Comments On Recent Fiscal Policy Articles: What Are The Limits?

As would be somewhat expected, with the vaccine roll-out starting, people are turning back to discussing fiscal policy. There has been some signs of shifting in "mainstream" views, but it is unclear how much the free-market wing will change their views. Pointing to the amount of debt outstanding and intoning "it is a really big number!" has been the go-to tactic for fiscal conservatives for a long time.

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Andolfatto Article

David Andolfatto wrote "Does the National Debt Matter?" recently. It runs through the background on government debt, and includes comments on its relationship to government money from a variety of perspectives.

It is a primer, and the subject matter overlaps many other primers on the subject. Since many of my readers will have already read other primers on the subject, I will only highlight a few points that caught my eye. For readers with less of a background in the area, the article is definitely worth reading.

The first thing to note are his comments relating debt to government money.

Together, these considerations suggest that we might want to look at the national debt from a different perspective. In particular, it seems more accurate to view the national debt less as form of debt and more as a form of money in circulation.

This is in line with how modern finance treats default-risk debt. We can decompose government bonds into the constituent payments, and view them as a sequence of zero-coupon bonds. These bonds have a discount price and an associated discount rate. We can use these discount factors to relate future cash flows to the present. The only thing different about "money" is that the discount factor is fixed to be 1.

The next thing to note is that the first reference is to the Scott Fullwiler article on fiscal sustainability. Since one of the usual complaints by MMT proponents is that their work is not being cited in the appropriate context, this citation is highly welcome. 

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Disclaimer: This article contains general discussions of economic and financial market trends for a general audience. These are not investment recommendations tailored to the particular needs of an ...

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