From Sam Brittan. Veteran FT writer.

A permanent secretary under an earlier Labour administration once asked me what I thought were the limits to permissible Budget deficits. My answer was: “Up to the point where the gains to output and employment are offset by the inflationary effects of a fall in the exchange rate.”

16 Responses

  1. “Up to the point where the gains to output and employment are offset by the inflationary effects of a fall in the exchange rate.”

    Ok…but you have to give the economy some time to adapt to changes inthe exchange rate. New productivity capacity will be created in the economy to produce substitute products for overly expensive imports.

    The inflation doom mongers are not inlined to wait for inflation to stabilize.

  2. Good answer

    Re total Govt debt (from yearly deficits). My view is up to required retirement savings

    So if in the US this figure is $100 trillion. Then up to this figure. So a long way to go.

  3. “Instead of risking the Budget deficit-reduction programme by boosting public spending and cutting taxes, the government is trying to encourage the private sector to borrow on special terms.”

    Why, that’s it! They MUST be out of money!

    FT – Cash Hoarding Companies Seem Unable to Splash Out:

    Well… hmmmm.

    1. @All,

      Sorry about that, thought I’d found a way to link to FT. Just google the title and the resultant links should work.

  4. Sam Brittan slipped up in that sentence about the “inflationary effects of a fall in the exchange rate”.

    The fundamental constraint on budget deficits is inflation, period.
    Whether that inflation stems largely from exchange rate effects, or not is irrelevant. In a country heavily involved in international trade relative to its GDP, exchange rate effects would loom large. In contrast, for a country not so heavily involved in international trade, the exchange rate contribution to inflation would be small.

    But the fact remains that it is OVERALL inflation that really matters.

      1. it’s a political judgement, and with my transition job in place total employment can likely be quite a bit higher than otherwise before ‘inflation limits’ from excess demand are reached.

        And while it can be tricky at what are considered low levels of unemployment, seems obvious today that we have a massive output gap to fill to meet our stated political goals

  5. Q. How fast can I drive?
    mmtA. Up to the point where you spin out of the corner.

    Funny, but how do you calculate this limit?

      1. Good point about spinning out. Perhaps, rather than going right up to the maximum limit, it makes more sense to be a bit ‘prudent’?

    1. @Jacob Goense, MMT says the limit is when inflation begins to accelerate, not when hyperinflation has taken hold. There is a big difference. Whilst the Fed, ECB and BoE would have you believe that inflation in the high single digits inevitably leads to hyperinflation, this is nonsense: plenty of countries have seen inflation at these levels for years without it becoming hyperinflationary.

      The key thing is having a decent view of what causes inflation, and how can it be stopped.

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