Getting Straight on Debt

December 13th, 2011 at 10:29 am

The journal Democracy was kind enough to post a long piece I penned on our fear and misunderstanding of the role of debt and deficits in advanced economies, something I’ve been thinking about for a long time.

The core of the thing is that there is an integral role for borrowing but this role has been lost amidst reckless, speculative bubbles on one side and ideologically driven austerity on the other.  Interestingly, as I document in the piece, the utility and hazards of borrowing have actually been well understood since Adam (Smith).

It will continue to be extremely hard to get back on track both here and in Europe if we continue to get this wrong.

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5 comments in reply to "Getting Straight on Debt"

  1. D. C. Sessions says:

    The basic meme is that borrowing is a moral failing.

    For instance, a farmer who can’t afford to pay cash for seed should not plant.

  2. Tyler says:

    We don’t need to borrow, and it is because we have our own currency.

    • Tyler says:

      The federal government has the unlimited ability to instruct banks to mark up depositors’ accounts.

      Visualize this: When the federal government pays bills, it does not send dollars to its creditors. It sends instructions to its creditors’ banks.

      I know this may seem like splitting words, but borrowing is nothing more than instructing banks to mark up and mark down accounts. When our government borrows (sells T-securities), it marks down the buyer’s checking account and marks up the buyer’s T-security account.

      In the process, the government does not “receive” any dollars. Instead, certain federal accounts first are marked up, then when the T-securities mature, marked down. It’s because the federal government has total control over the numbers in its accounts, that borrowing is unnecessary.

      Somewhat unusual way of looking at it, but the government can mark any numbers it wishes in any of its accounts, so it never runs short of dollars.

  3. Bruce Ross says:

    Austerity seems to be much discussed but little practiced in Washington. We’re at year three of trillion-plus dollar deficits, right? That’s not enough? What would be?

    Also, the notion of Japanese austerity is belied but it’s extraordinary national debt — though of course the historical details might be tricky.

    All in all, enlightening stuff, though. The problem of course is that we were running large deficits in good times — but we can’t go back and undo the Bush years.