Public debt — questions and answers
from Lars Syll
Can a government go bankrupt?
No. You cannot be indebted to yourself.
Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.
Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.
Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.
Does maintaining full employment mean the government has to increase its debt?
No.
First, f
ull employment can be maintained by printing the money needed for it, and this does not increase the debt at all. It is probably advisable, however, to allow debt and money to increase together in a certain balance, as long as one or the other has to increase.
Second, since one of the greatest deterrents to private investment is the fear that the depression will come before the investment has paid for itself, the guarantee of permanent full employment will make private investment much more attractive, once investors have gotten over their suspicion of the new procedure. The greater private investment will diminish the need for deficit spending.
Third, as the national debt increases, and with it the sum of private wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and can devote them to paying the interest on the national debt.
Fourth, as the national debt increases it acts as a self-equilibrating force, gradually diminishing the further need for its growth and finally reaching an equilibrium level where its tendency to grow comes completely to an end. The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income …
Fifth, if for any reason the government does not wish to see private property grow too much … it can check this by taxing the rich instead of borrowing from them, in its program of financing government spending to maintain full employment. The rich will not reduce their spending significantly, and thus the effects on the economy, apart from the smaller debt, will be the same as if Money had been borrowed from them.
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Real-World Economics Review Blog 
Thanks, Lars, for posting this wisdom from one of my teachers of long ago. Lerner was a kind and witty man in my presence. And a fine teacher among many who cared little about teaching. Had he not been a socialist he possibly would have been awarded the fauxenomics Nobel. Lots of common sense.
I have educated friends who are quite confused about debt. Using this Lerner excerpt saves me a lot of work.
The government cannot print foreign money to pay off foreign debt, therefore sovereign bankruptcy can occur via foreign debt. Since printing national currency devalues that currency (it is a form of taxation on the existing wealth), unless this is balanced by equivalent growth in exports, it weaken the terms of foreign credit, making foreign debt more expensive and thus amplifies the risk of default.
The entire austerity programme in the UK has been predicated on this false idea of public debt and the choices available to governments with a sovereign currency. I characterise it as Micawber moneynomics – i.e. treating national finances as they are like domestic household accounts!
Modest request, Lars: please design a board game, like Monopoly, to bring Modern Monetary Theory, and Abba Lerner, to the nation’s “kitchen table economics understanding.”
Andrew Jackson’s attorney will be in touch with you shortly.
Can a government go bankrupt – yes see Germany, see Venezuela, see Argentina…
Can a central bank go bankrupt – A central bank is nothing more than the private bank of a government body. Yes
Do tax payers repay debt? Yes Assuming the government reduces debt – the funds to repay the debt come from taxes on future generations. The Millennials should be pissed we are dumping our financial mess on them all for the benefit of today’s wealthy.
“… depends on what the debt is used for..” Only in the case of infrastructure expansion is the new debt of any value to future generations. Most of the governments “operating budget” is for expendables that do not provide new infrastructure/commonwealth.
As the national debt increases – it acts as a drain on future government budgets. Think of your own household – imagine the interest costs exceeding 30% of your budget. You get no value from paying interest. Equilibrium is total bs – Trumps current deficit in February was 234 billion – an annual rate of 1.5 trillion if this is the new “equilibrium”. Thinking this won’t hurt future generations is a bit off.
There is no relation to full employment, deficits and taxation policies.. Full employment is an independent outcome.
Economists that think there are dependencies in economics like there are dependencies in Newton’s laws of motion are confused. Cause and effect in physical sciences is part of nature. This same inter dependency does not exist in Economics.
How can an outfit titled “Real World Economics” have such streams of thought disconnected from the real world?
ps foreign debt is debt sold to foreign sources – it must be repaid in dollars as it was issued in dollars.
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Observations about the USA national public debt. First, the amount of the debt varied regularly, up during war and recession, and down during most of the remainder of the time, until 1980. From 1980 forward the amount rose consistently, with a reduction in the rate of growth during 2000 to 2007 before resuming the same level of increase through 2016. The history that led to this change in pattern includes decreases in federal taxes and increases in military spending. Seems since 1980 some organized groups opposing federal taxes have held great influence in Congress and the White House. I wonder who these groups could be?? Second, the U.S. debt was $22 trillion as of February 11, 2019. Most headlines focus on how much the United States owes China, one of the largest foreign owners. What many people don’t know is that the Social Security Trust Fund, aka your retirement money, owns most of the national debt. This debt is made up of intragovernmental debt (debt owned to over 200 federal agencies) which is 27% of the total, or about $6 trillion. Of this $6 trillion 50% is owed to Social Security and Disability insurance, 22% to federal retirement, 14% to military retirement, 11% cash on hand, and 5% to Medicare. The remaining 73% or $16.1 trillion is owned by “the public,” and 30% ($4.8 trillion) of this public ownership is foreign investors of one sort or another; of which China at $1.18 trillion and Japan at $1.03 trillion are the largest. Finally, we need to note that the USA has been a debtor nation from its founding. Winning a revolution is expensive. And but for the patriotism and sacrifice of men like Robert Morris that debt would have been much larger. A wealthy Philadelphian, Morris saw to the financing of the army during the revolution, bankrupting himself in the effort. Where is such patriotism and sacrifice today? Would any tech billionaire or Amazon founder Jeff Bezos sacrifice even 10% of their fortune to save the USA? Not likely!