The real public debt problem
from Lars Syll
The claim that our public debt is excessive has been used as a major justification for austerity – cuts in spending. That massive debt, we are told, 1) must be repaid, 2) threatens our country with bankruptcy, and 3) is a burden on future generations. All these are wrong. Let me explain why …
Britain’s national currency is managed by our central bank, the Bank of England, owned by the citizens of the United Kingdom (that is, our elected government). As a result, the British government can never default on its bonds. Our government can replace maturing public bonds with new ones. Should private buyers, households and businesses, refuse to purchase the new bonds at the interest rate set by the British government, our government can sell them to the Bank of England …
The debt is nothing more than pieces of paper that the government promises to buy back on a specific date. These pieces of paper can be bought back with new pieces of paper (new bonds) with later buy-back dates. If the private owners of the debt paper do not want the new bonds (new debt paper), our government can sell those new bonds to the Bank of England for cash and use the cash to pay the bond holders.
Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.
But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.
The government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued — especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure — in a longer run — good borrowing preparedness and a sustained (government) bond market.
The question if public debt is good and that we may actually have too little of it is one of our time’s biggest questions. Giving the wrong answer to it will be costly.
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—— Ugarteche, Puyana and Madi ——
Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
————— Michael Hudson ————–
Maria Alejandra Madi / Jack Reardon
————- Edward Fullbrook ————-
—————— Steve Keen —————–
————— Richard Smith —————
————– Gustavo Marques————
– Victor Beker and Beniamino Moro –
————– Lars Pålsson Syll ————-
—————– Stuart Birks —————-
Edward Fullbrook and Jamie Morgan
———— Armando Ochangco ———-
Shimshon Bichler / Jonathan Nitzan
————— Mauro Gallegati ————–
————— Herman Daly —————-
————— Asad Zaman —————
—————– C. T. Kurien —————
————— Robert Locke —————-
Lars, the whole basis of both sides of the argument is specious reasoning, seeming plausible only because of the pervasive dysinformation [sic] infecting the whole effluvium of mainstream economics doctrine & dogma. The Banksters’ national-debt-for-profit faux money game AKA corporate socialism for the hyper-rich and casino capitalism for losing-class suckers is as unnecessary as personal taxation.
If the US used a constructive, debt-free fiat currency, even issued at interest, similar to Benjamin Franklin’s system practiced for 52 years in Pennsylvania–without inflation (devaluation) or deflation (depression) or destabilization–we could soon enjoy a sustainable cultural renaissance, globally. Yes, that could happen IFF the system is initiated without the unnecessary vulnerability inherent with interest. Naturally, that will never happen as long as economics and economists and kleptocrats refuse to embrace and support a sane meta-economic paradigm, an ecocentric-biophilic standard of values.
Re: the Pennsylvania colonial currency system. Yes, it worked well and remained stable for so long despite some personal taxation. Yet, most citizens were already confusing the concepts of money, currency, coinage and valuable “trade goods” and, thus, failed to realize that fiat currency could be issued debt-free, without interest and all the related vulnerabilities to destructive-exploitive manipulation. A debt-free, interest-free, not-for-profit currency eliminates the need for taxation to support commonwealth and the operation of government. Additionally, as long as new currency is issued in direct proportion to actual goods/services of real benefit to the cultural commonwealth, there is no need of sophisticated intermediary regulatory processes and “management” by bureuacrats, Banksters or other kleptocrats.
It is tempting to follow-up on Huey Long’s system of an official partnership of US businesses and government, for the sake of the people’s commonwealth. However, even eliminating taxation in favor of public-private co-ownership of all US businesses is a diversionary non-necessity. If the operations of government are valid, valuable services for the good of the commonwealth of all the people, then issuance of not-for-profit legal tender fiat currency serves the purpose, compensation, fair exchange of valuable currency for actual benefits rendered & received.
Hence, clearly, discussions of the validity or merits or demerits of national debts are absurd.
I hope this helps clarify the muddy waters and evaporate the dense fog of disinformation and confusion.
I am simply to uninformed to comment on much in this discussion; I am in the watch, read (listen) and learn mode. But this I do know. After getting a degree in business, working in the corporate accounting world (then studying forensic accounting) and leaving it in disgust because it had become just what you describe above (aka corporate socialism) with theory merely a veneer over the rapacious greed and corruption and kleptocracy of American predatory capitalism’s Wall Street driven short-termism I became a software engineer. Then I watched my fellow engineers get all excited when Microsoft partnered with a big five accounting firm to maximize its investment/purchase of Great Plains to create a new Enterprise Resource Planning (ERP) platform (i.e., technology consulting services) the accounting industry found itself in conflict of interest position. What to do when an old audit client services generates X dollars while the same client pays X dollars times 100 for technology consulting services but has some audit issues (cannot give a clean audit). Well, humans being humans, you fix the books (audit) or turn a blind eye or worse yet, you collude (e.g., Enron).
FASB along with the SEC researched and identified the conflict of interest and offered up a rules change (can’t do both for the same client). All hell broke lose as the mountains of money generated caused the cash rich accountants to collaborate with ilk like Newt Gingrich and Joseph Lieberman to turn on the SEC (threaten defunding) and make the self-serving argument “We are professionals, we can manage our own conflict of interest issues, we don’t need regulation or oversight as that only kills innovation)!” The lobbyist for the big accounting firms then became the head of the SEC (completing regulatory capture) as soon a G.W. Bush was elected. And the rest is history as it has been nothing but downhill from there.
Economists helped too, to wit:
They faced a “conflict of interest” in that “if they criticize the industry and suggest tighter regulations, they may become black sheep and lose lucrative consultantships.” As for those private economists working within the financial industry itself, “one does not expect economists employed by real estate companies or by banks to be talking about housing and credit bubbles.”36
Nelson, Robert H.. Economics as Religion: From Samuelson to Chicago and Beyond (pp. 354-355). Penn State University Press. Kindle Edition.
A Nation/State is really not that different from an individual in the context of its relationships to other states. As you Brexiteers are about to find out:
The credibility of a nation’s IOUs rests on its ability to deliver goods and services wanted and needed by others. The value of any paper with golden edges or computer generated promises is directly tied to what can be delivered.
In the case of the US this includes the services of a mighty war machine which gives the US dollar its fiat value (literally).
Without an underlying credibility, a national government will issue IOUs at its own peril.
Yes! I agree 100%. I would like to suggest a change in terminology, however. The present use of the term, “debt” is applied to any participant in the economy that purchases goods or services on credit. The implication of this all-inclusive definition is not well understood, however. Individuals, households, businesses, and non-sovereign governments incur debt when they borrow money. But it doesn’t make sense that the sovereign needs to borrow money.
The term, “debt” is used to characterize any amount of money owed by one party to another party. To whom does the sovereign owe repayment of money it spends? What entity has the exclusive power to create money? All money in circulation in the economy is created from thin air by fiat through the sovereign’s unchallenged power–albeit, in the US, it is the sovereign’s designated agent, the Federal Reserve, that has been granted this power. The Federal Reserve has licensed privately owned banks to exercise this power within limits.
We all know that in this system a debtor must acquire pre-existing money (created and inserted in the circulating money supply by some previous “loan”) to repay the debtor’s “loan” with interest–additional money that is extracted from the money supply. The repaid principal is extinguished by the lender upon receipt, an obligation of “lenders”, but the interest is then the lender’s asset.
The power to create and extinguish money is accompanied by the power to extract interest from the money supply. The borrower is paying the “lender” for a product that is created from nothing, without cost, and which is destroyed when the “debt” has been paid. This is a “toll booth” operation, and every “borrower” pays the toll.
In the case of the US government the benefit of sovereignty has been transferred to the banking system. This is unnecessary and improper. The government pays for every service it provides to the public, and as is currently the case, it has agreed to “borrow” the funds for its spending from the bankers. Thus, it creates a debt that is then billed to the people.
The problem here is that the sovereign, when properly vested with the power to create money, actually has no need to have income from the money supply in order to spend. Why should necessary government spending in furtherance of its obligations to its citizens create public debt at all?
It would be good to see an analysis of these macro concepts as they tend towards extremes. For example, inflation is a progressive tax that’s hard to evade. Very high inflation can cause the economy to be supply limited and then shrink, the same as excessive tax,
Public debt replaces cash (subject to inflation) with an alternative that’s inflation neutral. That means the inflation-as-tax has to hit fewer people (non bond holders) and hit them harder, so it’s an unhealthy distributional effect. Double digit inflation and a large stock of domestic debt, although in theory sustainable, produces an unpleasant economic climate.
The ideal, as far as I can discern, is deficit <= growth. If you have 2% real growth you can afford 2% deficit, which means government can claim first use of that new wealth by money creation and the equilibrium of debt, GDP, and repayments stays fixed and inflation does not increase.
At least that's my understanding. One of the professors on the list could write a proper account.