Wednesday, 18 December 2013
Can the entire National Debt be bought back?
According to “Musgrave’s Law” (scroll down the column to the right of the one you’re reading right now) the answer is “yes”: it can be done by simply continuing with QE. That is, debt is replaced with monetary base. And as to any excessive inflationary effects, that can be dealt with by increased taxes (not that any increased tax seems to have been necessary as a result of QE to date).
However Peter Martin pointed out to me recently that the above is a questionable argument in that monetary base itself is a debt of sorts. That is, it is a liability of the government / central bank machine (gcbm). Indeed the same point applies to the money issued by a commercial bank: that money is a liability of the bank.
Moreover, government debt (for a monetarily sovereign country) is nothing more than a promise by government to pay the debt holder some monetary base at some point in the future. And for debt which is near maturity, the different between debt and base is near meaningless. That is, the two merge into each other.
Nevertheless, there are some differences between debt and base, as follows.
First, interest is paid on debt, whereas little or no interest is normally paid on base.
Second, while debt can be used in lieu of money in the world’s financial centres, debt is no use for about 95% of transactions: e.g. buying groceries, cars or houses. In contrast, money obviously is of use for buying groceries, cars, houses, etc.
Another point is that the purpose of “Musgrave’s law” is to undermine those who get hysterical about the allegedly huge and ever rising interest bill that has to be paid on the national debt. And if debt is converted to base, that solves the (non-existent) interest problem. I say “non-existent” because the REAL or INFLATION ADJUSTED rate of interest on the debt of responsible countries is currently around zero or even negative. In short, Musgrave’s law is partially psychological warfare aimed at those hysterics.
Another psychological point is that (as others have made clear) concerns about the National Debt arise largely because the minds of simpletons (like Kenneth Rogoff, Carmen Reinhart, Niall Ferguson, etc) are clearly governed by the overtones or innuendo behind the word “debt”. And those overtones are negative (“bankruptcy”, “bailiffs”, etc). That is, the simpletons can’t work out the ACTUAL NATURE of that so called debt.
So to keep them happy, why not get rid of the debt or at least explain to them that the debt is easily disposed of?
So to be strictly accurate, I should amend Musgrave’s law, to take account of Peter’s point, but for reasons given above, I think I’ll leave it as it stands because I gain brevity at the expense of accuracy.
And finally, if you think that turning the entire national debt into monetary base is an extreme idea, then bear in mind that Milton Friedman and Warren Mosler advocated a system under which the only liability issued by the government / central bank machine is money (monetary base to be exact). I.e. those two individuals advocated a system where government issues no interest yielding debt. And apart form the arguments put by Friedman and Mosler, I recently set out some arguments for a “no government borrowing” regime.