The flaws in Keynsian borrow and spend
Borrow and spend is a policy with several weaknesses. 1, it involves government borrowing something, that is money, which government can create in limitless quantities any time. 2, the “borrow” part of borrow and spend is deflationary: the opposite of the desired effect. 3, borrow and spend may result in interest rate increases and crowding out. To get round this, governments print extra money and buy back government securities. This is a charade: governments here are engaged in “print and spend” while pretending to effect “borrow and spend”. 4, when borrowings are paid back, the initial reflationary effect is reversed, thus borrow and spend does not have a permanent effect, whereas print and spend does. 5, one of the ways that borrow and spend works is that it supplies the private sector with additional assets (bonds which pay interest). This reduces “paradox of thrift” unemployment. But the private sector actually NEEDS or WANTS these assets, thus there is no need to pay interest to induce the recipients to accept those assets. Put another way, governments should issue zero interest bonds (i.e. cash) not interest paying bonds. 6, Borrow and spend expands the national debt, some of which will be held by foreigners. Paying interest to foreigners when no interest needs to be paid makes even less sense than paying such interest to natives. For the purposes of influencing unemployment and inflation, print and spend is a superior policy to adjusting interest rates because the latter is distortionary.
|Date of creation:||25 Sep 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kellermann, Kersten, 2007. "Debt financing of public investment: On a popular misinterpretation of "the golden rule of public sector borrowing"," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1088-1104, December.
- Hillinger, Claude, 2010.
"The crisis and beyond: Thinking outside the box,"
Economics - The Open-Access, Open-Assessment E-Journal,
Kiel Institute for the World Economy (IfW), vol. 4, pages 1-61.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:25434. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.