“Being right matters”

Michael Stephens | November 8, 2011

At Pragmatic Capitalist, Cullen Roche writes about the “eerily prescient” predictions regarding the euro made by Modern Money Theorists and economists looking at sectoral balances.  Roche quotes from Randall Wray’s Understanding Modern Money (see in particular p. 91ff), a paper by Stephanie Kelton (Bell), and a Wynne Godley article written in 1997 (“Curried Emu — the meal that fails to nourish,” Observer, Aug. 31).  From Godley:

If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under ‘conditions of extreme emergency.’ … The danger, then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.

See also Godley’s earlier piece (1992) in the London Review of Books, “Maastricht and All That“:

I recite all this to suggest, not that sovereignty should not be given up in the noble cause of European integration, but that if all these functions are renounced by individual governments they simply have to be taken on by some other authority. The incredible lacuna in the Maastricht programme is that, while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in Community terms, of a central government. Yet there would simply have to be a system of institutions which fulfils all those functions at a Community level which are at present exercised by the central governments of individual member countries.

With regard to Godley’s prescience, take a look at this policy note from 2000 on the US economy (“Drowning in Debt“) that discusses the eye-popping rise in private indebtedness (“…it is certainly entirely different from anything that has ever happened before–at least in the United States”).  It’s really worth reading the whole thing (only five pages).

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  1. Comment by Hugo Heden — November 9, 2011 at 6:44 am   Reply

    If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under ‘conditions of extreme emergency.’ … The danger, then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.

    Yes, governments are currency users like anyone else.

    And interestingly, Net Financial Assets (Euro-denominated) for these currency users does not increase, as far as I can tell. The remain constant. ECB does not create any (unless a new EZ member is added I guess.) Right?

    So to support growth, ever more endogenous debt must instead be taken on among the currency-users.. for as long as that can last. And then nominal prices will have to start decreasing. (Or they can just skip that old “growth” mumbo jumbo — who needs it?)

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