Guardian letter

The Guardian printed a letter today that I wrote in response to Larry Elliot's comment yesterday. It is disappointing that the chief economics editor of a liberal newspaper is spouting the nonsense that the underlying problem is international current account imbalances and that the solution is improving competitiveness in importer countries to enable them to become net exporters. Firstly, it is impossible for all countries to become net exporters unless we discover another planet with willing importers. Trying to do so will lead to trade competition between countries in which some countries can only benefit at the expense of others. It becomes a zero sum game which increases conflict and reduces cooperation. Secondly, it misses the real problem which is excessive private sector debt. This was the inevitable consequence of us relying for the past 40+ years on increases in commercial bank lending to provide our money supply and gradually removing all control on credit creation. That resulted, as it always will, in asset price bubbles which always burst, eventually. This is exactly what caused the Great Depression. The solution to this problem is crystal clear. The private sector must be allowed to reduce its debts. Instead what policymakers are trying desperately to do is get them to renew their borrowing spree. This is utterly ridiculous and cannot succeed. The private sector are not idiots. The ONLY way for the aggregate private sector to save is for the public sector to spend more into the economy than it takes back out through taxes. That is a straightforward accounting reality as the private sector and public sector balances MUST add up to zero. In other words we NEED deficit spending. This is what allowed robust recovery following the Great Depression. Provided this is supported by central banks this can continue indefinitely. There is no risk of default. The only limiting factor is inflation but this is readily controlled by reducing the deficit or switching to a surplus and/or increasing the base interest rate.