Summary: Today we have one example from the flow of comforting words about the government’s deficits. While pleasant reading, written by a knowledgeable expert, it does not withstand close scrutiny.
One of the great oddities of history is why nations adopt policies that were so obviously doomed to failure, or even disaster. It’s a long list, from 17th C economist John Law’s managing the debt of France with the Mississippi Company (latter known as the Mississippi Bubble), to Japan declaring war on almost everybody. For good reason Barbara Tuchman named her greatest history book The March of Folly.
There are two constant elements of these stories. First, warnings from experts. Second, assurances that these obviously crazy policies this time would end well.
So it is with the US government debt. We have all heard the warnings. As the debt grows, so do the volume of those saying not to worry. The economists of the Keynesian mainstream provide one form of comfort (fix the deficit later). The economists of the Modern Monetary Theory school provide another form (debts don’t matter, until they cause inflation or a currency collapse). A third group provides a vague form of comfort. An example of this is “Another way to look at the national debt” by Zachary Karabell (President of River Twice Research), special to the Washington Post, 8 February 2013 — Opening:
Welcome to the next chapter of the endless debt debate. The release of a Congressional Budget Office report on the next 10 years of the U.S. economy ends a brief lull in Washington. As we return once again to our regularly scheduled program of “Crisis and Impasse,” let’s take a moment to consider the following heretical idea: We have no debt problem.
We have spent years demonizing debt, and now have an entire political movement dedicated to the proposition that government debt will destroy America as we know it unless something is done now!
Stand by for a debunking of fears about the debt! I feel better already. The next line starts the analysis:
Yet debt is simply a new form of currency that is issued, bought, priced and sold like any other currency …
This is false. First, government debt (eg, 30 year Treasury bonds) are not currency in any meaningful form. They vary in price (currency is the standard of measurement for asset prices, like bonds). More important, although the government can convert debt into currency by printing money (ie, monetization) the process is not automatic. It is a political decision to inflate away the value of the nation’s loans.
Which brings us to the key issue: we do not owe the debt to ourselves. We owe it to specific people and institutions, many whom wield great political power — and will exert it to see that they’re paid in real money. The memory of the great post-WWII inflation burns in their memories; hence the obsession about inflation by their minions.
… and the fear that it will fatally undermine the nation is much like the belief in the 19th century that paper dollars would destroy value and rob the middle class, or the fear that silver would do the same, or the concern in the 20th century (and now) that unless all value is tethered to gold, economies will collapse. The debt freakout is the latest installment, the only difference being that those who believe debt will destroy us have more political power.
Correct, although Karabell ignores the importance of this in the history lesson that follows this paragraph. The 1% are the creditors of the nation, of both public and private debt. The late 19th deflation served their interests well, crushing the economic and political strength of the small farmer, craftsman, and merchant classes — debtors who were broken by the increased value in real terms of their loans. The rise and bursting of the housing bubble and the great recession had a similarly beneficial effect for the 1%, further concentrating wealth and power.
Economics were, are, and probably always will be tools of the 1%. Economists are their handmaidens.
Now Karabell reviews some unpleasant historical facts.
The establishment consensus is that there is too little growth and too much government spending everywhere in the developed world. Germany still hasn’t psychologically recovered from the debt and currency traumas of the 1920s. Brazil and much of the rest of Latin America are scarred by the memories of the 1970s and East Asia by the 1990s, when debt debacles nearly sank those economies.
Now for the climax.
Yet an amen chorus is not the truth, and consensus is not fact. Debt can be a fatal liability if used unwisely, but used well it can be a powerful tool. It allows governments, businesses and individuals to expand what they can do in the present in the belief that future gains will ensue. It can fund education, underwrite infrastructure and fuel research and innovation. The fact that debt is so often used poorly, to paper over problems or fund ephemeral spending, represents a serious and potentially crippling problem. But that is not an indictment of debt; it is an indictment of what is done with it.
He sets us up for a sound rebuttal to the fear of debt, showing that we have wisely spent the $6.4 trillion in new Federal public debt since the recession started in December 2007 (a 125% increase). That would deserve attention, and justify the deficits — immediate economic stimulus on investments than generate future growth. Instead we get a change of subject.
The current assumption is that debt is out of control and has been for many years. Consumer debt in the early 2000s gave way to sovereign debt today, and Greece and its Mediterranean brethren are held up as Exhibit A in the prosecution’s case. Yet this animus harkens back to moments when shifts in the financial system have triggered anger and panic. Our debt fixation, then, may be less a product of debt itself than one of adjusting to a new currency.
In fact the money we borrowed has been largely squandered. Foreign wars, building a vast domestic security system to defend against non-existent threats, and gifts to the 1% and their corporations. Easy credit often leads to poor spending. Now that $6 trillion of spending is gone along with the winter’s snow, and only the debt remains.
It looks like the deficits will continue, perhaps shrinking as the economy slowly grows, the small tax increase passed in January, and (perhaps) spending cuts take place. Or the economy might slow more than expected, boosting the deficit. The worst case is that we’ve become Japan, where only massive deficits and zero interest rates have maintained a stable economy for two decades — with no end in sight.
Either way we can count on a steady flow of assurances that the economy is healthy and the deficits are no problem. Fiscal deficits are the opiate of the masses.
Oddly enough, Karabell said something different in 2009
Back in 2009, when deficits were desperately needed to stabilize the economy, Karabell worried about deficits: “Deficits and the Chinese Challenge“, Wall Street Journal, 12 October 2009 — “Debt can become a real liability for a superpower. Recall what happened to postwar Britain.”
Leave a comment
Post your comments on the FM Facebook page!
For More Information about government debt
- A certain casualty of the recession: the US Government’s solvency, 25 November 2008
- Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
- Government economic stimulus is financial heroin, 28 December 2009
- The limit to America’s power is our ability to pay for it, 18 April 2011
- About America’s economic recovery: the good news and the bad, 1 May 2012
- America is rich and powerful because we can borrow. Will this debt build a stronger America?, 5 June 2012
- US economic update. Everything that follows is a result of what you see here., 8 June 2012
- America’s strength is an illusion created by foolish borrowing, 10 October 2012
- Ed Dolan Asks: What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives, 30 November 2012
- Let’s watch a great nation’s wealth burn away, 4 January 2013
This piece is cross-posted from Fabius Maximus with permission.