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Differing viewpoints on the role of debt in the economy

May 8, 2015

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 postKeyensian and MMT) viewpoints as they pertain to the role of debt in the modern economy differ profoundly, and may be summarised as follows:

Orthodox viewpoint

  1. The economy tends towards a stable equilibrium configuration.
  2. Private borrowing, spending and saving decisions are always driven by “rational expectations”.
  3. Banking and money flows don’t affect economic performance.
  4. Private debt growth does not affect economic performance.
  5. Public debt (deficit spending) must be minimised since it leads to rising inflation and rising interest rates. 

Heterodox viewpoint 

  1. The economy generally operates far from equilibrium.
  2. The idea of rational expectations is a fiction unsupported by evidence.
  3. Banking and the creation of new money by banks matter because they contribute to purchasing power and economic performance.
  4. 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.
  5. Sovereign government debt (aka Treasury securities) should be allowed to rise to whatever level is required for the operation of a healthy economy.

 

John Hermann

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One Comment
  1. hi john beautifully succinct, thanks

    what about simply diverting the base rate on all new money created by commercial banks – to the public purse to reduce deficits – and issue eco-fit money at 2% with base/cash rate fixed at 0.5% thus stimulating an entirely new industry of “enveloping” existing buildings against heat loss or heat gain.

    best regards ian greenwood uk +44 (0)121 449 0278

    >

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