Why Government Debt is "Bad"

From the perspective of the Just Third Way, the good thing about accumulating massive amounts of material from the past ("Long past?" "No, your past.") is that it becomes glaringly obvious that the local, national, and global economies are sliding swiftly down the skids — and why. This contradicts the modern delusion that the sum total of human knowledge became self-evident only this morning, and anything antedating your 6:30 am wake-up call is either completely wrong, totally outdated, or, like, so totally yesterday, Dude, that it isn't worth considering.

So . . . like, how is this relevant to the title of this posting? Well, Dude, like a lot of policymakers and academics are ridiculing the "Tea Party Types" for being concerned about too much taxation and the huge deficits that result from the misuse of the Federal Reserve by monetizing government debt. After all, His Defunct Majesty Lord Keynes proved beyond the shadow of a doubt that we don't need to worry about deficit financing of government. Debt is good. This is because, in Keynesian theory, you're not actually creating money when you monetize government deficits. Rather, you're just chopping up existing wealth into smaller and smaller bits for easy (re)distribution.

Unfortunately for today's monetary and fiscal policy, Keynes was wrong. Monetizing government deficits isn't simply a case of chopping existing wealth into smaller and smaller pieces until the guppies eat the treasury. It's pledging future taxes collected out of wealth that hasn't yet been produced. The present value of what exists in the economy is not based on what currently exists. That would limit the value of the "general wealth of the economy" to the book value of existing inventories of marketable goods, and the salvage or disposal value of capital goods.

Every accountant knows, however, that the real value of productive capital is not its salvage value, but the present value of what that capital will produce in the future — but that does not yet exist in the form of inventory. This means that the "general wealth of the economy" — what the policymakers and academics appear to believe backs the money supply — consists not only of the present value of existing inventories of marketable goods and services and capital, but of the present value of existing and future marketable goods and services.

Thus, when the government monetizes its deficits, it's not simply cutting up claims on existing wealth into smaller and smaller pieces the better and easier to undermine private property and redistribute wealth. Rather, by issuing currency and creating demand deposits backed by future tax collections, the government is promising to redeem the claims it is issuing in increasing numbers out of wealth that hasn't yet been produced — and becomes less likely to be produced the more the government erodes private property by manipulating money and credit. Hence we have the analysis of Henry C. Adams in the late 19th century, in which he concluded that government deficit spending was a fast track to loss of personal sovereignty on the part of the citizens:

As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account. (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)

But, you say, so what? We don't have any real sovereignty left, anyway. With the growing concentration of ownership of the means of production, and the growing State control of what remains, that isn't far from the whole truth. Still, loss of personal sovereignty is only half the problem. Deficit financing leads directly into loss of national sovereignty as well:

The facts disclosed permit one to understand how deficit financiering, carried so far as to result in an interchange of capital and credit between peoples of varying grades of political advancement, must endanger the autonomy of weaker states unable to meet their debt-payments. Provided only that the interests involved are of sufficient importance to make diplomatic interference worth the while, the claims allowed by international law will certainly be urged against the delinquent states, and the citizens of such states may regard themselves fortunate if they succeed in maintaining their political integrity. (Ibid., 28-29.)

As the American economy becomes increasingly weaker, and as that of China, the single largest holder of American debt paper, continues to experience explosive growth, we are seeing the beginning of the end — unless steps are taken immediately, such as enacting the Capital Homestead Act by 2012. And it can be done. In the early 1870s, France managed to repay an indemnity deliberately designed to destroy its economy forever in less than three years by producing massive amounts of quality goods, facilitated by sound money and extension of credit to business — not government.

It can be done. The time to do it is now.  The alternative is to sit idly by while China increasingly throws its weight around, and North Korea and Russia take advantage of the situation.

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