20 Jul 2011

Are Government and Private Debt Different?

Economics, Krugman, MMT 44 Comments

This idea has been zooming around the geeconosphere. Krugman et al. keep telling us, with eyes rolling, that the Republicans (and even that poor ol’ hoodwinked Obama) are nuts when they say things like, “In tough times when families are tightening their belts, the government should do the same.”

Now this always troubled me, for the same reason that the MMT analysis seemed wrong: It makes a qualitative distinction between “public” and private, when there is nothing intrinsic to the analysis relying on that distinction.

For example, could Krugman et al. say with equal validity, “In times when men are tightening their belts, the only way to avoid depression is for women to run up the credit cards”? Or could they start a campaign, urging Google and Microsoft to go billions into debt? More generally, are Krugman et al. really saying, “If only everybody around the world would stop trying to pay down their debts, we’d be fine”?

(On this last point, the reason I ask is this: If some people in the private sector really do want to pay down their debts, while other people in the private sector don’t want their debt to increase correspondingly–and this is the ostensible problem, according to Krugman–then how does it “solve” this problem by having governments take on offsetting debt? To the extent that the people in the private sector realize they are responsible for paying the interest on the “public” debt, won’t they try to save even harder? I’m not invoking a full-blown Chicago-style Ricardian Equivalence argument, but I’ve never seen any of the “public debt is different from private debt” people even address this complication, which seems rather serious to me.)

Anyway, such were my musings up until now. Yet along comes Daniel Kuehn to shock me:

Yesterday afternoon I was doing something I usually avoid – listening to a lot of the Congressional debate on C-Span. Both sides were depressing because both were demanding deficit reduction…

One of the things that just about every Republican said was that “Washington needs to do what families do and not spend more than they take in”. It’s powerful rhetoric that is electoral gold. Getting tough on the deficit is good for politicians – analogizing it to family values is even better.

What’s bothersome is that no one challenged this view, which among economists is almost universally considered to be fallacious. Even those economists who don’t think deficit spending is good macroeconomic policy do not claim that government has to, on average, run a balanced budget. The people demanding austerity ultimately have a better stump speech than the people who understand public deficits and debt, and this is a problem.

So my question to readers is – what is a good, succinct way for politicians to communicate that (1.) public debt is different from private debt, (2.) it is not fiscally responsible to cut public debt during downturns, and (3.) we can run deficits from now until the Sun burns out and everything would be just fine, so long as their magnitude is manageable over long periods.

As I say, this shocked me. In the Ron Paul moneybomb interview I gave yesterday, I was trying to play fair with Keynesianism. When the host suggested that the theory was responsible for our massive government debt, I gently clarified that in textbook theory Keynesians want to run a balanced budget over the course of the business cycle. Yes, you’re supposed to run big deficits during recessions, but you’re supposed to pay them off during booms. But now I stand corrected by Daniel; I guess nice guys really do finish last.

And how do we deal with the part I’ve put in bold? Yes, we can indeed run deficits forever, so long as we cap total debt at a certain fraction of GDP. (If that sounds impossible to you, I do the math in this article.)

Yet again I ask: How is this different from a corporation? At what point will GE be forced to start reducing the total market value of its outstanding bonds?

Last thing: I heartily encourage Daniel & Friends to write a stump speech for Democrats, in which they make clear to voters that we should raise the debt ceiling now, because we plan on running deficits until the sun explodes. Really guys, I mean that with sincerity: Blast that message out there.

44 Responses to “Are Government and Private Debt Different?”

  1. Daniel Kuehn says:

    1. What I have in mind is this idea that you can keep running deficits which, if they grow no faster than GDP, can create a debt that is stable at a desired share of GDP. As you say – this is obviously not a license for unlimited deficit financing.

    2. Similarly – I don’t see any reason why we should balance the budget on average – but I do think we should run deficits to stabilize the debt. Conceptually its the same thing, of course – tighten the deficit in good years and loosen it in bad. But actually balancing it seems completely unnecessary. This isn’t to say we can’t sometimes run surpluses to speed the reversion back to whatever stable debt level we’re interested in. In fact, once we have a real recovery from this downturn it would probably be wise to run some surpluses.

    re: “Last thing: I heartily encourage Daniel & Friends to write a stump speech for Democrats, in which they make clear to voters that we should raise the debt ceiling now, because we plan on running deficits until the sun explodes. Really guys, I mean that with sincerity: Blast that message out there.”

    Yes, well, the whole point of trying to frame this is that we DON’T talk about the sun exploding of course 🙂

    I see two real obstacles:

    1. As Peter Dorman highlights people don’t talk about public debt as an asset as well as a liability any more – they used to, and

    2. People don’t talk about how the time horizons and revenue streams of government are different from households.

    Once you understand those two points, the “deficits until the sun burns out ” line shouldn’t be all that offensive – and you can agree without without buying into all this weird MMT stuff about “we need public debt so that people can pay their taxes” or “sovereign nations can never default”

    • MamMoTh says:

      MMT does not say public debt is needed to pay taxes, and acknowledges that sovereign nations can default if they want to.

    • Porphy's Attorney says:

      If you’re an inflationist it actually makes sense: you can run a deficit perpetually as long as on average the debt doesn’t grow faster than nominal GDP (Daniel you’re wrong when you invoke GDP as such – you’re being a piker. Go for it all!). You’ll be able to generate revenues over time that make servicing it manageable.

      This isn’t actually *so* different from businesses, either; even profitable ones often have debt liabilities they service and don’t “pay down” on net. They can maintain a certain amount of debt service as long as the business continues to be fairly successful under the current monetary regime, which is basically a Keynesian one stacked in favor of debtors (for all the bawwing that it isn’t).

      Of course, if one isn’t a believer in the sustainability of an inflationary monetary regime, and believes all this insures that eventually it will come crashing down, then this won’t seem to make sense but indeed looks like it would hasten the inevitable crisis. But really it all makes a lot of sense if you “buy into” the current monetary model.

  2. Daniel Kuehn says:

    Oh – and one more thing.

    Once human civilization becomes interstellar, of course the Sun’s survival won’t be a constraint either. But you get my point, I’m sure.

  3. AP Lerner says:

    You’re answer is here

    http://blogs.ft.com/gavyndavies/files/2010/12/ftblog52.gif

    Public deficits = private savings. Always. To the penny.

    The rest is here

    http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

    Corporations can not spend first, and issue bonds later. Not possible.
    Individuals can not spend first, and issue bonds later. Not possible
    The US government MUST spend first, and issue bonds later. Otherwise, there is no currency to borrow (or tax)

    So why is the comparison between the US government and an individual valid? It’s not. Anyone that thinks so should be ignored.

    And under a fiat monetary regime, all spending starts with the printing press, and taxes serve as a means to ‘unprint’ all or a portion of the spending. At no point does the US government need to issue bonds to spend. Never. Bond issuance is nothing more than a reserve drain that serves as welfare to banks.

    I know, this is evil. But it’s reality.

    Sorry Mr. Murphy, until you figure this relationship out, you’ll continue to scratch you’re head and think the bond market is in some permanent bubble and wonder why rates are so low despite all the printing and borrowing. I just hope you’re not short treasuries (or JGB’s)

    In all seriousness, I would highly suggest reading some Randall Wray and Warren Mosler on these subjects. I know your ideology prevents you from accepting fiat currency as legitimate, but it should not prevent you from understanding it, right?

    • Major_Freedom says:

      Ah, the MMTers are crawling out from the rocks they have been living under, repeating the same nonsense that has been refuted time and time again. Maybe this blog has believers!

      Public deficits = private savings. Always. To the penny.

      Only if you define “private savings” as “money held by the private sector that was created at some point in the past by the government.” Then sure, the tautology holds.

      Note that net savings, i.e. growth in money held by the private sector that was created by government, is not even necessary for economic growth to take place, especially if that money was spent (consumed) into existence by government and those the government gives the money to. The significance of savings lies at the gross level. Economic growth is fundamentally based on saving out of revenues. Saving out of net income, that is, net saving, would all but disappear if the government stopped inflation, because at some point people will no longer perceive a need to save out of net income, because they have accumulated enough savings over time to enable them to consume their entire net incomes.

      Corporations can not spend first, and issue bonds later. Not possible.

      Individuals can not spend first, and issue bonds later. Not possible.

      The US government MUST spend first, and issue bonds later. Otherwise, there is no currency to borrow (or tax)

      You ignore the money that exists prior to the government issuing the first fiat dollar bill. The government borrowed and taxed before they spent, prior to the government usurping monopoly control over money production.

      Today, the government creates the money, but that doesn’t mean that they have to today spend before they can borrow and tax. If the government never created any fiat money, then money would be gold and silver, and the government would have to borrow and tax out of the private sector before they can spend it.

      You’re taking what’s true today, and pretending that it’s always been that way, and then fallaciously concluding that if the government didn’t spend first, then it couldn’t tax and borrow.

      So why is the comparison between the US government and an individual valid? It’s not. Anyone that thinks so should be ignored.

      You’re not ignoring them, LOL. Whole swaths of Congress are not ignoring them.

      If your goal is to not get ignored, then that’s your weakness.

      And under a fiat monetary regime, all spending starts with the printing press, and taxes serve as a means to ‘unprint’ all or a portion of the spending. At no point does the US government need to issue bonds to spend. Never. Bond issuance is nothing more than a reserve drain that serves as welfare to banks.
      I know, this is evil. But it’s reality.

      You ignore Mises’ regression theorem that shows fiat money cannot even be money unless it is preceded by a prior money that the fiat money replaces. It is impossible for individuals to attach a value to a fiat money from nothing. Spending does NOT “all start with the printing press.” The fiat paper starts at the printing press yes, but the property of money precedes the printing press.

      Sorry Mr. Murphy, until you figure this relationship out, you’ll continue to scratch you’re head and think the bond market is in some permanent bubble and wonder why rates are so low despite all the printing and borrowing. I just hope you’re not short treasuries (or JGB’s)

      Murphy doesn’t believe the bond market is an a PERMANENT bubble. He suspects that it might be in a bubble, which is by nature temporary.

      Furthermore, Murphy even alluded to the same reason for low rates that you just referred to, which is that the Fed put them there through its treasury purchases and other asset purchases.

      In all seriousness, I would highly suggest reading some Randall Wray and Warren Mosler on these subjects. I know your ideology prevents you from accepting fiat currency as legitimate, but it should not prevent you from understanding it, right?

      In all seriousness, I would highly suggest reading some Robert Murphy on these subjects. I know your ideology prevents you from accepting gold currency as legitimate, but it should not prevent you from understanding it, right?

  4. Blackadder says:

    It’s true that saying we could run deficits forever is not an effective campaign slogan, but then neither is saying we should abolish government altogether and embrace anarchy.

    • bobmurphy says:

      Right, which is why I would never put up a blog post saying, “Hey Roderick and Stephan, help me out! Let’s write a ditty for Boehner.” (In case it’s not clear, Daniel specifically says that in his post, for Democrats. I didn’t quote it in this post.)

      • Daniel Kuehn says:

        I’d take Republicans and libertarians too, but they just seem like a lost cause. A lot of Democrats seem like a lost cause too, but it seems like we’d have the most luck there. I’m an independent, so it’s certainly not out of party-loyalty that I mention Democrats. It’s just the facts on the ground, I’m afraid.

    • Dilip says:

      @BlackAdder: Its not actually embracing anarchy but apparently the Republicans subscribe to what is called “Starve the Beast” approach. A Bloomberg editorial thoroughly debunks it here:
      http://www.bloomberg.com/news/2011-07-20/budget-calculations-slay-the-starve-the-beast-mythology-view.html

  5. Dilip says:

    @BlackAdder: Its not actually embracing anarchy but apparently the Republicans subscribe to what is called “Starve the Beast” approach. A Bloomberg editorial thoroughly debunks it here:
    http://www.bloomberg.com/news/2011-07-20/budget-calculations-slay-the-starve-the-beast-mythology-view.html

  6. MamMoTh says:

    1) The government is the issuer of the currency, the private sector is a user of the currency

    2) If you run a balanced budget over the cycle in presence of a current account deficit then the domestic private sector must get indebted over the cycle

    3) GE’s bonds will drop in price when people don’t want to hold them

    • MamMoTh says:

      4) The government “debt” is just an interest bearing asset of the private sector denominated in the country’s currency.

      5) Issuing government debt in the case of a free floating fiat currency is just an interest rate maintenance operation, an unnecessary remnant of the gold standard days.

      6) Paying down the government debt is equivalent to taxing the private sector to the penny

      • Major_Freedom says:

        The government “debt” is just an interest bearing asset of the private sector denominated in the country’s currency.

        Except the private sector is composed of many individuals, many of whom don’t lend to the government, but are on the hook for the interest payments.

        Issuing government debt in the case of a free floating fiat currency is just an interest rate maintenance operation, an unnecessary remnant of the gold standard days.

        It’s amazing how some of you MMTers actually believe that all you need to do is repeat the same nonsense over and over again.

        No, issuing debt in the case of a free floating exchange fiat currency is not just an interest rate maintenance operation. It is also a monetary maintenance operation, specifically, by the Treasury issuing debt to the primary dealers, who then sell the Treasuries to the Fed, or the Fed reselling Treasuries to the primary dealers.

        Paying down the government debt is equivalent to taxing the private sector to the penny

        To the extent that a private sector lender owns US debt, then paying back US debt is paying back the private sector taxpayers who happened to have lent to the government.

    • Major_Freedom says:

      If you run a balanced budget over the cycle in presence of a current account deficit then the domestic private sector must get indebted over the cycle

      Not if the current account deficit is matched by a decrease in domestic spending, which will lower domestic prices, thus make domestic goods more attractive to foreign buyers, and thus reverse or offset the current account deficit.

      A country, or more generally, an area of land that contains individual people, cannot run a perpetual current account deficit, because at some point, they will need to earn money where they are by offering something to others, or else they will have no money left. Governments are not as binded by this as individuals are, because they can just steal what they need to cover their debts. Individuals cannot. THIS is what fundamentally distinguishes government debt from individual debt.

      An individual can run a current account deficit by buying more than he sells, and not go into debt, by reducing his cash balance over time. But again, he can’t do this perpetually, or else he’ll run out of money. If he continues to run a deficit past zero cash, then yes, debt is the only way he could do it. But not all current account deficits are debt inducing. This is more clearly seen in a country on a gold standard that runs a current account deficit and a reduction of gold balances, which before long reduces domestic demand, domestic prices, and raises international attractiveness, which halts further gold outflow.

      • MamMoTh says:

        Wrong.

        Net Savings Private Sector = Government Deficit + Current Account Surplus over any period of time.

        If over the cycle Government Deficit=0 and Current Account<0, then Net Savings<0 , that is the private sector is dis-saving or going into debt.

        • Major_Freedom says:

          If over the cycle Government Deficit=0 and Current Account<0, then Net Savings<0 , that is the private sector is dis-saving or going into debt.

          Ah, so now it’s dissaving OR going into debt. Before you said only debt.

          That’s all I wanted to say.

        • Subhi Andrews says:

          You have the causation backwards,

          If over the cycle, Government is in Surplus, and Net savings is positive, then there will be a trade surplus.

          🙂

          • RG says:

            Trade surplus = weather deficiency

  7. Major_Freedom says:

    If some people in the private sector really do want to pay down their debts, while other people in the private sector don’t want their debt to increase correspondingly–and this is the ostensible problem, according to Krugman–then how does it “solve” this problem by having governments take on offsetting debt?

    You just hit the “economics versus statism” nail right square on the head.

    In order for a particular voluntary economic action to improve the life of the individual, his actions cannot be counter-acted by government as if they were destructive.

    One of my favorite examples of this, which is highly relevant, is when the private sector starts to increase their cash balances. Keynesians would argue that this should be “counter-acted” by government, by printing and then spending money, so that the government’s spending offsets the reduction in the private sector’s spending. But what they seem to not realize is that the reason people are holding more and more cash is because they are trying to increase their purchasing power. If the increasing cash balances is not countered by government printing and spending money, then prices will begin falling. This falling of prices, and increasing of cash balances, satisfies the desire for increased purchasing power.

    If the private sector is set on increasing purchasing power, then the government printing and spending money should, if the above theory is correct, result in prices not falling, but rising, as well as rising cash balances, which keep rising because people are trying to raise their purchasing power but the government’s printing and spending is acting against it, thus leading to further cash balance increases. And wouldn’t you know it, that’s pretty much what is happening now.

    And do you know what? The ONLY rebuttal I have EVER gotten to the above, which is almost identical to your thinking with US bonds, are emotional responses that just convey the interlocutor’s impatience, anxiety, jealousy, and anger. “They have enough money! They should spend it on jobs NOW!” or “They have trillions of dollars in cash!! WHAT MORE DO THEY NEED??!?!” or “Are you saying that “they” [i.e. corporations, fat cats, take your pick] should become even richer than they already are? That’s ridiculous!!!” and so on.

    But if we look strictly at the economics of it, and we did consider cash balances in relation to prices, then if companies are sitting on trillions of dollars, and they are still not investing enough to generate less than 9% employment, then prices need to fall BY MORE STILL. After the largest collapse in US history, are we to expect anything less than a huge correction that is greater than any correction any of us have ever experienced before? Has Keynesianism numbed the public to such a degree that they have now come to expect very little to change no matter what economic calamity arises? Sometimes I wonder how many people actually believe “Oh don’t worry, the government will just print more and spend more, and everything will be okay again” in response to the US capital pool disappearing completely due to an alien teleportating it all to some other planet.

    I think the reason why Krugman and other inflationistas keep calling for more deficits and more inflation is because they don’t want their worldviews to shatter by having the opposite theory vindicated. They don’t let the effects of hoarding cash, or the Fed to stop printing money, run their full courses, because they don’t actually want to test their own convictions. They don’t want their ideological enemy, namely individual liberty, and thus self-responsibility, to win. It would mean they’d have to perceive the government as an inhibitor and oppressor, instead of what they want it to be, which is the parent they never wanted to stop being a child to.

    As for you pointing out the blatant contradiction in that statist Kuehn’s worldview, who is more concerned with how the state can “communicate” to the hapless tax paying public, and their children, that they are better off shouldering the burden of paying off the government’s profligate spending to garner votes, which benefits special interest groups, as if being on the hook for even more taxes down the road, to pay off debt that was used to finance programs they may not even support, is something they should be thankful for, and join in with creatures like Kuehn who say to people “don’t worry, this stealing of your money is for your own good,” then all I can say is, and again and again and again I will say: WHY do you even give that horrible creature anything other than contempt? He’s a cheerleader for theft at gunpoint for crying out loud.

    • MamMoTh says:

      But what they seem to not realize is that the reason people are holding more and more cash is because they are trying to increase their purchasing power.

      That’s the silliest thing I ever read, even on this blog.

      Not to mention how it ignores the fact that on aggregate the private sector cannot increase its holding of cash balances (savings) without the government increasing its deficit.

      • Major_Freedom says:

        My argument is based on what people are trying to do, and what the effects of it are on prices. The individual who seeks to increase his cash balance does so in order to raise his purchasing power.

        Yes, in the aggregate, total cash cannot increase unless the government creates more. But my statement was not about 100% of the population.

        If it suits you, then substitute: “But what they seem to not realize is that the reason people are seeking to hold more and more cash is because they are trying to increase their purchasing power.”

        in place of what I said.

        It’s not necessary that 100% of the people increase their cash balances, or even that total cash balances increase. As long as people are increasing their cash balances, which is possible, and as long as the government does not print money in response, which is possible, then prices will tend to fall.

        You’re making a totally different argument about the tautological nature of aggregate cash and government creation of cash.

      • Major_Freedom says:

        In other words, take the foundation for everything I say from an methodological individualism perspective. If I say “the private sector” I mean “individuals in the private sector” and by that I don’t mean “Every single last individual in the private sector.”

    • Daniel Kuehn says:

      I really resent being talked about that way, Major_Freedom, and I wish you’d stop.

      • Major_Freedom says:

        I really, REALLY resent YOU speaking the way you do, and how it affects those who are victimized by your advocacies, but you aren’t stopping.

        Stop playing the victim card when it is precisely you who is trying to create victims.

        Resent my statements all you want, you deserve it.

        • Anonymous says:

          Bravo Major Freedom.

          Do I read blackadder…not so much

      • Blackadder says:

        I really resent being talked about that way, Major_Freedom, and I wish you’d stop.

        Wait, are you saying you still read Major Freedom’s comments?

        • Daniel Kuehn says:

          Not usually – as much for length as for content – but my name caught my eye as I was scrolling down in this one.

        • Argosy Jones says:

          I imagine him in a disused captain america costume with an ‘F’ on his forehead in place of the A. He types furiously to a “free jazz” record through a haze of incense that that wafts over his stacks of Mises and Rothbard texts, and clings to his dreadlocks.

          “FREEEEDOOMMMMMMMMM!!!!!!!!”

          • Blackadder says:

            Argosy,

            Comments like yours make me wish this blog had a “like” feature.

      • Silas Barta says:

        You can resent it all you want, Daniel_Kuehn. No one will care until you say what specifically is wrong his his characterization. Here’s the relevant portion:

        As for you pointing out the blatant contradiction in that statist Kuehn’s worldview, who is more concerned with how the state can “communicate” to the hapless tax paying public, and their children, that they are better off shouldering the burden of paying off the government’s profligate spending to garner votes, which benefits special interest groups, as if being on the hook for even more taxes down the road, to pay off debt that was used to finance programs they may not even support, is something they should be thankful for, and join in with creatures like Kuehn who say to people “don’t worry, this stealing of your money is for your own good,” then all I can say is, and again and again and again I will say: WHY do you even give that horrible creature anything other than contempt? He’s a cheerleader for theft at gunpoint for crying out loud.

        Now, other than the moral status of taxation, what specifically did Major_Freedom get wrong about? Do you not want the next generation to be deeper in debt to fund your favored policies, which they didn’t even have a choice of? (What would Thomas Paine think?) And did you not just lament the poor skill some politicians have in convincing voters to put their children deeper into debt?

        • MamMoTh says:

          Basically it’s all wrong, as has been explained plenty of times.

          • Dan says:

            Dr. Murphy, I think Mammoth has something here. You spend so much time trying to explain your views when you could just keep repeating that you already explained why they are wrong.

            • MamMoTh says:

              What has Murphy got to do with Silas copying and pasting Major_Freedom’s nonsense?

  8. david nh says:

    Isn’t one reason that corporations can sustain indebtedness for lengthy periods is that they use the money to produce something that has a higher NPV, i.e., it is an economically viable investment. That’s the nature of the enterprise. Also, because future revenues that corporations received are gained voluntarily, we can tell whether the corporations are actually creating something of greater value than their investments. Sometimes corporate debt is actually secured by specific assets.

    Not all government spending is investment, uneconomic investments are subsidized through coercive tax receipts and the ability within reason to inflate debts away, even economic investments are usually not recovered through user fees (e.g., road tolls), other sorts of government spending can also reduce the productive capacity of the economy through incentive effects, “knowledge” effects and misdirecting investment funds, etc. You know the drill.

    So I would suggest that there is in fact a difference between corporate and government debt and it is the latter that is the less naturally sustainable.

    “you’re supposed to run big deficits during recessions, but you’re supposed to pay them off during booms.”

    That’s because, in the Keynesian world, they originate not in the desire for big government but in the need to offset excess money demand that results from supposed monetary policy failures.

  9. Joe says:

    “Yet again I ask: How is this different from a corporation? At what point will GE be forced to start reducing the total market value of its outstanding bonds?”

    That’s the clincher for me. Why is it that a bad business decision is a good one when the government does it?

    • RG says:

      Because the government is not in business. They do not trade. They only steal.

  10. marris says:

    :):):) From what I’ve read, MMT guys don’t have any economic reasons why government debt is different from private debt. If MMT policy makers wanted to, they could implement their recovery plans with private debt (they need some private guy to go along, but there are powerful incentives for him to do so: low borrow rates, etc).

    MMT Claim 1: Government debt can increase as long as the ratio of debt to GDP stays stable. Basically, this boils down to: (1) each year, there will be some real-GDP increase (more stuff) that government can use; as long as it doesn’t grab some huge share of the stuff, then we’re OK, (2) each year, there will be some increase in prices of the same stuff (due to new money entering the system). We could say the same things about GE.

    MMT Claim 2: Government debt is somehow special because government bonds are safe. Rather than the government issuing some bond, some MMT policy maker could just as easily get GE to issue special government-backed bonds. The bonds would satisfy whatever demand for safe bonds that the public had. The only difference is that GE executives would decide how to spend the borrowed money (rather than fiscal planners).

    MMT Claim 3: Government debt is useful because the government can spend money without worrying about profit and loss. For example, maybe GE can already get very low rates in the current environment. However, they are not borrowing to build factories because they are worried that people are not spending and the factory will realize a loss. In this claim, “not having to worry about profit and loss,” is a feature, not a bug. Anyway, there are few ways to work around this too. GE can embed conditional repayment into the bond (GE does not pay unless the factory makes money). The bond (really more like equity now) will sell for a lower price on the market, but never fear, the money printer is here! The government could just buy the bond from GE at par (or whatever) and issue some derivative bond which “fixes” the loss problem. For example, GE pays off the bond if the factory works out and the government passes the cash flow through the derivative bond. If GE cannot pay, then the government just pays it off.

    Economically, the MMTers are basically 1940s Keynesians. No capital structure theory. Little (no?) emphasis on even basic Friedman expectations. For example, many (all?) think that the government should spend money because this will push the economy to some high-employment, low-inflation “sweet spot.” You know, to “full capacity.”

  11. Captain Anarchy says:

    The difference, of course, is that they’re the ones with the guns and the printing press. We aren’t dealing with voluntary exchange, so there will obviously be differences.

  12. Silas Barta says:

    Now this always troubled me, for the same reason that the MMT analysis seemed wrong: It makes a qualitative distinction between “public” and private, when there is nothing intrinsic to the analysis relying on that distinction.

    Agree 100%. This kind of error happens so often I have a name for it: “nominal invariance violation”. Nominal invariance is the requirement that your arguments not be refutable by mere choice of labels.

  13. Bob Roddis says:

    One of the things that just about every Republican said was that “Washington needs to do what families do and not spend more than they take in”. It’s powerful rhetoric that is electoral gold. Getting tough on the deficit is good for politicians – analogizing it to family values is even better.

    What’s bothersome is that no one challenged this view, which among economists is almost universally considered to be fallacious.

    This is excellent news. My sense is that the only reason we have ever had Keynesian policies is because average people do not understand that the government dilutes the currency ON PURPOSE (and is the sole cause of inflation) and that it blows money out its ass by going into debt ON PURPOSE. The problems we face are inflicted upon us as solutions by Keynesians.

    Certainly Austrian and libertarian economists do not believe that government debt is different from private debt other than being far less productive or that government deficits are necessary for anything or are anything other than a black plague upon the human race.

    If Ron Paul spends tens of millions of dollars and Pickler Nation still does not understand that PURPOSEFUL INTENTIONAL money dilution causes inflation, he will have failed.

    If we can get the public simply to understand what inflation is and that it has been these Keynesians who are at the root of their misery, we will have succeeded. We could certainly save a lot of money on salaries alone at the state and federal level simply by refusing to allow governments to employ Keynesians. Further, that would result in sending hither fewer swarms of Officers to harrass our people, and eat out their substance.

  14. kavram says:

    I’m a bit confused – in exactly what way is austerity an easier sell to voters than deficit-spending??? Has this Keuhn guy even seen what’s going on in Greece/Ireland/etc….??

  15. jim says:

    I think you miss a key point

    the real problem is excess private sector debt. The majority of that debt was accumulated in ten years from 1998-2008

    View this graph of US debt
    http://tinyurl.com/44bc98h
    Total debt=Blue ;Private debt=red; govt debt=black

    And this graph showing how private sector borrowed for the last 6 decades
    http://tinyurl.com/4x9zcgu

    The problem with negative borrowing rates shown in these graph is that a huge amount of money is entering the banks (and other financial lending institutions) in the form of savings and loan repayments. This is a fact of life it is not something the govt can tell people to stop doing.
    The consequence of this aggregate behavior of private sector de-leveraging is the current economic slump.

    Here’s why:

    In a normal functioning economy there are usually more who are willing to borrow than save. Interest rates regulate the relation of borrowing to saving. When interest goes up it encourages people to not borrow and they save instead and when interest rates go down more are encouraged to borrow and less to save.
    So normally, if one has $1000 in earnings and spends $900 and saves $100 then the $900 becomes someone else’s income and $100 is borrowed and spent thus also becoming income for someone else. In fact, more than $100 is usually borrowed and the next iteration of income becomes larger than the original $1000 and the economy grows as income grows.

    But what happens when there are not enough willing to borrow? If the $900 is spent and $100 saved but no one wants to borrow that $100, then income will contract and in the next iteration there is only $900 of which $810 is spent and $90 is saved. Easy to see how this excess saving produces a downward spiral in national income. And the paradox is it also produce less saving than the savers want to save – this is “the paradox of thrift”

    Here is a longer version:
    http://www.beezernotes.com/wordpress/?p=4202

    So what does this have to do with the budget deficit? If the govt stops borrowing the national income will decline and we are in a depression. The politicians all know this to be fact. Some however believe that a good theatrical performance will get the private sector to stop deleveraging. We’ll soon see if that works.