This is the final blog post of the Deficit Spending 101 series, it immediately follows the Central Bank Role blog.
We now know that it is a myth to perpetuate the idea that a currency-issuing government is financially constrained. This myth underpins arguments by orthodox economists against government activism in macroeconomic policy. There is another persistent myth that needs to be dispelled – that government expenditures crowd out private expenditures through their effects on the interest rate.
We have seen that the central bank necessarily administers the risk-free interest rate and is not subject to direct market forces. The orthodox macroeconomic approach argues that persistent deficits reduce national savings … [and require] … higher real interest rates and lower levels of investment spending. Think back to the 7.30 Report transcript I provided.
Unfortunately, proponents of this logic which automatically links budget deficits to increasing debt issuance and hence rising interest…
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