The Meme that Refuses to Die: Government Debt Must Be Paid Back
I’m stealing this headline directly from Sandwichman. He sez:
No it doesn’t. It almost never is. To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt. But don’t take it from me, look at the record.
Here’s a longer-term view, zoomed in on successive times slices so you can see the changes:
Do you notice our progenitors’ great-great-grandchildren (us) paying off our forebears’ debts? Yeah, neither did I. (It did happen once, and the result was economic catastrophe. Every depression in our nation’s history was preceded by a big decline in nominal Federal debt.)
Here’s the U.K.:
David Graeber, from Debt: The First 5,000 Years:
The reader will recall that the Bank of England was created when a consortium of forty London and Edinburgh merchants — mostly already creditors to the crown — offered King William III a £1.2 million loan to help finance his war against France.
To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist.
That was 317 years ago — in 1694.
Governments that issue their own money don’t have to pay off their debts. They actually can’t. In fact, they issue money — the money that’s necessary for a growing economy to operate — by deficit spending.
Private borrowers (and non-sovereign-currency states like Greece and Alabama) do have to pay off their debts (or default). That’s why the level of private debt, not sovereign debt, is the big management problem — a problem that neoclassical economics has not tackled, does not even have the theoretical apparatus to tackle.
Yes, of course: government debt and interest payments as a percentage of GDP are important issues. I’ll hand it back to Sandwichman:
The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it. The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates. If you want to show your solicitude for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.
Today’s creditors will hate you. But your grandchildren will love you.
Update (thanks to Buffpilot at Angry Bear for finding holes): A more precise explanation of why a sovereign-currency issuer might “have” to pay back their debt: if they have committed to redeem their money for something else. For instance Argentina (dollar-denominated debt) and whole host of others who were on a gold standard, had promised to give gold in return for their money. If they can’t or won’t do so, that’s a default on their promise. The U.S. and the U.K. (among others) do not face that situation.
Cross-posted at Angry Bear.