BEE Partner, South Africa Economy Watch

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 »

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 »