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Sunday, July 28, 2019

Debt Worries Yet Again

J.W. Mason posted an interesting list of arguments to not worry about government debt levels in "A Baker's Dozen of Reasons not to Worry About Government Debt." On reading it, I realised that one could cut through the whole thing by arguing as follows: the reason why we should not worry about government debt in a country like the United State is that nobody can come up with a (not highly disputable*) reason why that the stock of debt matters.

I will largely leave that assertion for the reader to chew on. However, I would note that I chose my wording carefully.

  • I wrote "in a country like the United States" to get around the fuzziness of the definition of "floating currency sovereign." The United States in certainly in that camp, as is Japan, and the inclusion of other countries might be debated. I think the club is fairly wide (among developed countries), but some people refuse to listen to me for some reason or another.
  • There is a widespread confusion in the broad public between the words "debt" and "deficit." I wrote "stock of debt" to make clear that this is a stock measure, even though "debt" is a stock by definition. A great many people deliberately blur this distinction, and it is very easy to imagine some people summarising my sentence as "Brian Romanchuk does not think the fiscal stance matters!", which is obviously incorrect. 
If I get any pushback on my assertion either in comments here or on Twitter, I'll probably expand this article to discuss points that are raised. Prove me wrong!

(Note: since this is just a short comment, putting it in my Sunday publishing slot.)


* The Fiscal Theory of the Price Level (FTPL) is one of the few stories that one can come up with to worry about the stock of debt. However, given that the price level does not jump in response to changes in fiscal policy, the FTPL is obviously contradicted by the data. However, if one accepts the FTPL, it does contradict my assertion, as I recognise.

(c) Brian Romanchuk 2019


  1. Ok, here's one try why it could matter.

    If the debt in some way represents a claim to future output or resources by the debt holders, and if the debt holders are a relatively small group within society that only cares about themselves, then that could cause a problem. And the relative size of the 'stock of debt' to the future economy could determine how large that problem would be?

    1. Your argument seems to be that the distribution of that stock (inequality) is a problem. I think many would agree with that regardless of what the number is. So, the question again (I believe) is how is the magnitude of the number itself an issue?

    2. Unknown, if the stock of debt is miniscule compared with future output or resources, then the resulting problems would be pretty minor. If the stock of debt (claims on future production in my scenario) is gigantic compared to output then the problem would seem to be larger, at least to me. But I'm mostly just trying to give Brian a possible argument why the magnitude might matter. I'm not saying the US government would not be able to pay any amount of dollars due- I'm saying that to the extent those dollars represent a claim on resources and to the extent those resources might end up belonging to some wealthy idiot I don't like, well that probably is a problem for me.

    3. The inequality argument seems to be a stretch. Policymakers can set the real rate of return on bonds to be negative, and so we get a wealth tax easily.

    4. That's an interesting point but would you personally buy a government bond where you knew the real rate of return on it would be negative? Why would you outside of a sense of patriotism or something similar. And then you wouldn't really be someone that only cares for their own self either.

    5. Real yields have been negative for some time in most of the developed world, and even nominal yields in some currencies. From a buyer’s perspective, they don’t have good alternatives.

    6. Brian- you are right. If policy sets the return at zero or even negative rates and the bonds still sell (and they do), then I can see that there would not be increasing inequality due to the debt. Thanks.

    7. But I do recall that Bill Mitchell has referred to government bond issuance as a type of corporate welfare. And I still think it is a jobs program for bond dealers. But maybe that's a good thing- keeps them off the streets and from doing more harmful things...

    8. This comment has been removed by the author.

  2. Government debt only matters if the rate of interest on it is significantly above zero. Government debt is simply base money which pays interest, and as Warren Mosler argued, there is no very good reason to pay any interest at all to anyone for holding base money. Such interst is funded by taxpayers in general and goes into the pockets of the better off. I.e. in effect, it's a gift by the poor to the rich.

    The only possible excuse for a rate of interest significantly above zero that I can see occurs when it's necessary to damp down economic activity in a hurry, and it's politically difficult to raise taxes or cut public spending. But that interest rate increase should be replaced with tax increases or public spending cuts as soon as possible.

  3. Here's another try at why it might (or not) matter.

    Government debt levels reflect the extent to which government has overreached beyond tax collecting limits. Today's debt level is the sum of all past overreaching efforts.

    This debt only has value because government gives it value. Government steadfastly commits to converting 'government debt' to green cash upon demand (perhaps indirectly).

    Green cash has value related to actual physical ownership. If you have green cash (or the electronic equivalent), you can purchase anything for sale.

    How can you get green cash? The best way is working for government, either directly or by making direct sales. The next-best way is working for those-who-work-for-government, which is a less direct path to cash and is much more competitive (vs others looking for cash).

    Here is where trouble develops. The competitive sector of the economy has difficulty acquiring excess cash that can be loaned back to government (as is needed to control the value of cash). This leaves only the non-competitive sector of the economy with excess cash available to buy government bonds.

    In a nutshell, government overpays one sector so that this sector can buy government bonds so that the cycle can continue while maintaining currency value.

    Some folks really get rich under this scheme, while others do little more than get by.

    This pattern seems to be a durable economic model. (It does seem to be important to spread the wealth into (as needed) emerging economic pinch-points to prevent unacceptable system distortion.)

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