Thursday, May 10, 2012

The Global Debt Crisis, V: What's REALLY Going On?

In the May 4, 2012 "Money and Investing" section of the Wall Street Journal, there was a small article, almost a filler, on the last page, C10. The headline was "Watch Athens, Not Paris, This Weekend." There was a pie chart breaking down the Greek debt situation. Per the chart, private creditors hold 27% of Greece's "sovereign debt," leaving 73% held by "Official Creditors" — raising the side issue as to why private individuals, for whom, presumably, governments exist at all, rate as "unofficial."

Be that as it may, the article missed the true significance of the statistics. The big concern was whether the candidates from the thirty-two political parties contending for seats in the Greek legislature will upset the agreements reached with the IMF to cut spending in return for bailouts, triggering another round of the ongoing debt crisis in the euro-zone. There was not a word in the article about what stands behind the debt.

Debt sold to private creditors is the most immediately dangerous, yet — in theory, anyway — the soundest type of debt for a government to have if it is foolish enough to believe the Keynesian Great Lie. In Keynesian theory, the debt a government owes to private individuals or entities is "real" debt. It must be paid. Private debt cannot be repudiated, written down or rescheduled without bankruptcy. A government that floats debt to the private sector had better have a solid plan for retiring the debt, or it faces financial ruin when the bill comes due. This is because private debt is funded out of existing savings. Borrowing this money and not repaying it is clearly theft on a massive scale.

What about the "official debt"? In Keynesian theory, public debt that is absorbed by a nation's commercial or central banks is not a problem. No, sir. It's a debt we owe to ourselves, and are simply shifting money from one pocket to another — mere booking entries. There's some redistribution that goes on because of the inflation (necessary to shift wealth via forced savings from non-owners to owners to finance new capital investment), but, in the aggregate, it's all on paper, and it zeros out. Quoting Alvin Hansen of Harvard University, "The American Keynes," in Hansen's article in a Fortune magazine article in the November 1942 issue (page 166), Harold Moulton related,

"We are advised that an internal public debt is not a menace and that we should not be 'intimidated' by it. 'On the contrary, instead of looking upon [it] with the sort of awe that was inspired in our savage ancestors by some incomprehensible phenomenon such as lightning, we must take a leaf out of the book of modern science. . . . It is, in fact, so different from what we commonly think of as debt . . . that it should scarcely be called debt at all.' An internal public debt 'has none of the essential earmarks of a private debt'." (The New Philosophy of Public Debt, 1943, 49-50.)

See? There is nothing to worry about. Put off your primitive skins and beads, assume the Emperor's new clothes, and stop worshipping the false gods of fiscal sanity. Keynes — or at least his clone — declared that public debt (tee hee) isn't really debt! Paraphrasing Martin Luther's letter to Philipp Melancthon (August 1, 1521), Keynes does not save governments who are only fictitious spenders. Be a spender and spend boldly, but believe and rejoice in Keynes even more boldly. For Keynes is victorious over unemployment, debt, and the economy. As long as governments are here they have to spend. This life in not the dwelling place of thrift but, as Keynes says, we look for a new heavens and a new earth in which material happiness dwells. . . . Spend boldly — every government is a mighty spender.

Or we can apply a little common sense to the problem. Let's look at the assumptions we raised in the previous posting in this series:

• "Money" consists solely of coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts) — M2.

• Money is a general claim issued by the State against the general wealth of society.

• By emitting bills of credit (creating money by issuing sovereign debt) the government is simply shifting around existing wealth with no change in the aggregate.

• Government debt paper is a debt the nation owes to itself and doesn't have to be repaid.

We'll look at money in the next posting in this series.


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