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The real debt problem

from Lars Syll

The ad nauseam repeated claim that our public debt is excessive and that we have to balance the public budget is nothing but absolute nonsense. The harder politicians — usually on the advice of mainstream establishment economists — try to achieve balanced budgets for the public sector, the less likely they are to succeed in their endeavour.darling-let-s-get-deeply-into-debt And the more the citizens have to pay for the concomitant austerity policies these wrong-headed politicians and economists recommend as ‘the sole solution.’

One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external … A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them all together​ they will no more be impoverished by making the repayments than they will be enriched by receiving them.

Abba Lerner The Burden of the National Debt (1948)

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

But the truth is that public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others have to pay the taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt cancels itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the national debt these payments will be made to our children and grandchildren.

To both Keynes and Lerner, it was evident that the state has the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that means that it has to take on debt and (more or less temporarily) underbalance its budget – so let it be! Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

Discussing within which margins public debt is feasible, the focus today 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.

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.

To view government debts in terms of the ‘functional finance’ concept introduced by Abba Lerner, is to consider their role in the macroeconomic balance of the economy. In simple, bare bones terms, the function of government debts that is significant for the macroeconomic health of an economy is that they provide the assets into which individuals can put whatever accumulated savings they attempt to set aside in excess of what can be wisely invested in privately owned real assets. A debt that is smaller than this will cause the attempted excess savings, by being reflected in a reduced level of consumption outlays, to be lost in reduced real income and increased unemployment.

William Vickrey

    April 9, 2019 at 10:03 pm

    The above explanation of debt and the stupidity of political and economic austerity policies from my real world experience is what the public needs, in order to seriously question miss conceptions of debt that ultimately penalise them. Ted

  2. Ikonoclast
    April 10, 2019 at 12:20 am

    I agree with the above. However, I believe we need to go further in our thinking. It seems to me (and correct me if I am wrong) that modern legal tender money is created ex nihilo (out of nothing) in two ways:

    (a) The government can “print” (create) fiat money by running a true budget deficit; and
    (b) Banks can create debt money by lending.

    I call these “fiat money” and “debt money” in the below discussion to distinguish them. In the wider sense, they are both forms of fiat money.

    In circulation, fiat money and debt money are indistinguishable from each other in the sense that they both operate as legal tender. However, there are “final calls” on each kind of money, at which final calls each kind of money can be destroyed. The final call on debt money is the repayment of the debt. At this point the debt money is destroyed nihil in (into nothing). Correct my Latin if necessary. The final call on fiat money is taxation. When a fiat unit is taxed it is destroyed into nothing. This is if we accept the MMT view that fiat money must be created before being destroyed (logical) and that all taxed monies are destroyed and all new budget monies are created in the budget (MMT accounting view). There is nothing wrong with looking at it this way. Once the circulation is electronic, there are no real counters of the money units, only virtual counters.

    Each type of money has its own controlling system as it were. The government is in direct control of the quantity of fiat money units in the broad money supply. The private lending banks are in direct (shared-competitive) control of the quantity of debt money units in the broad money supply. The government is then in only indirect control of the quantity of debt money units in the broad money supply by means of central bank operations and regulations. By reason of the remove from direct control to indirect control and the imprecision introduced by operating with these “extra links” and “longer levers”, the government’s control of debt money supply might be less precise, or at least less timely, in relation to, for example, an over-lending crisis. Again, correct me if I have any of this wrong.

    It seems to me that the government should take the creation of debt money wholly into the Central Bank which itself should be 100% government owned. Thence, the 100% government owned Central Bank or Reserve Bank becomes the wholesaler of debt and private banks become the retailers of debt. The creation of debt wholesale is a natural monopoly and the rights to all natural monopolies rest properly with a social democratic government.

    In addition, the private retailing of debt should only be for business debt (commercial banking in other words). Personal loans and private owner-occupier housing loans should only be made by the central or Federal Government. This in turn would require the Government to 100% own and operate a retail bank with branches across the nation. Australia’s Commonwealth Bank fitted this side of the bill before it was sold off and privatized. However, it did still compete in commercial lending in those times. The new policy would strip private banks of all lending other than business and commercial lending. The quid pro quo would be that the government reatail bank would undertake no business or commercial lending

    The implementation of such a policy would imply the creation of a new government bank or the nationalization (or re-nationalization) of a suitable vehicle. In any financial and/or economics crisis where a large retailing bank needs rescue, the rescue should certainly take the form of a nationalization to implement the above policy.

    Of course, the above steps are inadequate on their own to properly reform or transform capitalism in social democratic terms. They would represent a reasonable step in that direction. But again, by all means correct me if any of my suppositions, deductions or prescriptions are patently wrong. I am keen to learn heterodox views on this. The orthodox views I dismiss mostly as nonsense, though broad Keynesians do make some sense.

      April 11, 2019 at 12:57 am

      In reply to Ikonoclast April 10,2019@12 20 am
      Thank you for your clear logical thinking on the need for a government owned central bank on behalf of the people I also support your closing paragraph on the need to reform capitalism. From my experience in life, if we are unable to make an existing system work there is little likelihood that we can make a new system work. Having made that statement I think MMT thinkers could be included in the conversations to broaden the discussion in an open democratic manner.Ted

  3. Craig
    April 10, 2019 at 3:32 am

    If we simply tie monetary policy directly to the terminal systemic ending point, cost and price summing point and terminal expression point for all forms of inflation at retail sale and also regulate anti-social activities prior to that point with tax incentives for economic virtues (thrift, competition and good will) and tax discouragements for economic vices (greed, dishonesty and disregard for reasonable rules) we can have a genuine paradigm change in the money system that benefits every agent economically. It’s so easy when you actually look at it and confront the potentialities, and if you either can’t fight past the false orthodoxies blinding you to it or simply refuse to look at the temporal universe realities it will effect then you’ll never see it. Consult the Martians, they have exteriorized objective enough viewpoint to easily see it.

  4. April 10, 2019 at 9:06 am

    In general I agree. However you quote from Abba Lerner seems false to me “Taking them all together​ they will no more be impoverished by making the repayments than they will be enriched by receiving them.”

    This is a theory of debt which ignores interest payments, isn’t it? Future generations pay back more than the present generation borrowed. It is the interest payments that create a drag on demand. More taxes means less disposable income. It would be irresponsible to leave a future generation with high interest payments.

    It also appears to ignore issues of equities. Poor people pay their taxes but seldom have investments because they don’t accumulate surplus capital. So their taxes go to paying interest and principles and govt pays out interest to bond holders, but bond holders are (relatively) wealthy that is (yet another) transfer of wealth from the poor to the wealthy.

    The way to address this(at least in terms of averages) would be for government to employ poor people and pay them wages.

    Public debt is an issue. Just not as important as Neoliberals make out. And indeed private sector debt is 3-5x greater than public. The real fear factor in the UK is that households are spending more than they earn and have been for at least 9 Qs. Combined with Brexit stockpiling by business, we could be in for a big shock at some point.

  5. April 10, 2019 at 6:19 pm

    Bookkeeping techniques are designed for entities that “use” money, not for an entity that “creates” money. Calling taxes “revenue” reflects the bookkeeping need for a revenue source even when none is needed by an entity that creates money. Additionally, it is rather obvious that the government must first spend and then tax, not “tax and spend” as claimed by Regan.

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