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Really Bad Ideas, Part 3: Government Debt Isn’t Actually Debt

The failure of fiat currency and fractional reserve banking to produce a government-managed utopia is generating very few mea culpas, but lots of rationalizations.

Strangest of all these rationalizations might be the notion that government debt is not really a liability, but an asset. Where personal and business loans are bad if taken to excess, government borrowing is not just good on any scale, but necessary to a healthy economy. Here’s an excerpt from a particularly assertive version of this argument:

What if every government paid off its national debt?

(Medium.com) – IT might make you feel better but tomorrow if the US Federal Government, or Australia or the UK repaid the entirety of its national debt, it would make not one dollar’s difference to your bank account.

In fact the economy would tank.

“If America repaid all its national debt tomorrow, we very likely would crash into the mother of all great depressions long before the debt is ‘paid off’”, says economist, Professor Randall Wray.

There were six times in US history in which budget surpluses were achieved for long enough to retire a significant amount of debt. Five of those were followed by depressions, the last of which culminated in the Great Depression of the 1930s.

The last time America ran a significant budget surplus (about 2.5 years) was under President Clinton. The 2002 recession is a direct result of Clinton’s 1999 surplus which forced the domestic private sector into deficit. Consumer spending fell, unemployment rose and a recession occurred.

The economy crashed first in 2000 and then onwards into the Great Recession that began in 2007.

Economist Ellis Winningham concurs with Professor Wray that the economy would ‘crash’ long before the outstanding debt would be retired.

“The surplus would then become a deficit again,” he said.

“But reducing or retiring the debt isn’t what caused the economic downturns. It was the surpluses that caused it. Simply put, you cannot operate an economy with no money in it.”

So why have we convinced ourselves that government debt is the mother of all evil? That somehow, if the government is in surplus, our bank accounts will automatically improve?

In fact, as we shall see, the precise opposite is what would probably happen.

What is debt?
Anyone who has ever been chased by a debt collector has come to associate the word ‘debt’ as necessarily scary, bad and to be avoided. If you are a household, this is likely to be true.

But debt has an entirely different meaning for governments.

To whom is the national debt owed? That would be us: the people.

But this truth has been avoided in favour of eliciting a pavlovian response based entirely on the principle that a government budget is the same as that of a household.

“People think that public debt is like a household debt, hence, they buy into the neoliberal nonsense about the government going ‘bankrupt’ and then it’s financial armageddon and we will all die,” says Winningham. “It’s total nonsense. The public debt is just a bunch of savings accounts that pay interest.

“People think it will improve their lives because they believe that the government’s debt is their debt. In reality, the government’s debt is the private sector’s asset.”

In truth, there is no such thing as the national debt beyond a rhetorical device used to scare the public into submission.

In the US, the National Debt is the sum-total of all US dollars ever issued by the Federal Government, from the nation’s founding up until this very moment, that have never been taxed away by the Federal Government.

The national debt is actually the government’s savings account

“From around the 1790’s until today, 2017, the US government has issued, after taxes, $18 trillion dollars for everyone in the non-government sector to use,” says Winningham. “In fact, the national debt has been around for over 170 years now, so at some point, you’re going to have to start understanding that it is not an actual problem.

“Further, you need to start understanding that when you accuse Obama, or Bush, or Trump of adding to the national debt, you’re actually accusing them of adding US dollars to the US economy. Or, more precisely, you’re accusing them of adding US dollars to our national savings.”

Let’s start with the idea that the 2000 tech stock crash was caused by the tiny (and in any event fictitious) surpluses run by the Clinton administration in the 1990s.

What actually happened in that decade was a massive increase in societal debt via the private sector – encouraged by the Federal Reserve’s decision to bail out every entity anywhere in the world that ran into financial problems. Long Term Capital Management, Russia’s default, Mexico’s peso crisis, and the Asian Contagion were all met with lower rates, loan guarantees and aggressive money printing.

The result was a torrent of hot money, much of which flowed into US tech stocks, sending their valuations to stratospheric, completely unsustainable levels (while filling government coffers with capital gains tax revenues). The inevitable crash had nothing whatsoever to do with those temporary surpluses and everything to do with equity valuations that had exceeded anything seen during even the Roaring 20s.

As the following chart illustrates, US total debt rose from 235% of GDP in 1995 to 250% in 2000, producing the tech bubble. And then it really got going as the government responded to the subsequent bust with even easier money, producing a housing bubble that in its own way was as historically extreme as the tech bubble. When this burst we got the Great Recession – which was then countered with massive increases in government debt worldwide.

Through these booms and busts, the entity doing the actual borrowing didn’t matter. What did matter was the amount of new debt being created. The government could be the main borrower as it was post-2008 or it could use lower interest rates and loan guarantees to encourage the private sector to borrow as in the 1990s. Either way the result was a destabilizing credit bubble.

As for the assertion that governments paying off debt lead to depression, a quick stroll through US financial history paints a different picture, with long periods of more-or-less balanced budgets during which debt/GDP fell steadily.

Especially interesting is the half century between the Civil War and WW I, in which government debt plunged in relation to GDP – to pretty close to zero — but the global economy grew steadily with minimal inflation. This was the age of the Classical Gold Standard in which the supply of money – and by implication the borrowing power of governments – was limited by the dominance of sound as opposed to make-believe fiat money. It was ended not by a financial crisis related to government budgets but by war and ideology — an ending that could have been avoided by a few personnel changes atop several European countries.

So here’s an alternative explanation for the relationship between government debt and financial crisis: Excessive debt in any sector – government, corporate, household, whatever – produces asset bubbles that inevitably burst, yielding recessions, depressions, and – in response – massive increases in new government borrowing. Avoid debt binges and you avoid asset bubbles and speculative manias. Avoid manias and the government has little need for crisis borrowing.

Instead of lurching to another level of New Age financial experimentation when the current bubble bursts, a historically-literate society would return to the classical gold standard and perhaps even ban government debt entirely.

But of course if we were historically literate we wouldn’t be in the current fix. So expect the “government debt not only doesn’t matter, it’s actually a form of wealth!” argument to win out during the next crisis, ushering in the final, fiery act of the fiat currency experiment.

The previous articles in this series are here and here.

32 thoughts on "Really Bad Ideas, Part 3: Government Debt Isn’t Actually Debt"

  1. “As for the assertion that governments paying off debt lead to depression, a quick stroll through US financial history paints a different picture, with long periods of more-or-less balanced budgets during which debt/GDP fell steadily.”

    That’s no proof against the original thesis which is about paying down the debt at current GDP. And “more or less balanced budgets” implies small but consistent deficits.

    I agree with the author on asset bubbles but surely no gold standard will remedy this (1929?) so in expectation of better argument i’ll file this article under little documented confirmation bias.

  2. It’s not that difficult to understand. When excess debt is created, it expands the money supply creating artificial price inflation and artificial growth. When that money is removed from the system as debts are paid off, assets turn to price deflation and the Recession or Depression is simply a function of things going back to where they naturally should be.

    Don’t expand the money supply with debt more than the normal growth rate and you eliminate both boom and bust cycles. The Depression of 1973 was when clown politicians removed the dollar off the silver standard and there wasn’t enough currency to match the growth of the industrial revolution.

    1. Surely one look at the money supply will tell you it doesn’t correlate well with inflation. Monetarism died long ago. You seem to have missed its demise.

    1. Don’t worry. Sooner or later MMT or something just like it will get its chance to print roaring fountains of money.

      1. MMT says that it is valid to print money so long as it is used to set productive forces to work that otherwise would be idle.
        MMT explains why the second and greater crash (post 08) – the meme that was all over the place a few years ago – never came. Austrians certainly can’t explain why they got it so wrong (after being so so right).

        1. Once our elected representatives vote themselves the power to print money without debt they will come up with literally tens of trillions of “productive” ideas almost overnight. Paul Ryan and Nancy Pelosi are looking forward to that day.

          1. I debate an MMT advocate fairly often on another site and it can be quite frustrating. I think believers in MMT see the world’s population as a collective machine and not as the individual people within. Or perhaps, MMT is a follow on attempt to change the dismal science into a hard science? To separate the math from the politics and free will?

            I don’t know but I feel a sense of pure hopelessness for humanity.

          1. Afaik MMT has no size for government. You can privatize everything according to MMT as it considers it a political choice. It doesn’t change the fact that if the government has a currency monopoly, certain rules apply. One of those rules is that government surpluses (more taxes than spending) make the private sector poorer overall. You don’t have to be a genius to see this, but it automatically follows that paying the government debt (with taxes) will create deflation and then depression.
            You can rail against MMT all you want, that doesn’t change the current setup or how stupid people sound when they state things obviously mistaken.

          2. I wonder what your deal is talking nonsense like this and comparing a set of tools to an ideology like communism. Very emotional.
            MMT is not a system or ideology. It describes the current monetary system. It doesn’t tell you to float loads of money around and not have taxes. You all made that up as you go to give a bad name to something you don’t like but ultimately don’t understand.
            My advice is to be silent on anything you don’t really understand cause otherwise you just look like a fool which you do.
            Good luck.

          3. Your question is absurd since MMT doesn’t advocate high or low government expenditure, but i’ll answer your underlying bias, as your framing of the question is biased.
            If you’re worried about too much government expenditure, called crowding out, depriving the private sector of real resources, then liberalism is your answer. MMT is compatible with liberalism as it only describes the current monetary system in our capitalist society. So government doesn’t need to spend one dollar on any project which society wants privatized. It’s not cause government can buy anything for sale in our currency, that it should. So if you want government expenditure limited, convince your fellow citizens and elected leaders, instead of blaming MMT. MMT only tells you you’re lying if you say you need taxes to fund government spending in the US.

          4. You don’t get it. The private sector decides the height of government spending. By definition that is the antithesis of a Soviet state. My remarks are not intentionally flippant but merely describes the absurdity and obtuseness of your argument. You are either unable or else unwilling to apply rational reasoning in your idea of MMT and revert to scaremongering i thought was confined to the McCarthy era.
            If you’re serious about a limit on government spending you would embrace MMT to tell the US government it’s dumb to use so many of our resources for defense and bureaucracy. Instead you blame MMT for not giving you a control lever on government spending. As if there would be one without MMT, as if there was one under the gold standard!?
            Just crazy confirmation bias where you only believe what you want to and ignore all facts.

          5. Where did i say you were a fool for bringing up the matter of gov spending? I only said it’s absurd to expect MMT to have a say in this. So i conceded your point? I thought i made that point, where you want to advocate limited spending?

            A soviet state is defined by its state planning. A Job Guarantee to stabilize the economy from shocks, has nothing to do with state planning as the government only hires people the private sector does not currently want. As soon as the business cycle restarts the Job Guarantee buffer empties out as people can get better wages in private sector jobs. The alternative is mass unemployment after a shock. If you prefer that, fine. Don’t expect me to like it, too, cause it’s inhumane.
            In any case the private sector drives the economy unlike in a soviet system where the state decides economic activity.

            If you can’t see the difference, no problem. Doesn’t mean it isn’t obvious to most people.
            If you’re against state planning, like me, tell the US gov to stop spending trillions on defense and bureaucracy instead of blaming an economic model, that correctly predicted the trouble before the 2008 crisis, of communism.
            If you want to get rid of the Fed, fine, but what would you pay with? Grains of gold? Not likely.

          6. Where do i believe what i want? I said i prefer small gov and that MMT does not make political statements.

            You on the other hand think it does ( you believe this although MMT literature contradictie this) , you now equate the Sanders campaign with MMT which is a dumb statement as MMT makes no political statements.
            It’s scaremongering all the way and to top it off you still seem to think the gold standard kept a lid on government spending which it never did. All it did was create deflation after lots of government spending with mass unemployment resulting from that.
            Then you say MMT is Sanders is North-Korea and big government projects (like the New Deal which gave the US assets for generations to come) and state planning? You mean state planning unlike the vast stable subsidy we give the health insurance industry and defense contractors we have now?
            Never in your argument have you been able to say what exactly these big MMT projects are, as the job guarantee isn’t that big GDP-wise. Nor is Sanders Medicare for all as it will free up massive amounts of resources to facilitate the private sector where now the inefficiency is huge, exactly like in the Soviet system.
            Most European countries use their resources vastly more efficiënt yet are pretty much in line with Sanders’ arguments, regardless of government size. I never hear you mention those besides Venezuela etc though their government programs are much smaller than in the US, less costly, but they are much higher on every human index.

            Maybe time to do a little digging and educate yourself instead of feeding yourself the same axioms every day?

            You don’t have to repeat yourself. This conversation is over.

          7. “How with MMT do you get small government?”
            -You privatize as many government services as you want. Government only stabilizes the economy with counter-cyclical measures like a job guarantee.

            “So who determines a good public expenditure from a bad one?”
            -The people who vote. Problem is politicians are bought by big firms, but that has nothing to do with the discussion on MMT.

            “MMT will not control their hearty desires to enlarge the domain of government, will it?”
            -Did not having MMT around at the time stop Reagan blowing up the national debt, or Bush? What is the point here? That MMT will unleash government spending hell and no MMT but the lie that taxes fund gov spending will not blow the debt? Not convincing in the light of history.

            “That is why Sanders loves MMT. It permits him his big government state whilst tax revenues will limit it.”
            -Sanders aims to raise taxes. Not really in line with your attack against MMT is it?

            “Taxation limits big government.”

            -How so? When was government ever restricted by taxation to take from the people what it wants? Government is only restricted by what the country produces in what it can take. But if it wants, government just takes it all. It was like that in the time of monarchs and emperors, and it still is. The best defence against big government is an enlighted and aware electorate, which understands government spending transfers goods and services to the government in exchange for fiat money.

            -No and it never has. Look at government spending in history instead of making wild claims. You think WW2 was financed with taxes? Or the Vietnam war?

            “Today, some politicians want MMT, but many do not. They would rather work in a system that at least allots some value to money.”
            -MMT describes the current system. It is not something you can want or not, it is not a goal, nor a philosophy. You cannot have MMT or not have it. It describes how our monetary system works. Just like the assumption taxes limit or fund government spending, does not explain our monetary system. It’s a lie, a lie to protect politicians from spendthrift without actually ever achieving that purpose.

            “They would rather work in a system that at least allots some value to money.”

            -Doesn’t money have value? Are you implying inflation? You’re not clear here.

            “They don’t want Venezuela or NK because its bad for business.”

            -Indeed a government that doesn’t accomodate itself to the private sector but instead does economy planning, is bad for business. That’s evident.

            “But its a sliding scale. If government is 40% of GDP today, why not 50% tomorrow, or 60%? And that is where the politicians, loosed of budget constraints by MMT, will eventually take us.”
            -Indeed that’s a genuine concern i share. But government can take a country there regardless of whether it believes MMT to be true or not. US defense spending in WW2 wasn’t based on MMT, but government just bought nearly everything the country produced. That doesn’t make it exactly like the state planning the Soviets had, but you get my point: taxation will never constrain US government spending, nor will MMT open pandora’s box.

            The real discussion is not whether MMT is true or not. It is. The real discussion is how big a government you want. Do you want to spend double on health care other countries with better health care spend or not? Do you want to spend 10 times more on defense compared to other countries? Do you want private schools or also invest in public education given the boost in productivity gained from a higher educated workforce?

            That’s what the debate should be about. Not the money.

            And it’s always about the money, to keep the discussion totally irrelevant so nothing changes in politics.

          8. @Disqus_RogerV:disqus
            1) Until recently Australia has had no national debt
            2) They haven’t had a recession since 1991
            3) There is plenty of money in the Australian economy
            4) MMT is for suckers

  3. In the end, only weapons will make a difference. Remember how the Colonists could take and do whatever they wanted because they had the better weapons? Why didn’t Japan take asia? Why could the U.S literally devastate Iraq and others?

  4. What about our money being debt, I thought such a system had to grow? Wouldn’t the government paying off the national debt create a further scarcity of currency?

    1. The private sector creates FAR more fiat munny than the government ever could. Difference is that private debt is the liability of individuals & businesses, whereas public debt is the liability of everyone (and no one) thereby guaranteeing it will ‘grow’ to the point of collapse.

  5. Somehow it still seems as though that an outstanding debt is an IOU . . . which is a weaker position than having gold in hand. . .unless it is believed and accepting that the global economy has been fundamentally transformed for the better. . .which seems a bit warped.

  6. One huge problem that invalidates the entire argument that is proffered by Professor Randall Wray. His thesis is based on the notion that the national debt is owed to we, the people. That may be true to a limited extent. However, the Federal Reserve prints the money out of thin air, then “lends” it to our Government for interest. The Banksters own our Government as long as we acquiesce to paying these white collar mobsters for something our Treasury should be doing, without an interest debt component.

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