Yves here. Sometimes it is best to let things speak for themselves. In that spirit, I am embedding a very important paper by the well-respected investment management firm GMO which debunks the tenets of “sound finance,” meaning the claim that governments need to balance their budgets. I expect to be referring to it regularly, particularly the section on why debt does not burden future generations, a particularly nasty bit of fear-mongering used to pit the young and old against each other, as opposed to rentiers and socialism for the rich.
To encourage you to read it in full, below is the executive summary:
In the context of the role that debts and deficits play in overall economic policy, in this paper I focus on the philosophy known as “sound finance,” which includes adherents who believe that governments should seek to balance their budgets. I, however, take a different view, and believe that the role of government when dealing with budget deficits should be one of “functional finance,” which ensures that the policies implemented help to reach the overarching goals of macroeconomic
policy (generally held to be full employment and price stability).
This paper attempts to show why the proponents of sound finance are mistaken by defining and unpacking a series of “myths” that are foundational to, or at least helpful to, convincing us that sound finance requires that governments run a balanced budget. Though not a complete list, following are the “myths” presented:
Myth 1: Governments are like households
Myth 2: Printing money to finance budget deficits is inflationary
Myth 3: Budget deficits/high debt lead to high interest rates
Myth 4: Budget deficits are unsustainable
Myth 5: Debt is a burden on future generations
To conclude, I offer some thoughts on the actual impact of monetary policy on the real economy, which I believe to be quite small. These thoughts include a brief discussion about how fiscal policy, once the nature of government debts and deficits is fully understood, can be a viable alternative to monetary policy.