Public debt — questions and answers

21 Mar, 2019 at 18:02 | Posted in Economics | 5 Comments

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?

dec3bb27f72875e4fb4d4b62daebb2fd161b36392c1a0626f00cfd2ece207d84First, full employment can be maintained by printing the money needed for it, and this does not increase the debt at all. It is probably advisable, however, to allow debt and money to increase together in a certain balance, as long as one or the other has to increase.

Second, since one of the greatest deterrents to private investment is the fear that the depression will come before the investment has paid for itself, the guarantee of permanent full employment will make private investment much more attractive, once investors have gotten over their suspicion of the new procedure. The greater private investment will diminish the need for deficit spending.

Third, as the national debt increases, and with it the sum of private wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and can devote them to paying the interest on the national debt.

Fourth, as the national debt increases it acts as a self-equilibrating force, gradually diminishing the further need for its growth and finally reaching an equilibrium level where its tendency to grow comes completely to an end. The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income …

Fifth, if for any reason the government does not wish to see private property grow too much … it can check this by taxing the rich instead of borrowing from them, in its program of financing government spending to maintain full employment. The rich will not reduce their spending significantly, and thus the effects on the economy, apart from the smaller debt, will be the same as if Money had been borrowed from them.

Abba Lerner


  1. A Beginner’s Guide to MMT
    “An overview of a once-fringe school of economic thought that’s suddenly of the moment.By Peter Coy, Katia Dmitrieva, and Matthew Boesler turn to the new book, Macroeconomics (Red Globe Press 2019), by William Mitchell, Senior Scholar L. Randall Wray, and Martin Watts, to dispel some of the misconceptions surrounding Modern Monetary Theory.”

  2. “Can a central bank go bankrupt?
    No. A central bank can in principle always ‘print’ more money.”
    In principle yes and that’s fine.
    However, in which jurisdictions is it legally possible for the CB to finance Treasury overspending by creating money?

  3. The first claim is wrong as the government can borrow money from other countries. The countries you borrow from are not going to be happy if you default on your debt. I cant recall that an ecomic theory exists that describes gun boat diplomacy.

  4. “Do increased public debts burden future generations?
    No, not necessarily. It depends on what the debt is used for.”
    Prof. Syll’s answer violates Lerner’s principles of functional finance and key principles of MMT.
    A better answer is:
    YES. Future generations of taxpayers may have to pay higher taxes. Extra taxes are likely to be required in order to release resources for extra spending by bondholders (or their inheritors) – these will receive higher future interest and redemption payments.
    Contrary to Prof. Syll, extra public debt is not required for the “sound finance” of public expenditure. According to Lerner, the macroeconomic purpose of new issues and/or redemptions of government bonds is to manage liquidity and interest rates in financial markets.
    And contrary to Prof. Syll, the burden of debt on future taxpayers is not offset by benefits from public expenditures. Such benefits certainly exist but they are completely irrelevant because they are unaffected by bond issues. According to MMT a sovereign government can always undertake worthwhile projects paid for in its own currency because it can “print”/create money – it does not need to borrow its own currency!. Thus increased debt is not needed for any public expenditure while the costs and benefits of these expenditures do not depend on debt.
    Thus extra public debt is likely to redistribute net of tax incomes/welfare from taxpayers to bondholders. However, there will be no effects on the total amount of resources available to future generations, apart from the possible (minor?) disincentive and distortionary effects of taxation.

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