Summary: Today we have one example from the flow of comforting words about the government’s deficits. While pleasant reading, written by a knowledgeable expert, it does not withstand close scrutiny.
Government expert at work, keeping us warm.
One of the great oddities of history is why nations adopt policies that were so obviously doomed to failure, or even disaster. It’s a long list, from 17th C economist John Law’s managing the debt of France with the Mississippi Company (latter known as the Mississippi Bubble), to Japan declaring war on almost everybody. For good reason Barbara Tuchman named her greatest history book The March of Folly.
There are two constant elements of these stories. First, warnings from experts. Second, assurances that these obviously crazy policies this time would end well.
So it is with the US government debt. We have all heard the warnings. As the debt grows, so do the volume of those saying not to worry. The economists of the Keynesian mainstream provide one form of comfort (fix the deficit later). The economists of the Modern Monetary Theory school provide another form (debts don’t matter, until they cause inflation or a currency collapse). A third group provides a vague form of comfort. An example of this is “Another way to look at the national debt” by Zachary Karabell (President of River Twice Research), special to the Washington Post, 8 February 2013 — Opening:
Welcome to the next chapter of the endless debt debate. The release of a Congressional Budget Office report on the next 10 years of the U.S. economy ends a brief lull in Washington. As we return once again to our regularly scheduled program of “Crisis and Impasse,” let’s take a moment to consider the following heretical idea: We have no debt problem.
We have spent years demonizing debt, and now have an entire political movement dedicated to the proposition that government debt will destroy America as we know it unless something is done now!
Stand by for a debunking of fears about the debt! I feel better already. The next line starts the analysis:
Yet debt is simply a new form of currency that is issued, bought, priced and sold like any other currency …
This is false. First, government debt (eg, 30 year Treasury bonds) are not currency in any meaningful sense. They vary in price (currency is the standard of measurement for asset prices, like bonds). More important, although the government can convert debt into currency by printing money (ie, monetization) the process is not automatic. It is a political decision to inflate away the value of the nation’s loans.