Debt myths debunked

16 februari, 2015 kl. 16:42 | Publicerat i Economics | 5 kommentarer

myths-debunked

A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay. This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity. So fiscal consolidation is the royal road to economic recovery.

This, the official doctrine of most developed countries today, contains at least five major fallacies, which pass largely unnoticed, because the narrative is so plausible.

First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it …

Second, deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend …

Third, the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

Fourth, there is no connection between the size of national debt and the price that a government must pay to finance it. The interest rates that Japan, the United States, the UK, and Germany pay on their national debt are equally low, despite vast differences in their debt levels and fiscal policies.

Finally, low borrowing costs for governments do not automatically reduce the cost of capital for the private sector. After all, corporate borrowers do not borrow at the “risk-free” yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households.

Robert Skidelsky

5 kommentarer

  1. Six. The causality is entirely backwards in the majority of cases. The government is borrowing in the same way that your bank borrows your salary every month as a result of you getting paid and not immediately spending it all.

  2. Does this wisdom apply to a developing country with mounting foreign debt, say, an African country taking in Eurobonds? These have to be paid in foreign currency, not least, interest accruing to foreigners…

  3. ”Third, the national debt is not a net burden on future generations”.
    This is only true if the debt is 100% owned by citizens of the country issuing the debt.

    But the statement is not true regarding international debt, as was recognised by Abba Lerner in 1948.
    Government debt owed to foreigners WILL be a burden on future generations when interest payments or redemptions become due.
    Conversely the debts of foreigners and foreign governments held as assets in sovereign (or private) funds WILL benefit future generations of counties owning such assets.
    In the case of the UK, about 30% of the national debt is held by foreigners (equivalent to about 23% of UK GDP).

    • Actually, your concern is already addressed by this:
      ”But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.”

      In essence, this is to say that by creating assets for future generations, they will have a stronger economy that will be better able to ‘absorb’ the ‘debt burden’.

  4. I would quickly like to bring the flipside to the table: If domestic debt is not a burden then taxation is not one either. And one may wonder why countries accumulate debt in the first place.


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