Monday, 23 May 2011

National debt.

The debt can actually be disposed of by printing money and buying it back. To do so, proceed as follows.

1. A fair amount of debt has already been bought back with printed money under the guise of QE. The result has not been rampant inflation. Indeed the price rises that HAVE occurred recently have more to do with increased demand for raw materials from developing countries than QE.

2. Any inflationary effect that DOES derive from a buy-back can always be nullified by raising taxes or cutting public spending. The two latter would NOT, repeat NOT damage living standards. The objective of such taxation is simply to prevent excess demand.

3. A potential problem with buying back is that former debt holders would take some of their money abroad (as indeed they have with QE). This would depress the value of the relevant country’s currency on forex markets. Well the first answer to that is that the pound sterling lost about 25% of its value in 2008, and the reaction of UK population has been one big yawn.

Secondly, ANY country which acts in isolation is asking for trouble. E.g. if one country raises interest rates when everyone else is lowering rates, the relevant country will have problems. In contrast if a significant proportion of countries with allegedly excessive national debts all buy back together, their creditors have fewer escape routes, thus the forex implications are less dramatic.

4. The next non-problem is that having replaced debt with monetary base, and come the recovery, the private sector could easily have an excess of such money which could easily be inflationary. Solution: raise taxes and/or cut public spending. Again, this would NOT damage living standards. Again, the objective here is simply to keep demand under control: i.e. keep it at the maximum level consistent with acceptable inflation (“NAIRU”, if you like).

5. Re the speed of buy-back, buying back a country’s entire national debt in just one year would doubtless involve too much dislocation. But doing it over five or ten years would be no problem.

6. So that’s it: national debt disposed of (or drastically reduced). However, it is legitimate to ask whether there are actually any good reasons for reducing or disposing of it. The fact that half the world is in a panic about debt is not a good reason. There are actually several reasons, as follows.

i) As Keynes said, stimulus can be funded either by borrowed money or printed money (see 5th para here). Now if stimulus is the objective, what is the point of borrowing? Borrowing is DEFLATIONARY. That is, it is ANTI-STIMULATORY. Mad or what?

ii) Second, where government borrows, the lenders – that is the wealthy – profit from the exercise. Now why should they, when there is an alternative, i.e. money printing, which does not benefit any particular group? Thomas Edison said that any new money should be the property of the people. He was right.

iii) Third, the mere existence of national debt tempts politicians to expand the debt, and put the country further and further in debt to other countries. There is nothing wrong with debt as such, but politician’s motive for running up debt is primarily to buy votes: a very poor reason.

iv) Both Milton Freidman and Warren Mosler have advocated a “zero debt” regime. See p.250 here, and 2nd last para here respectively.

v) The idea that governments need, or should borrow to fund infrastructure improvements is rubbish. See p.9, heading: “Borrowing to purchase assets” here. Plus see here.


  1. Given that at least 50% of the national debt is simply gilt backing for compulsory annuities at insurance companies, you could get rid of at least 50% of the national debt by nationalising those pension payments.

    That eliminates 'debt' and simply beefs up the state pension for those people in receipt.

    The UK national debt is largely a job guarantee scheme for insurance clerks. Not quite sure why people think they deserve such a privilege while the rest have to do without. Obviously they've got a good lobbyist :)

  2. Neil, That’s an idea. Of course government would still have a liability: to the annuity holders. But at least the liability would not be called “National Debt”. Strikes me this is similar to the way in which government has a liability for future public sector workers’ pensions, but this is not counted as part of the national debt in 2011. And changing the name of a liability from “national debt” to something with another name is half the battle, i.e. it pacifies the twits who get worked up about the word “debt”.

    Also, neither your suggestion nor mine involve much of a free lunch. So the real fundamental question is “what arrangement makes sense”. That is why I gave some reasons above for thinking that national debts do not fundamentally make much sense.


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