“Our grandchildren will inherit the government's debts” is a common phrase. But it is wrong, and economists should point that out. But many still believe it.
1. If the federal debt grows faster than GDP - which it is now - this causes interest rates on government debt to rise steadily. To fund these interest rates, the government either has to a). raise taxes, b). cut spending, or c). monetize the debt via some form of money printing. There is no fourth option. This means that deficit spending to fund entitlement spending guarantees that future generations will either receive less, get taxed more, or suffer higher rates of inflation that erode savings.
2. The amount of money in circulation is unrelated to the total value of goods and services in the economy. When the government spends more than it takes in to fund entitlement spending, it allocates more scarce resources to those receiving benefits at the cost of those who do not. Whether or not future generations "inherit the debt" is irrelevant to the fact that we currently allocate nearly half of the federal budget to citizens who will not produce any economic value until the day that they die. That is a generational transfer given that demographics dictates that those benefits will not be available for younger generations.
3. Much of the spending on older generations is non-productive or flows out of the US economy. Purchases of imports, international travel, care provided by immigrants who send money out via foreign remittances, and medical care for seniors with incurable, terminal illnesses all results in no long term benefit or return. Whether we should allow these things or not is a policy choice; whether they have long term benefits for the American people is simply not in dispute.
The whole idea that there is a magic money glitch where you can simply borrow as much as you want for as long as you want without consequences is an absurd farce. If something doesn't pass the common sense test, it simply will not work regardless of how many complicated accounting schemes attempt to show otherwise.
I tried to make some similar points to Cam here. They're pro MMT, but then point out that, properly considered, they don't usher in Nirvana but take us back to the perennial problems of economics
@Cameron Murray and @Cam Springer, first of all, thank you both for a very helpful discussion of this point.
I have one consideration to add, and I’d be very interested to know whether I’m missing something important.
To me, one of the most significant aspects about this debate is the fact that ownership of Treasury instruments is concentrated among the wealthiest households. Not to the same extent as stock ownership, but I think a reasonable estimate is that half of domestically owned Treasury instruments are owned by the wealthiest 1%.
So it isn’t really the case that the Treasury has a liability and “We” (the people) have an asset.
This puts interest payments in a different light. They are, in large part, transfers from the entire body of tax-paying Americans to the wealthy.
And government borrowing through the issuing of debt came to be a replacement, under Reagan, for tax revenue.
And this is a very important difference. It’s the difference between finding a government that is able to redistribute wealth downward, to a government which must choose between default and funnelling wealth upward.
Good point. This distribution is what really matters (though the central bank can always accumulate Treasuries over time too).
The distributional issue can be imagined more clearly by thinking that one way of dealing with future interest payments to this group of bond holder via taxation would be to create a new tax on Treasury bondholders only to pay the interest on Treasury bonds ;-)
I’ll interpret the winky face as an implicit acknowledgement that this would be an awfully long way to go for a shortcut :)
Obviously a tax on wealthy bond owners is roughly as politically infeasible as simply going back to high marginal tax rates instead of funding the government by issuing debt.
So, what’s the answer to this problem? I wish I knew.
I think we agree mostly because we seem to both actually care about details.
Yes, we control money not value. Yes. That is the point. But it think the difference might be that i see the cost coming immediately when we print mioney without value via inflation. The cost isn’t passed into the future but starts being incurred right away. E.g. Covid era money printing and the global inflation pulse.
On ageing, the funny thing is that we have feared this problem for a century and deapite all the ageing we’ve had, the welfare system is still working.
Thanks for the detailed comments. Very thoughtful.
On 1. the government can also reduce the interest rate. Which would happen automatically if the burden of debt really did start contracting the economy—the “burden” would self-correct.
But you are right that these are options. The raising taxes and cutting spending option (fiscal contraction) to fund the interest would also be contractionary and hence lead to interest rates. And the monetise debt option has been used to a degree many times too (QE). In fact, doing so was seen as desirable during an economic contraction, not a huge problem.
Your point 2. I totally get that the monetary transfers occur within the economy to people who aren’t productive. That has been the policy choice of the welfare state for decades, and much of it has crowded out the some similar transfers within families and communites too. But I don’t know why these systems wouldn’t persist in the future—if we could afford them in the past when we were poorer, why can’t we also afford them in the future when we will be much richer?
Your point 3. seems to be about the balance of trade and financial accounts, which is of course a risk when foreigners own a lot of your currency and suddenly decide it has little value.
Lastly, there is a magic money tree. Money is just a thing we invented. We can make more any time. But there are consquences to how we use it to spend and organise society.
And I think in general it is false to say that only the debt is inheritated and not the assets by future generations. Because if we can pass off debts to the future now, we can pass off even bigger ones later! It really is about using the tools of money to sustain productively organised society.
Appreciate the thoughtful reply as well - always nice to find people willing to have discussions on this kind of stuff.
1. As far as the government setting rates, there are two issues with that. First, the government sets overnight rates but generally does not control rates further out on the yield curve. If medium and long term rates rise, treasury auctions will be forced to offer higher rates or the bonds will trade below par at auction. Yield curve control (monetizing long term bonds to hold down long time rates) would reduce long term rates, but at the cost of printing money. During COVID, the monetization of debt combined with the use of that debt to give money directly to citizens was a major cause of inflation (though supply chain disruption also mattered). Money is conceptual and we control it, value is not. When we print more money, we do not create or destroy value, we just reallocate it. If, in the future, we need to print money to deal with the debt, that will cause inflation.
2. The reason that transfers to the elderly cannot survive (at least at their current size relative to the economy) is because there will be fewer and fewer workers to support a growing number of elderly people. We could afford these transfers when were poorer because population was exploding. This becomes less true as the population ages and we can already see the impacts of this in places like Italy and Japan.
3. On the every debt as an asset piece - I forgot to mention that when foreigners own a bond issued by our government, we pass down debt to American young people and assets to foreign young people. Maybe we end up defaulting and refusing to pay foreign debtors (this is historically not uncommon), but that would have a profoundly negative impact on our long term ability to govern.
Eventually, the government has to live within its means, just like every other entity. Whether or not it is technically true to say that future generations "inherit" the debt does not really matter. What is certainly true is that deficit dollars expended inefficiently today eventually drag on growth and prosperity tomorrow.
You haven't lived in the Global South, obviously. Cost of debt is inflationary, especially when graft & corruption (& in the Global North, rorts) is involved. I hope Australia doesn't learn the hard way.
I really enjoyed reading this and thinking about debt in this way. However, if our objective is to change thinking we need something much simpler than this. This explanation or argument is far too complex. We need to find simple analogies that people can use to relate their real-world experience to arguments about austerity, in a way that feels like common sense not a priori or logical reasoning.
I'm a hypocrite because I haven't developed a simpler story myself, but how about this possibility: I bought my house 15 years ago and the principal repayments were about 15% of my net income. (With interest it was like 40%) Before then my rent was about 20% of my income. Today the principal repayments are about 5% of my income. (With interest it's like 10%) This is what ACTUALLY happens. There is no way you could argue that I stole from my future self by taking on debt. Absolutely none. And the way it works with public debt and investment is way more profound an effect than this. I think as economists/academics we can get caught up in logic - logic is the way we should think but it isn't the way we should communicate.
And I forgot to mention that if I was still renting - my rent would be about 15% of my income still. Boy I used a lot of numbers for someone who said don't use numbers! :-)
Your starting assumption, that “[e]very debt liability is another’s loan asset”, is an accounting statement which contains a surprising truth when you analyze it carefully.
I need to describe the transaction preceding your statement so we can consider the financial positions of the two parties involved, i.e., the creditor (C) and the debtor (D), as their two balance sheets involve two sets of asset and liability accounts, one pair for each of them (i.e., 4 accounts in total).
In your article, you say that D has incurred a debt to C, so I’ll consider one example you cite where the new liability is a “bank mortgage”. In effect, that means the bank customer’s IOU was handed to the bank and received by it as a new bank asset.
What happens in the bank’s accounts?
Obviously, D’s IOU is recorded as a debit-item in the one of the bank’s asset accounts (in particular, the “loan account” opened in the name of the customer, D), increasing the bank’s total assets, represented as a debit-balance. That debit-item should be matched by a corresponding credit-item in a different account. Here there are two possibilities which you have not analyzed.
One possibility (a) is that the matching credit-item is posted to the bank’s CASH asset account, representing the withdrawal of the loan amount in CASH which was handed over as a loan to the customer.
The only other possibility (b) is that the matching credit-item is posted to a bank liability account, representing the fact that the bank still owes the customer the amount of the loan, the implication being that “payment” requires an asset transfer (i.e., CASH).
What happens in the customer’s accounts?
The amount of her IOU is obviously recorded as a credit-item in one of her liability accounts where it represents the increase in her total liabilities (shown as a credit-balance). That credit-item should be matched by a corresponding debit-item, representing what D received from the bank (C).
But where D posts that debit-item depends entirely on which of the two possibilities, (a) and (b) above, occurred at the bank.
If the bank paid out the loan amount in CASH, as in (a), the customer would post the debit-item to her own CASH asset account (where it will increase her debit-balance). But this never happens in practice.
What always happens in practice is (b). The bank records the fact that it still owes the customer the loan amount as a liability and does NOT pay out CASH. This fact is represented by a credit-item in one of the bank’s liability accounts (where it will increase the credit-balance). That account would also be one which must have been opened in the name of customer D.
This credit-balance is INDEED, the asset of customer D! So, she must post that matching debit-item to her “deposits at bank” asset account, recording that credit-balance in the bank’s liability account as her new asset. So, your starting assumption is correct: The customer’s asset is represented as the credit-item in the bank’s liability account.
But this proves the very strange FACT that the bank did not payout the loan! The FACT that it is still obliged to do so is represented by that credit-balance in its liability account.
Here begins the deception: When the bank C does not show D this bank-liability account, she remains unaware of this accounting deception and happily purchases whatever it was she intended to buy with the new “loan of credit”. She thus transfers “her credit” to another Unsuspecting person (U) who accepts her cheque. U deposits D’s cheque and “her credit” is transferred to U’s account at a different bank (Z).
Both banks, C and Z, know this game well and the originating bank (C) now happily owes U’s bank (Z) the amount of that “credit” until U demands a payout in CASH. The originating bank (C) can thus avoid paying out its debt-obligation indefinitely, as long as people (like U) accept cheque transfers of such “credit liabilities” of banks as an alternative to CASH.
Now do you see where criminal fraud comes into bank “lending”?
The bank C claims it is “lending” its customer D the credit-balance in an account which it opened in her name, when the same credit-balance is already her asset. Lawyers call this behaviour “conversion”, a nice legal term which means “theft”.
My accountant once summarized this argument for me in very simple terms as follows: “Nobody can lend a liability!”
This ignores several important components:
1. If the federal debt grows faster than GDP - which it is now - this causes interest rates on government debt to rise steadily. To fund these interest rates, the government either has to a). raise taxes, b). cut spending, or c). monetize the debt via some form of money printing. There is no fourth option. This means that deficit spending to fund entitlement spending guarantees that future generations will either receive less, get taxed more, or suffer higher rates of inflation that erode savings.
2. The amount of money in circulation is unrelated to the total value of goods and services in the economy. When the government spends more than it takes in to fund entitlement spending, it allocates more scarce resources to those receiving benefits at the cost of those who do not. Whether or not future generations "inherit the debt" is irrelevant to the fact that we currently allocate nearly half of the federal budget to citizens who will not produce any economic value until the day that they die. That is a generational transfer given that demographics dictates that those benefits will not be available for younger generations.
3. Much of the spending on older generations is non-productive or flows out of the US economy. Purchases of imports, international travel, care provided by immigrants who send money out via foreign remittances, and medical care for seniors with incurable, terminal illnesses all results in no long term benefit or return. Whether we should allow these things or not is a policy choice; whether they have long term benefits for the American people is simply not in dispute.
The whole idea that there is a magic money glitch where you can simply borrow as much as you want for as long as you want without consequences is an absurd farce. If something doesn't pass the common sense test, it simply will not work regardless of how many complicated accounting schemes attempt to show otherwise.
I tried to make some similar points to Cam here. They're pro MMT, but then point out that, properly considered, they don't usher in Nirvana but take us back to the perennial problems of economics
https://clubtroppo.com.au/2014/09/27/paul-krugman-the-academic-martin-wolf-the-economic-journalist-bottom-line-read-wolfs-great-new-book/index.html
@Cameron Murray and @Cam Springer, first of all, thank you both for a very helpful discussion of this point.
I have one consideration to add, and I’d be very interested to know whether I’m missing something important.
To me, one of the most significant aspects about this debate is the fact that ownership of Treasury instruments is concentrated among the wealthiest households. Not to the same extent as stock ownership, but I think a reasonable estimate is that half of domestically owned Treasury instruments are owned by the wealthiest 1%.
So it isn’t really the case that the Treasury has a liability and “We” (the people) have an asset.
This puts interest payments in a different light. They are, in large part, transfers from the entire body of tax-paying Americans to the wealthy.
And government borrowing through the issuing of debt came to be a replacement, under Reagan, for tax revenue.
And this is a very important difference. It’s the difference between finding a government that is able to redistribute wealth downward, to a government which must choose between default and funnelling wealth upward.
Good point. This distribution is what really matters (though the central bank can always accumulate Treasuries over time too).
The distributional issue can be imagined more clearly by thinking that one way of dealing with future interest payments to this group of bond holder via taxation would be to create a new tax on Treasury bondholders only to pay the interest on Treasury bonds ;-)
I’ll interpret the winky face as an implicit acknowledgement that this would be an awfully long way to go for a shortcut :)
Obviously a tax on wealthy bond owners is roughly as politically infeasible as simply going back to high marginal tax rates instead of funding the government by issuing debt.
So, what’s the answer to this problem? I wish I knew.
Likewise. I wish I knew.
I think we agree mostly because we seem to both actually care about details.
Yes, we control money not value. Yes. That is the point. But it think the difference might be that i see the cost coming immediately when we print mioney without value via inflation. The cost isn’t passed into the future but starts being incurred right away. E.g. Covid era money printing and the global inflation pulse.
On ageing, the funny thing is that we have feared this problem for a century and deapite all the ageing we’ve had, the welfare system is still working.
https://www.fresheconomicthinking.com/p/fear-of-an-ageing-population-is-age?utm_source=publication-search
Partly this is because the ages people work are not fixed. As we live longer we start work later in life and finish work later in life.
https://www.fresheconomicthinking.com/p/ageing-stretches-out-our-lives?utm_source=publication-search
Thanks for the detailed comments. Very thoughtful.
On 1. the government can also reduce the interest rate. Which would happen automatically if the burden of debt really did start contracting the economy—the “burden” would self-correct.
But you are right that these are options. The raising taxes and cutting spending option (fiscal contraction) to fund the interest would also be contractionary and hence lead to interest rates. And the monetise debt option has been used to a degree many times too (QE). In fact, doing so was seen as desirable during an economic contraction, not a huge problem.
Your point 2. I totally get that the monetary transfers occur within the economy to people who aren’t productive. That has been the policy choice of the welfare state for decades, and much of it has crowded out the some similar transfers within families and communites too. But I don’t know why these systems wouldn’t persist in the future—if we could afford them in the past when we were poorer, why can’t we also afford them in the future when we will be much richer?
Your point 3. seems to be about the balance of trade and financial accounts, which is of course a risk when foreigners own a lot of your currency and suddenly decide it has little value.
Lastly, there is a magic money tree. Money is just a thing we invented. We can make more any time. But there are consquences to how we use it to spend and organise society.
And I think in general it is false to say that only the debt is inheritated and not the assets by future generations. Because if we can pass off debts to the future now, we can pass off even bigger ones later! It really is about using the tools of money to sustain productively organised society.
Appreciate the thoughtful reply as well - always nice to find people willing to have discussions on this kind of stuff.
1. As far as the government setting rates, there are two issues with that. First, the government sets overnight rates but generally does not control rates further out on the yield curve. If medium and long term rates rise, treasury auctions will be forced to offer higher rates or the bonds will trade below par at auction. Yield curve control (monetizing long term bonds to hold down long time rates) would reduce long term rates, but at the cost of printing money. During COVID, the monetization of debt combined with the use of that debt to give money directly to citizens was a major cause of inflation (though supply chain disruption also mattered). Money is conceptual and we control it, value is not. When we print more money, we do not create or destroy value, we just reallocate it. If, in the future, we need to print money to deal with the debt, that will cause inflation.
2. The reason that transfers to the elderly cannot survive (at least at their current size relative to the economy) is because there will be fewer and fewer workers to support a growing number of elderly people. We could afford these transfers when were poorer because population was exploding. This becomes less true as the population ages and we can already see the impacts of this in places like Italy and Japan.
3. On the every debt as an asset piece - I forgot to mention that when foreigners own a bond issued by our government, we pass down debt to American young people and assets to foreign young people. Maybe we end up defaulting and refusing to pay foreign debtors (this is historically not uncommon), but that would have a profoundly negative impact on our long term ability to govern.
Eventually, the government has to live within its means, just like every other entity. Whether or not it is technically true to say that future generations "inherit" the debt does not really matter. What is certainly true is that deficit dollars expended inefficiently today eventually drag on growth and prosperity tomorrow.
You haven't lived in the Global South, obviously. Cost of debt is inflationary, especially when graft & corruption (& in the Global North, rorts) is involved. I hope Australia doesn't learn the hard way.
It entirely depends on the ownership composition of a nation’s debt stack
Okay fair enough, but what about interest?
I agree that debt (especially public debt) is not our grandchildren problem. If it can be anyone's problem it will be our problem.
But I disagree with the other statement:
Every debt is also an asset—we inherit both sides of the ledger
Large portion of debt can be spent on consumer goods not buying assets. That's what governments usually do
I really enjoyed reading this and thinking about debt in this way. However, if our objective is to change thinking we need something much simpler than this. This explanation or argument is far too complex. We need to find simple analogies that people can use to relate their real-world experience to arguments about austerity, in a way that feels like common sense not a priori or logical reasoning.
I'm a hypocrite because I haven't developed a simpler story myself, but how about this possibility: I bought my house 15 years ago and the principal repayments were about 15% of my net income. (With interest it was like 40%) Before then my rent was about 20% of my income. Today the principal repayments are about 5% of my income. (With interest it's like 10%) This is what ACTUALLY happens. There is no way you could argue that I stole from my future self by taking on debt. Absolutely none. And the way it works with public debt and investment is way more profound an effect than this. I think as economists/academics we can get caught up in logic - logic is the way we should think but it isn't the way we should communicate.
And I forgot to mention that if I was still renting - my rent would be about 15% of my income still. Boy I used a lot of numbers for someone who said don't use numbers! :-)
Your starting assumption, that “[e]very debt liability is another’s loan asset”, is an accounting statement which contains a surprising truth when you analyze it carefully.
I need to describe the transaction preceding your statement so we can consider the financial positions of the two parties involved, i.e., the creditor (C) and the debtor (D), as their two balance sheets involve two sets of asset and liability accounts, one pair for each of them (i.e., 4 accounts in total).
In your article, you say that D has incurred a debt to C, so I’ll consider one example you cite where the new liability is a “bank mortgage”. In effect, that means the bank customer’s IOU was handed to the bank and received by it as a new bank asset.
What happens in the bank’s accounts?
Obviously, D’s IOU is recorded as a debit-item in the one of the bank’s asset accounts (in particular, the “loan account” opened in the name of the customer, D), increasing the bank’s total assets, represented as a debit-balance. That debit-item should be matched by a corresponding credit-item in a different account. Here there are two possibilities which you have not analyzed.
One possibility (a) is that the matching credit-item is posted to the bank’s CASH asset account, representing the withdrawal of the loan amount in CASH which was handed over as a loan to the customer.
The only other possibility (b) is that the matching credit-item is posted to a bank liability account, representing the fact that the bank still owes the customer the amount of the loan, the implication being that “payment” requires an asset transfer (i.e., CASH).
What happens in the customer’s accounts?
The amount of her IOU is obviously recorded as a credit-item in one of her liability accounts where it represents the increase in her total liabilities (shown as a credit-balance). That credit-item should be matched by a corresponding debit-item, representing what D received from the bank (C).
But where D posts that debit-item depends entirely on which of the two possibilities, (a) and (b) above, occurred at the bank.
If the bank paid out the loan amount in CASH, as in (a), the customer would post the debit-item to her own CASH asset account (where it will increase her debit-balance). But this never happens in practice.
What always happens in practice is (b). The bank records the fact that it still owes the customer the loan amount as a liability and does NOT pay out CASH. This fact is represented by a credit-item in one of the bank’s liability accounts (where it will increase the credit-balance). That account would also be one which must have been opened in the name of customer D.
This credit-balance is INDEED, the asset of customer D! So, she must post that matching debit-item to her “deposits at bank” asset account, recording that credit-balance in the bank’s liability account as her new asset. So, your starting assumption is correct: The customer’s asset is represented as the credit-item in the bank’s liability account.
But this proves the very strange FACT that the bank did not payout the loan! The FACT that it is still obliged to do so is represented by that credit-balance in its liability account.
Here begins the deception: When the bank C does not show D this bank-liability account, she remains unaware of this accounting deception and happily purchases whatever it was she intended to buy with the new “loan of credit”. She thus transfers “her credit” to another Unsuspecting person (U) who accepts her cheque. U deposits D’s cheque and “her credit” is transferred to U’s account at a different bank (Z).
Both banks, C and Z, know this game well and the originating bank (C) now happily owes U’s bank (Z) the amount of that “credit” until U demands a payout in CASH. The originating bank (C) can thus avoid paying out its debt-obligation indefinitely, as long as people (like U) accept cheque transfers of such “credit liabilities” of banks as an alternative to CASH.
Now do you see where criminal fraud comes into bank “lending”?
The bank C claims it is “lending” its customer D the credit-balance in an account which it opened in her name, when the same credit-balance is already her asset. Lawyers call this behaviour “conversion”, a nice legal term which means “theft”.
My accountant once summarized this argument for me in very simple terms as follows: “Nobody can lend a liability!”