Tuesday, May 15, 2012

The Global Debt Crisis, VII: Permanent Deficit Financing

If Keynesian economic analysis is correct, the size of the outstanding debt is nothing to worry about. Government debt is an asset. By emitting bills of credit backed by its own "faith and credit," the government increases wealth. For example, when people pay cash money into the Social Security Trust Fund, the Trustees prudently turn right around and purchase government bonds instead of holding on to sterile cash or throwing it away by buying worthless private sector securities with nothing behind them but the present value of existing and future marketable goods and services.

By this reckoning Social Security is fully funded for a decade or so. Even if the Trust Fund runs out of money, the government can bail it out, which it can do by creating more wealth, i.e., issuing more bonds to deposit into the Trust Fund, which can then be redeemed for cash by selling them on the open market to the Federal Reserve.

*      *      *      *

Obviously, there is something wrong with the Keynesian analysis. If government securities backed only by the faith and credit of the issuer are real wealth, every nation on earth would be richer than Croesus. Pick up the newspaper or watch the news, however, and most of the space and time is taken up with the fact that many governments have issued so many securities that there's no way they can conceivably make good on the promises they've made, at least within the current framework.

A large part of the problem is due to bad ideas about money and credit — and debt. Under Keynesian assumptions, all that's happening when a government emits bills of credit instead of borrowing money out of existing savings is that existing wealth (on which the State has a general claim through its ability to tax) is divided into smaller and smaller pieces.

With more money around, however, the price level starts to rise — inflation, or more units of currency "chasing" the same amount of goods and services. Since wages in general are reactive and rise more slowly than the price level, people who subsist on wage income alone are forced to reduce consumption. Only the fact that new jobs are created in aggregate in response to the transfers of purchasing power caused by unilateral government redistribution through inflation keeps up consumption — and then only so long as private companies use their profits to hire more workers, the government subsidizes hiring or hires people directly, or consumers can go into debt to purchase consumption goods and services.

This is because — according to Keynes — the only way to save is to reduce consumption and accumulate cash. This is, in fact, how Keynes defines savings: reductions in consumption. By inflating the currency and raising the price level, consumption is reduced below what it would otherwise be, but those reducing consumption do not receive the benefit of the "savings." Instead, there is a transfer of purchasing power to producers, who benefit at the expense of the wage workers. These "forced savings" are invested in new capital formation, creating jobs. Keynesian monetary theory is designed to benefit the wealthy at the expense of the poor.

The concept of "forced savings" is also the source of the Keynesian belief that there is a necessary tradeoff between inflation and unemployment. The idea is that without inflation you cannot create jobs (at least according to Keynes), but wage workers continually lose purchasing power the more money there is, and thus (presumably) the more jobs there are. If the system works the way Keynes said it does, there are more jobs, but wages become worth progressively less.

To make up for the loss in purchasing power that consumer borrowing doesn't cover, the government prints more money. This in turn allegedly creates more jobs as demand increases. The cycle can go on forever and debt increase without any danger. As Harold Moulton summarized the Keynesian theory in the passage we quoted previously in this series (and again here to save your having to hunt for it),

"The proponents of the philosophy that the only hope for full employment and continuing prosperity lies in permanent deficit financing recognize, of course, that this means a continuous expansion of the public debt. The economic implications of an ever-expanding public debt are, moreover, given consideration. 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 by 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, op. cit., 49-50.)

Ancient science, philosophy and the common sense of primitive people all tell us that a debt is a debt — a promise is a promise — and must be kept. Contracts (another word for promise, as is "covenant") are so sacred that you call upon the gods to witness that you mean what you say, and to ensure that you will keep your word . . . with a cosmic "or else" hanging over you. Oath breakers don't fare well in the mythology of any people.

Some traditions view trickery in getting out of a promise with admiration. The key to getting along is to phrase your promise exactly right so that you leave no loopholes. Even this, however, is a manifestation of the sacredness of the promise itself. Once it is crystal clear what the promise is to all parties, it had better be kept — or else.

This can get irritating to people who put the spirit of the law above the letter, or to those who base the natural law on God's Nature, self-realized in his intellect. "Modern science," however, is equal to the task. As Arthur C. Clarke once claimed, any sufficiently advanced science is indistinguishable from magic. Nowhere is this more true than in the "Modern Monetary Theory" embraced by Keynesian economics. Since "MMT" is "modern science" (or at least claims to be), assertion is sufficient to justify the basic premises. If the basic premises, per ancient science, philosophy or primitive common sense, are shown to be untenable, that's only because you don't understand such controversial or complex matters. You only think it doesn't make sense because you're a primitive savage.

Or not. It might be that the Keynesians and others who claim that others just don't understand might be a little shaky themselves on the basics — especially money and credit, banking, finance, and law.


No comments: