by Bill Mitchell
…..So if you start putting all this together you will conclude that mainstream economic theory which has been used as an authority to design policies that include fiscal austerity and these bizarre monetary policy gymnastics is not capable of prescribing a policy mix that will generate prosperity.
We were told that fiscal austerity would bring growth as consumers and business firms, unshackled from the threat of future tax hikes ‘to pay for the deficits’ would jump out of their pessimism and spend up big. That hasn’t been happening.
We were told the deficits would push interest rates up. They have come down and into negative territory in some cases. Japan is now borrowing over 10-year periods at negative rates – that is, investors are paying a fee to buy Japanese government debt.
We were told that the deficits, and then the non-standard monetary policies (QE and its variants) would generate such growth in the supply of money around the world that inflation would quickly accelerate and possibly become hyper.
None of that has happened, nor will it, and for good reason.
These predictions were based on a body of macroeconomic theory that has no correspondence to the real world. Its conception of the role of banks is flawed. It doesn’t understand that banks do not loan out reserves.
It doesn’t understand that public deficits do not starve the economy of savings but, in fact, stimulates higher saving.
It doesn’t understand that SPENDING = OUTPUT = INCOME which generates employment.
You cannot have growth without spending……