Why should someone who is anti-austerity care about debt – Simon Wren-Lewis.

For a country that can create its own currency there is never any necessity to default.

Most of the posts I have written about austerity have been aimed at countering the idea that in a recession you need to bring down government deficits and therefore debt. But what if you accept all that (you are anti-austerity). Why should you care about debt at all? Why do we have fiscal rules based on deficits? Why not spend what the government needs to spend, and not worry that this resulted in a larger budget deficit?

The story often given is that the markets will impose some limit on what the government will be able to borrow, because if debt gets ‘too high’ in relation to GDP markets will start demanding a higher return. You can see why that argument is problematic by asking why interest rates on government debt would need to be higher. The most obvious reason is default risk. But for a country that can create its own currency there is never any necessity to default.

Being anti-austerity does not mean we can forget about debt completely, as long as we are using interest rates rather than fiscal policy to control demand.

. . . Mainly Macro

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