BEE Partner, South Africa Economy Watch

The government budget tends to move counter-cyclically. In a slump, incomes will be reduced and spending curtailed, so tax collections will fall, but welfare and related spending to support the unemployed will tend to rise. Other government budget items are likely to be unaffected. Hence, the overall effect will be to throw the budget into deficit. By contrast, in a boom, tax collections will rise and welfare spending will tend to decline, so a surplus will tend to emerge. In short, in an economy with demand-based cyclical fluctuations, the central government budget will tend to move in a counter-cyclical fashion.

Now consider the monetary implications of deficits and surpluses. A deficit arises when the government spends more than it receives in taxes; this means a net increase in money in the system. Such money will appear as excess reserves in the banking system. If allowed to remain, it will drive down interest rates. Looked at another way, it will drive up security prices. A surplus is just the opposite; it arises when the government spends less than it takes in, and it creates a reserve deficiency, tending to force interest rates up. Read the rest of this entry »

In the older economy, the monetary system did provide a constraint, and this constraint helped stabilize the economy; changes in the value of reserves worked in conjunction with the price mechanism. By contrast, the modern monetary system offers no constraint, and, in fact, inflations and asset price booms are self-financing, since price rises increase the value of collateral, on the one hand, and raise the value of bank capital on the other. The modern monetary system also allows for a creative use of the central government’s budget. The shift in money from real to nominal, following the changes in technology, has brought a new role for the government. The government budget is both much larger and plays a stabilizing role in the way it affects the economy. Read the rest of this entry »

This rate has to be the target for which policy makers aim. If they try to reduce unemployment below this rate, they may temporarily succeed, but inflation will ultimately take off. If they raise unemployment above this rate, inflation will decline, but it will not stay lower, or even continue to fall, unless inflationary expectations are lowered. For this to happen, unemployment must stay high, but unnaturally high unemployment, coupled with lower than normal inflation, will lead employers to believe that real wages are exceptionally low. So they will begin to hire labor, and unemployment will move back to its natural level. Inflationary expectations are therefore unlikely to be lowered. Read the rest of this entry »

William Vickrey (1996: 10) argued, ‘The “deficit” is not an economic sin but an economic necessity. Its most important function is to be the means whereby purchasing power not spent on consumption, nor recycled into income by the private creation of net capital, is recycled into purchasing power by government borrowing and spending. Purchasing power not so recycled becomes non-purchase, non-sales, non-production and unemployment.’ In an endogenous money world, there can be no crowding out unless the monetary authority stops lending.

The recent Asian financial troubles and IMF intervention have once again given credence to the view that increasing levels of debt will eventually lead to lenders refusing to take up further public borrowing. Usually this is cast in terms of countries with low levels of capital that have major private debt denominated in a foreign currency used to finance imports. Crises occur when the export revenue, which services the debt, falls for one reason or another. But none of these countries would have any trouble issuing debt in its own currency. Read the rest of this entry »

The International Labour Office (1999) argues:

[A]ny strategy for full employment must be based on a sound macroeconomic framework. To achieve this, unsustainable current account imbalances, or foreign debt accumulation, must be reduced and low rates of inflation achieved. This requires the continuous adjustment of policies, a realistic exchange rate, fiscal discipline and wage moderation (wage increases in line with labor productivity). But in times of global deflation this is not necessarily sufficient as a guide to policy, and a boost to demand may be needed, perhaps going so far as to generate expectations of inflation, in addition to the accepted policy of balancing budgets over the business cycle as a whole (International Labour Office, 1999). Read the rest of this entry »