What if every government paid off its national debt?
The following is a heavily edited excerpt of my upcoming book whose title has changed so many different times now, I don’t even know if it’s worth mentioning. Right now I’m thinking: ‘The Big Lie — How The World Really Doesn’t Work’. You can read a longer excerpt by subscribing to Hello Humans on Patreon for as little as $1 a month
IT might make you feel better but tomorrow if the US Federal Government, or Australia or the UK repaid the entirety of its national debt, it would make not one dollar’s difference to your bank account.
In fact the economy would tank.
“If America repaid all its national debt tomorrow, we very likely would crash into the mother of all great depressions long before the debt is ‘paid off’”, says economist, Professor Randall Wray.
There were six times in US history in which budget surpluses were achieved for long enough to retire a significant amount of debt. Five of those were followed by depressions, the last of which culminated in the Great Depression of the 1930s.
The last time America ran a significant budget surplus (about 2.5 years) was under President Clinton. The 2002 recession is a direct result of Clinton’s 1999 surplus which forced the domestic private sector into deficit. Consumer spending fell, unemployment rose and a recession occurred.
The economy crashed first in 2000 and then onwards into the Great Recession that began in 2007.
Economist, Ellis Winningham concurs with Professor Wray that the economy would ‘crash’ long before the outstanding debt would be retired.
“The surplus would then become a deficit again,” he said.
“But reducing or retiring the debt isn’t what caused the economic downturns. It was the surpluses that caused it. Simply put, you cannot operate an economy with no money in it.”
So why have we convinced ourselves that government debt is the mother of all evil? That somehow, if the government is in surplus, our bank accounts will automatically improve?
In fact, as we shall see, the precise opposite is what would probably happen.
What is debt?
Anyone who has ever been chased by a debt collector has come to associate the word ‘debt’ as necessarily scary, bad and to be avoided. If you are a household, this is likely to be true.
But debt has an entirely different meaning for governments.
To whom is the national debt owed? That would be us: the people.
But this truth has been avoided in favour of eliciting a pavlovian response based entirely on the principle that a government budget is the same as that of a household.
“People think that public debt is like a household debt, hence, they buy into the neoliberal nonsense about the government going ‘bankrupt’ and then it’s financial armageddon and we will all die,” says Winningham. “It’s total nonsense. The public debt is just a bunch of savings accounts that pay interest.
“People think it will improve their lives because they believe that the government’s debt is their debt. In reality, the government’s debt is the private sector’s asset.”
In truth, there is no such thing as the national debt beyond a rhetorical device used to scare the public into submission.
In the US, the National Debt is the sum-total of all US dollars ever issued by the Federal Government, from the nation’s founding up until this very moment, that have never been taxed away by the Federal Government.
The national debt is actually the government’s savings account
“From around the 1790’s until today, 2017, the US government has issued, after taxes, $18 trillion dollars for everyone in the non-government sector to use,” says Winningham. “In fact, the national debt has been around for over 170 years now, so at some point, you’re going to have to start understanding that it is not an actual problem.
“Further, you need to start understanding that when you accuse Obama, or Bush, or Trump of adding to the national debt, you’re actually accusing them of adding US dollars to the US economy. Or, more precisely, you’re accusing them of adding US dollars to our national savings.”
Put simply, The National Debt is the country’s total exports minus the country’s total imports, and isn’t an actual debt at all, but a “balance of trade”.
Government debt also includes all those debt securities which governments have issued and which have not yet matured. A security, in this sense, is just an IOU which has a second hand market.
“Some people do not understand what ‘debt’ is, says Professor Wray. “They think that only government’s treasury bonds are debt. They do not recognize the central bank’s debt (in the form of notes and reserves) or the treasury’s currency (coins and notes) are also debt.
“You can have the central bank buy up all treasury bonds (issuing reserves and notes) and then claim ‘the government is now debt free!’ Of course, it is not debt free, it has merely exchanged one kind of debt for another. In effect this is just a massive quantitative easing policy. It has implications for interest rate policy, it automatically results in zero interest rates. I’m not necessarily against such a policy, but no one should be fooled by it.”
Put another way: money. Debt is money. Currency is debt. Cash is debt. The money in your bank account is debt.
“The US dollar itself is ‘government debt’,” says economist Dr Steven Hail. “Paying it back — at least in terms of paying off the gross debt — would mean ending the US dollar. And what would you pay it back with? Paying it back in net terms but not in gross terms would mean everyone else owing to the government whatever the outstanding stock of US dollars happened to be.”
When the government pays down its debt — that is achieving or making step to achieve surplus — millions if not billions of dollars are sucked out of the economy.
That’s less money for you, less money for me and more borrowing for everyone (except the government).
Because as I mentioned before, in order for the government to repay its debts, its population must borrow. And borrow it has.
Around the world, government bids to balance their books are plunging households into ever increasing levels of private debt.
Australian household debt now stands at about 125% of GDP, a record level, higher than any comparable economy, and rising.
US household debt as a share of GDP was about the same as in Australia in 2000, peaked at 98% in 2008, and then fell back to 80% of GDP as the property market crashed. This ratio has stopped falling now.
“There has been an extremely well-coordinated and well-financed misinformation program since the 1970s to convince the public that government is bad and “free” markets are good. The “balanced budget”, “growth through austerity” misinformation campaign is part of that,” says Professor Wray. “The result, of course, is slow growth, high unemployment, and rising inequality and poverty. The funders of the program like it that way.”
A balanced budget reinforces the need for austerity: You know that very thing keeping people in poverty.
More than one way to skin a cat
Conventional thinking says there is only one way for a national government to ‘pay off’ its debt, and that is by running a budget surplus. For every dollar of surplus, one dollar of the outstanding debt can be retired.
Winningham claims there would be no harm to the economy by retiring the debt, so long as it is done the right way…
Correction: A previous edition of this excerpt claimed there was disagreement between Professor Wray and Ellis Winningham as to whether paying off the deficit would crash the economy. The two are in agreement