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Rethinking public debt

from Lars Syll

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 pay 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 public debt these payments will be made to our children and grandchildren.

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.

The real issue … is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole … The latter is impossible because a project that uses up resources needs the resources at the time that it uses them up, and not before or after.

204545_600This basic proposition is true of all projects that use up resources … The proposition holds as long as the project​ is financed internally, so that there are no outsiders to take over the current burden by providing the resources and to hand back the burden in the future by asking for the return of the resources.
It is necessary for economists to keep repeating​ this basic proposition because one of their main duties is to keep warning people against the fallacy of composition. To anyone who sees only a part of the economy it does seem possible to borrow from the future because he tends to assume that what is true of the part is true of the whole.

Abba Lerner

  1. July 17, 2020 at 12:53 am

    Thank you Lars , for showcasing Prof.Stephanie Kelton and her new book “The Deficit Myth”. Ever since Ronald Reagan and Milton Friedman US citizens have been brainwashed !
    Our forthcoming textbook ” Mapping the Global Green Transition:2009-2020″ underpins all the needed ” green new deals” with MMT “

  2. John Hermann
    July 18, 2020 at 8:27 am

    I have a problem with some aspects of Lars’ account of public debt. I would make the following points:
    1. There are two types of public debt: (a) debt of a monetary sovereign (usually a central government), and (b) debt of all other forms of government — including state, regional and municipal governments. A debt in category (a) is not really debt at all. But rather, it is a form of broad state fiat money. In the aggregate, that “debt” never needs to be paid back, and in practice it is not paid back for a very good reason. That reason is that the “debt” in question corresponds with the net money supply and to try to “pay it back” amounts to destroying the money supply. The mechanisms by which this happens are clear and I can elaborate on them if necessary.
    2. There are no unwanted side effects on future generations for “debt” falling into category (a). The supposed side effects only apply to debt falling into category (b), and even then the problem can be easily avoided if desired. And I have seen no evidence that children and grandchildren have ever been obliged to “repay” any public debt in category (a) that was created during the lifetimes of their parents and grandparents.
    3. For category (a), taxes do not pay the interest on public debt. In reality, tax receipts for a monetary sovereign do not pay for anything. That money ceases to exist upon payment, both for the money supply and for the associated banking reserves. The interest component, if it exists at all, is factored into the overall debt itself, and the money applying to the interest payments is created by the central government with the cooperation of its central bank.

  3. Ken Zimmerman
    August 3, 2020 at 12:31 pm

    Arguments about debt have been going on for at least 5,000 years. For most of human history, that is, at least, the history of states and empires, most human beings have been told that they are debtors. Strangely, historians, particularly cultural historians have been reluctant to consider the human consequences, especially since this situation, more than any other, causes continual outrage and resentment. Say to people they are inferior they are unlikely to be pleased. But rarely do those so informed revolt. Say to people they are potential equals who have failed, and that therefore, even what they do have they do not deserve, that it is not rightly theirs, and rage and revolt are more likely to be the result. A reading of history seems to support these conclusions. For thousands of years, the struggle between rich and poor has largely taken the form of conflicts between creditors and debtors, of arguments about the rights and wrongs of interest payments, debt peonage, amnesty, repossession, restitution, the sequestering of sheep, the seizing of vineyards, and the selling of debtors’ children into slavery. Similarly, for the last 5,000 years, with astonishing regularity, popular insurrections have begun the same way: with the ritual destruction of the debt records-tablets, papyri, ledgers, whatever form they might take in any particular time and place. After that, rebels usually go after the records of landholding and tax assessments. In the ancient world (100 CE and before), all revolutionary movements had a single program: “Cancel the debts and redistribute the land.”

    Our tendency today to overlook this history is especially odd when you consider that so much of our contemporary moral and religious language first emerged directly from these very conflicts. Terms like “reckoning” or “redemption” are only the most obvious since they are taken directly from the language of ancient finance. In terms of western civilization, the same can be said of “guilt,” “freedom,” “forgiveness,” and even “sin.” Disputes about who really owes what to whom have played a central role in shaping our basic vocabulary of right and wrong. The fact that so much of this language did take shape in disputes about debt has left the concept strangely incoherent. After all, to argue with the king, one must use the king’s language, whether the initial premises make sense or not. If one considers the history of debt, then, what one discovers first is profound moral confusion. Its most obvious manifestation is that near universally, one finds that most human beings hold simultaneously that (1) paying back money one has borrowed is a simple matter of morality, and (2) anyone in the habit of lending money is evil.

    The more interesting paradox occurs in the 12th and 13th centuries when government debt is created. Mostly to pay for the soldiers, sailors, and military infrastructure to protect and expand empires and to make war on demand. Already by the 16th century, merchants were using bills of exchange to settle debts. But government debt bonds–rentes, juros, annuities–were the real credit money of the new age. It is here that we must look for the real origins of the “price revolution” that hammered once-independent townsfolk and villagers into the ground and opened the way for most of them to ultimately be reduced to wage laborers, working for those who had access to these higher forms of credit. Even in Seville, where the treasure fleets from the New World first touched port in the Old, precious metal was not much used in day-to-day transactions. Most of it was taken directly to the warehouses of Genoese bankers operating from the port and stored for shipment east. But in the process, it became the basis for complex credit schemes whereby the value of the precious metal was loaned to the emperor to fund military operations, in exchange for papers entitling the bearer to interest-bearing annuities from the government. Papers that could in turn be traded as if they were money. In this way, bankers could almost endlessly multiply the value of gold and silver they held. Already in the 1570s, we hear of fairs in places like Medina del Campo, not far from Seville, that had become “veritable factories of certificates,” with transactions carried out exclusively through paper. Since there was some uncertainty on whether the Spanish government would pay its debts, or how regularly, the bills would tend to circulate at a discount. Especially as juros began circulating throughout the rest of Europe, causing continual inflation. It was only with the creation of the Bank of England in 1694 that one can speak of genuine paper money, since its banknotes were in no sense bonds. They were rooted, like all the others, in the king’s war debts. This cannot be stressed enough. The fact that money was no longer a debt owed to the king, but a debt owed by the king, made it quite different from what it had been before. In many ways it had become a mirror image of older forms of money. Skip ahead 326 years we see not much has changed. Today, while in more varied forms than 1694, money is still debt owed by the king (the Federal Reserve). To make war.

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