Abba Lerner and the true nature of public debt

24 Feb, 2019 at 21:01 | Posted in Economics | 6 Comments

national debt5One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external. It is owed by one person to others. That is what makes it burdensome. Because it is interpersonal the proper analogy is not to national debt but to international debt … But this does not hold for national debt which is owed by the nation to citizens of the same nation. There is no external creditor. We owe it to ourselves.

A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.

Abba Lerner The Burden of the National Debt (1948)


  1. Incurring private debt can reduce the ability of a household to finance future purchases and consumption. Borrowing privately today can improve consumption today at the expense of consumption in the future.
    Understandably, people often suppose by analogy that the government is in a similar bind and that borrowing today for consumption of public goods will have to be financed by public austerity at some future time.
    This is a profound misunderstanding.
    The issuing of bonds, like the issuing of currency, is simply printing paper — or in our digital age, bits and bytes in a computer. If the government, thru its fiscal policy, mobilizes the use of resources for production of goods in the present, it prevents the irretrievable loss associated with leaving resources idle and without employment. But, the government is unable to constrain future public consumption by issuing public debt in the present. The reason is simply this: the debt will be “repaid” in the future by returning to the government these pieces of paper. “Paying off” the national debt does not require payment of future goods in satisfaction of the debt, but only payment of public debt for public debt, pieces of paper or bits and bytes for other pieces of paper or bits and bytes.
    When the sovereign issues debt, that debt is a promise to pay currency in the future. Which the sovereign, as issuer of currency can always do.

    • The way you depict the deficit to bond mechanism lacks the accounting process. The bonds must be repaid with interest. So it is not simply printing money!

      The issue that is overlooked is that money devalues thru inflation, so today’s bond purchase is not recovered in the future repayment even with interest unless inflation is less than the inteeest, which usually does not happen. Therefore, running a deficit and never a surplus is exploitative because they rarely pay for the illiquidity.

      The question about why we need to run a deficit is often blamed on entitlements which is a self-serving claim. The other problem is that QE buys back the bonds without interest payments or before maturity is reached, again exploiting the bond buyers. All that can be said is the principle is safe, but it is not a process of ‘just printing money!’

  2. Posted without comment implies that we’re supposed to take Lerner’s analysis seriously, i presume. But it was a shallow analysis 70 years ago when it was written, and is even shallower now. Lerner seems to be trying to say that we each hold an equal share of the debt, and ithat share is equal to the amount that we owe. This is incredibly far from the reality.

    TheBalance has a convenient analysis based on US Treasury data at

    As a taxpayer, I owe 1 part in 138 million of the national debt. But I’m a creditor on that debt only to the extent that my investments (mostly a 401(k) plan) hold bond funds. I sold my Treasury Direct holdings years ago. Those people who don’t have any bond investments don’t get any credit on the principal if those debts are ever paid off. For them it’s all outgo and no income.

    • It ought to observed that a significant part of the U.S. National debt is held by agencies of the Federal government itself, including the Federal Reserve system which simply recycles the most of the interest paid by the Treasury back to the Treasury and the Social Security Administration, which funds benefits in excess of current receipts of FICA taxes from its holdings.

  3. But this does not hold for national debt which is owed by the nation to citizens of the same nation. There is no external creditor. We owe it to ourselves. Abba Lerner
    Obviously not the case for foreign owners of national debt.
    Moreover, that investors would be willing, in recent history, to accept negative yields from some monetarily sovereign countries indicates the “national debt” is a misnomer in those cases since who lends at negative rates?
    Instead, the national debt of a monetary sovereign should be thought of as a risk-free fiat storage service for which it should charge.
    That goes for bank reserves too which, having zero maturity wait, should be charged the MOST negative interest.
    As for individual citizens, they should be exempt from negative interest up to a reasonable account limit via accounts of their own at the Central Bank. It’s a disgrace that citizens are not allowed accounts at the Central Bank already.

    • “investors would be willing, in recent history, to accept negative yields from some monetarily sovereign countries”
      Usually, buyers are making more on other trades. Because the dollar is so strong, you can swap dollars into yen or euros, buy some Japanese or German government bonds at negative interest, then on the far leg of the swap get back more dollars than you started with. In other words dollar swaps command a premium that makes the negative rates on government bonds irrelevant …
      See Jeffrey Snider’s article “Everywhere you look there’s a dollar shortage” for more:

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