Debt?

Sober, non-partisan, approach.

Photo by Jason Leung on Unsplash

Alan Greenspan seems like a creditable source, at least for us moderate Rs and Ds.  This is what he wrote in 1987:

“That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy's expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance.

It was not always thus. For most of the period prior to the early 1930s, obligations of governments in major countries were payable in gold. This meant the whole outstanding debt of government was subject to redemption in a medium, the quantity of which could not be altered at the will of government. Hence, debt issuance and budget deficits were constrained by the potential market response to an inflated economy. It was even possible in such a monetary regime for a government to become insolvent.”

The real issue is maintaining a money supply in our economy that will fuel reasonable levels of productivity without creating a spiraling inflation. 

There is a relationship between consumption and production in free-market economies. Production follows from consumption. We produce more or less as people purchase more or less.

In the “old days,” there was more danger in rapidly growing demand (putting money into the economy in the hands of consumers).  Could production be expanded to accommodate such increased demand?  If not, would increased demand lead to runaway inflation?  Higher prices, higher wages, higher prices and so on.

Today new technologies and global capital markets promise ever greater productive capacity.  (Shortage of labor, perhaps, in particular areas may be a limitation, although the global marketplace has a substantial surplus of people underemployed or looking for work.)  Investment in robotics, AI, and other new technologies promise an abundance of new goods and services.  The capital is available, the technology is there, our overall capacity to produce is slack. All that is missing is an increased demand for product, i.e. more money in the hands of prospective customers (that is an adequate supply of exchange currency). Barter doesn’t work very well.

But there is always a time gap between perception of demand and the provision of new goods.  According to elementary economics, production will be encouraged after demand increases and prices rise.  More money in the hands of consumers, pressure on prices, new production.  Temporary and steady inflation (some) is thus built into this equation. 

Or looked at another way, the role of the government should be to ensure that the amount of purchasing power (i.e. money) in the economy is, over a period of time sufficient for such adjustments, sufficient to maintain a healthy virtuous circle of consumption, production, employment, consumption ….

And as Greenspan also says, the government can always pay its own debts in the currency it creates.  ““There’s nothing to prevent the federal government from creating as much money as it wants and paying it to someone.” 

And if, in the future, people in other countries do not want to be paid back in dollars, then they will stop buying American debt, i.e. holding dollar-based securities in their sovereign wealth funds.  And actually we would be (as we are now) under no compulsion to finance government expenditures through debt. But all that is still unlikely. The dollar looks like it will remain the world’s reserve currency for quite a while.

A related topic that helps complete this picture is the decreasing necessity for a country like the United States to purchase raw materials, services or goods, produced in other countries.  So our foreign debt (purchases or sales) should grow less as a proportion of total expenditures. (I believe this is true, but I realize it is a controversial opinion and will leave the discussion for another time.)  

Therefore, the issue is not debt per se.  It is how we manage our money supply, making sure that we can support increasing productivity by increasing the purchasing power (for example, by more government purchases of infrastructure and more subsidies for families with children and students).

Of course, it is not just this simple. We will need to worry about the unintended consequences of wealth, like climate effect and inequality, as well as global disparities and conflict. And there is a point beyond which too much demand for goods and services could outstrip productive increases. But with an increasing technological ability to produce, these should be manageable. At least they will be the problems that we must solve, not debt itself.

(Greenspan quotation from “Danger Ahead: Mike Pence Would Pick Up Where Paul Ryan Left Off,” Stephanie Kelton. Blog from The Lens, stephaniekelton@substack.com)