Home > Uncategorized > A Tale of Two Debt Fallacies and a Way Off the Hook

A Tale of Two Debt Fallacies and a Way Off the Hook

Post Keynesian Economics Forum

ETELBERTO ORTIZ C., Universidad Autónoma Metropolitana, Unidad Xochimilco, Mexico City

The world continues to watch the ongoing debate on debt and government deficits in the US, with an eye on the impending “sequester”, the conservatives’ equivalent of a “guillotine” on government spending. But, there are two areas of the debate mired in confusion:

1.         While the discussion centers on the continued increase in the stock of debt for all levels of the US government and frames the debate in terms of an obvious “imperative” to reduce the debt, it  ignores how these cuts would be accomplished and their impact on the overall performance and structure of the economy.

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  1. BFWR
    November 1, 2013 at 2:27 am

    “A better solution for the US economy is a distributive shock, precisely in the opposite direction: reduce excessive financial incomes, increase real wages, and expand public expenditures. This approach will result an increasing ability to meet debt commitments and provide the impetus for badly needed structural changes in the US economy.”

    For the first two I could not possibly agree more. And selectively, I agree with the third as well. The key word is distributive. Our money system being digital in nature (98% of it is created as debt) a distributive reverse flow of money would cancel debt without causing inflation of the monetary supply. Actually, individual incomes, being chronically scarce even in so called “good times” despite any velocity of money is the deeper reality, and that scarcity reality is going to be ongoing due mainly to technological innovation…so individually distributive monetary policy is like “Don’t worry, be happy.” And after the stupendous personal debt overhang is largely, emphasis largely eliminated all you’d really need to keep any cost push or demand pull inflation equilibrated with prices is institute an already widely used and unobtrusive to price discovery mechanism, a general discount on prices based on the total price of consumption over the total cost of what is produced in a monthly period…and then rebate the total of their discounts back to all merchants participating in such to enable them to be whole on their margins.

    This is evolution of profit making systems in an age of technologically advanced economies. Even though giving money to individual consumers is anathema to Banks and Banking, who are the already bailed out credit monopolists and enforcers of a consumer financial paradigm of loan ONLY to DICTATE to us? And even more importantly, why are economists and individuals en masse not waking up to these monopolistic usurpations of wealth and power and demanding a balancing, competitive consumer financial paradigm of monetary grace the free gift?

  2. November 1, 2013 at 3:35 am

    To sum up this version of the Keynesian contradiction: government is the solution to our problems; but the government does not have the answer, because it fails to understand the problem.

  3. November 1, 2013 at 7:04 am

    The rhetorical question in this post: “Who will pay for it, if not the government?” shows a serious ignorance about government. The government does not pay for anything, because it is really the individual savers, the taxpayers and the next generation of taxpayers paying off government debt, who pay for government spending.

    A significant part of government activity involves transfer payments or wealth redistribution. Many readers of this blog could retire in poverty because public pensions are government liabilities and government’s debt are fixed interest assets in private pension funds. Governments can reduce pension payments (e.g. Greece) or cancel (or call-in) government bonds to reduce government debt (effectively defaulting on its bonds as Poland did). Bail-ins in bank regulations are to confiscate bank deposits (e.g. Cyprus) and pension savings (Greece and Poland).

    With government debt write-offs, the government can continue to borrow and spend. This is part of the Keynesian doctrine called “euthanasia of the cumulative oppressive power of the capitalist” (GT, p.376). All those who have savings for retirement are capitalist “rentiers”, because they “exploit the scarcity-value of capital” by earning interest. A less direct method than bail-ins (to punish capitalists) is the policy of negative real interest rates to kill off savers as a Keynesian prescription (GT p.376):

    “I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.”

    This is as true today in Britain, as it was in 1936. Many readers of this blog will be financially dead by the time they retire and their survival in retirement will depend on whether the next generation of taxpayers will hang around to support them. That is, one generation of taxpayers must depend on the next larger generation of taxpayers – a Ponzi scheme. This is a Keynesian Ponzi scheme of many pension systems, including e.g. US social security and other defined benefit funds.

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