The problem arises when you assume that the debt of a country in its own money is the same that private debts.
When a private bank credit some household or business they get an asset (the debt owned to them) and a liability (the money they just created from nothing) that cancel each other. The entity receiving the credit have the same position but inverted. So, if you take all the economy, everything cancels to zero and not "law of conservation of mass" has been violated.
The debt issue by a country is a very different animal. In fact, probably we should stop calling it debt. When a government issue debt they are creating financial assets that allows the private sector to operate. An interesting mental experiment is to think in what would happen if all the governments pay all the 'debt' and stop spending.
Stephanie Kelton write about those things:
"Our challenge is not whether we can “afford” to make the payments we have promised to seniors, veterans, the disabled, government contractors, healthcare providers, bondholders, etc. (today, tomorrow and into the indefinite future) but whether we will be a productive enough nation to allow the government to make good on those promises without causing an inflation problem. That is the debate we should be having."
> An interesting mental experiment is to think in what would happen if all the governments pay all the 'debt' and stop spending.
I suppose they would have to explicitly collect taxes to cover their current spending, not make bets on the future of economy. Isn't it how our civilization worked for a long time?
> Our challenge is not whether we can “afford” to make the payments we have promised to seniors, veterans, the disabled, government contractors, healthcare providers, bondholders, etc. (today, tomorrow and into the indefinite future) but whether we will be a productive enough nation to allow the government to make good on those promises without causing an inflation problem.
I don't really see the difference. If we are productive, the government can compel citizens one way or another to deliver on those promises. If we aren't, it can't and it needs to reduce them - either explicitly or implicitly by devaluing the money they are denominated in or any other creative way it could come up with. So sure, whether the government can afford future spending is the same thing as whether the economy will be big enough to tax it with fulfilling these promises. I think.
OK, so somehow I got back to making bets on future economy. But this time it appears to be a bet made to justify future spending, not current spending, so unavoidable.
Part of "current spending" _is_ making bets on the future state of the economy. Governments build roads, dig ports, build new neighborhoods, etc. in anticipation of economic and/or population growth.
When a company lends money to do such that, it is called leverage, and considered a good thing because it allows them to make higher yields on their capital. Shouldn't governments be judged the same if they borrow money to speed up such developments?
"I suppose they would have to explicitly collect taxes to cover their current spending, not make bets on the future of economy. Isn't it how our civilization worked for a long time?"
So, If the government have pay all its debt and it's not spending anymore, where the money that is collecting as taxes come from?
" don't really see the difference. If we are productive, we can compel citizens one way or another to deliver on those promises. If we aren't, we can't and we have to reduce them - either explicitly or implicitly by devaluing the money they are denominated in."
The difference is what we should be doing now. Should we be reducing the deficit because we will "run out" or money?
or should we try to increase the future productivity creating infrastructure and knowledge?
What of the two options will make it possible to pay in the future?
"OK, so somehow I got back to making bets on future economy. But this time it appears to be a bet made to justify future spending, not current spending, so unavoidable."
I'm talking about investing in the sense of creating real assets.
A bet and an investment are not the same thing, even if it is true that many 'investors' nowadays think that it is.
You added content to your post after I answered you, by the way. It's better if you answer in another post.
> When a government issue debt they are creating financial assets that allows the private sector to operate. An interesting mental experiment is to think in what would happen if all the governments pay all the 'debt' and stop spending.
There's a great Planet Money about this, and what happened when the US paid off its debt in 1835:
So I listened to this again and I feel compelled to update that it's merely a good Planet Money, not a great one. Not as much detail about the issue as I'd remembered.
In the UK the political parties are wed to a lock on pensions that keeps them tracking inflation. One of the parties tried to wiggle out of a small part of it in the recent election and it seems that was at least partly responsible for their poor election performance. It will be interesting to see how this plays out over time and whether at some point the dam will break and chaos will ensue.
At an individual level it's probably a good idea not to rely on the state for anything if you can manage that.
The point is that, the government, can always pay future pensions because it can issue money.
The question is: can do it without generating inflation?
It depends of the productivity of the economy in that future.
The conclusion is that saving money means nothing, what is really important is generate real wealth now so we can pay in the future without generating inflation.
So, investment in real capacity (creating infrastructure and knowledge) now will allow generate the real resources for "paying" in the future. Just the opposite of what they try to sell us.
Never mind how much money you save now if, in the future, there are not real resources for taking care of everybody.
In theory, you're right, but the way we measure things now basically prohibits that. Let's say we made sure, today, that "investment" were high so that it can produce the "output" that pensioners can consume. What would that look like, when it all plays out?
"You were promised $600/month. Obviously, we can't do that because that would require taxing 70% of labor income, which is way past the Laffer point. We're paying you $400/month instead. But it's okay, because we made productivity enhancements that let the same money go further. For example, the food tastes 50% better, so it's all a wash. Plus, you can move ten miles out to a cheaper apartment because construction and transportation are better now."
if the government expend money in the economy beyond real available capacity (all else unchanged) we will see inflation.
If the government increase taxes in the economy in absence of inflation (all else unchanged), there is going to be a deflationary trend.
All the point of the argument is that if we have real available capacity in the economy you can spend, 600$ or whatever have been promised, and, if we don't have real resources available, we can't spend anything, never mind what have been promised.
It have nothing to do with how much money we have saved or how big is the deficit, but with the real resources available at the moment of paying.
>It have nothing to do with how much money we have saved or how big is the deficit, but with the real resources available at the moment of paying.
My point is that the obligation is phrased as "$600 + inflation index", not "the amount of utility you could have got for $600 at the time we made the promise". Improved productivity can help you meet the latter, not the former. The latter is a more reasonable promise, but the former is what was actually promised.
>All the point of the argument is that if we have real available capacity in the economy you can spend, 600$ or whatever have been promised,
It's not true that "if the real productive capacity is there, then taxing out the money for the pensions is no problem". The evasion behavior is non-linear and there's a cap to how much you can collect with taxes before e.g. pushing economic activity underground and into other countries. (Hence the Laffer curve point.)
When a private bank credit some household or business they get an asset (the debt owned to them) and a liability (the money they just created from nothing) that cancel each other. The entity receiving the credit have the same position but inverted. So, if you take all the economy, everything cancels to zero and not "law of conservation of mass" has been violated.
The debt issue by a country is a very different animal. In fact, probably we should stop calling it debt. When a government issue debt they are creating financial assets that allows the private sector to operate. An interesting mental experiment is to think in what would happen if all the governments pay all the 'debt' and stop spending.
Stephanie Kelton write about those things:
"Our challenge is not whether we can “afford” to make the payments we have promised to seniors, veterans, the disabled, government contractors, healthcare providers, bondholders, etc. (today, tomorrow and into the indefinite future) but whether we will be a productive enough nation to allow the government to make good on those promises without causing an inflation problem. That is the debate we should be having."
http://www.nakedcapitalism.com/2013/10/stephanie-kelton-how-...