign currency). I believe economists are smart enough to measure the effects of a budget deficit to ensure smooth inflation, as opposed to the hyper mode.

    Overall, budget deficits are not to be feared due to some irrational fear of hyperinflation. To the contrary, well design budget deficits, where the government directs funds to projects that have a long-term benefit to the economy, are essential to a well-functioning economy. The problem is really in the name. Budget deficit sounds scary. If they would call it: "Government investment", which is what it really should be, I think the discussion would change dramatically. I've never heard anyone argue against a high ROI investment, because it was inflationary.

  19. Without the IMF the euro would be history.

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