Realist, not conformist analysis of the latest financial, business and political news

Government’s Security Against The National Debt Is Not The National Economy

The end result of MMT

It’s entirely true that government borrowing is not like a household doing the same. One reason being that government is not mortal as with the vast majority of us (Elijah being one of the few recorded not to have been so). Thus rolling debt over for generations can indeed be done and the sensible among us are entirely happy with the idea that we in the UK are still paying for having beaten up the Frogs in 1815.

Yes, still paying, for all that George Osborne said he’d paid it off. What he did was buy in the specific bonds identified as part of the cost of thrashing Napoleon. He did so by issuing more debt. So, we’re still paying for it even if we can’t identify which bond is it that is doing so. But then really, how wondrous to keep reminding ourselves of that joy of crushing the soap dodgers.

However, while all of the above is true, this claim isn’t:

When the federal government borrows, it also does so against an asset, which is the productive capacity of the Australian economy.

No, the government is not borrowing against the Australian economy. It is borrowing against the tax revenues it can extract from the Australian economy.

Two examples of how this differs. The German government (Weimar version) borrowed and printed sufficiently to create hyperinflation back in 1923 or so. All that stuff about using a wheelbarrow to collect a week’s wages – the barrow being worth more than the wages. The solution was to create a new currency of course, the Rentenmark. Which worked by linking the issuance of currency to a known and unavoidable tax stream – the tax on rents (or land value taxation, that detail doesn’t matter). The linkage of the currency to the amount that everyone agreed the German state could abstract from the economy through taxation killed the inflation stone dead in mere days.

Government borrowing – currency issuance being, if we like, a form of that or vice versa if we prefer to think that way – is not done against the economy, but against the tax revenue that can be squeezed out of it.

It can also work the other way, a government might not be able to squeeze the cash out. Louis XVI tried rather hard to get more cash out of the populace and pre-revolutionary French bonds are valueless now because they cut off his head to stop him.

What secures government debt is not the economy but the tax revenue that can be taken from it.

0 0 votes
Article Rating
Notify of

Newest Most Voted
Inline Feedbacks
View all comments
4 years ago

One may note that the German taxpayer did not have to pay back Weimar’s debts, or indeed Hitler’s war debts. Nor did the Zimbabwean taxpayer have to pay back what Muggins stole. The counterfeits were a perfectly efficient means of robbing the locals.

I just hope ScoMo doesn’t try that nonsense here in Oz. Though no doubt the Guardian would be over-joyed if the government stole my last penny.

4 years ago

The boon was not stating a resource on which the Rentenmark would be limited; it was credibly stating that the supply would be limited at all. The arcane “mining” process that purports to limit the issuance of new Bitcoin makes people accept it despite its total lack of backing. By comparison, the US dollar is currently defined by politicians competing to put forward larger numbers for “targeted stimulus.”

Would love your thoughts, please comment.x