One of the more peculiar ideas to come out of "Modern Monetary Theory" is the belief that public debt is so different from private debt that it should not properly be considered "debt" at all. It should, rather, be considered an asset because it's a debt the nation owes to itself. It's only a question as to which pocket you're carrying the money in, not who owes what to whom. As Moulton explained this rationalization,
"The view that 'a public debt has none of the earmarks of a private debt,' and that 'it should scarcely be called a debt at all' arises from contemplation of the fact that the money collected as taxes flows back to the people as interest receipts." (The New Philosophy of Public Debt, op. cit., 54.)
In other words, the money that the government creates by emitting bills of credit it pays out to citizens in the form of interest payments, adding to their wealth. As Moulton concludes his summary of this position, "The same line of reasoning might be applied to the debt of a state or a city, if such debt were held wholly by the citizens of the particular state or municipality. And, if we consider our states and our cities as a collective whole, all state and local public indebtedness could be looked upon as not really debt at all. Moreover, if we view the corporations of the country collectively, their bonded indebtedness would not really be debt because the income collected from the American people for the services rendered is paid out to the American people as interest. In this way we get rid of all debt problems." (Ibid., 55.)
Really? The size of the debt — or debt itself in any amount — is a problem that solves itself? Keep in mind that Moulton was writing seventy years ago using facts that are readily available to the architects of the current debt disaster. As he continued,
"On second thought, however, it will be reflected that particular railroad companies or industrial corporations, or state or local governments, might find themselves in difficulty because they are unable to make financial ends meet. Likewise, one may reflect that the federal government might, under certain circumstances, find it impossible to collect sufficient revenues to meet its interest and other obligations. National governments have, in fact, frequently found themselves in serious financial difficulties. Thus the mere fact that in all cases the collection of revenues and the payment of interest 'merely shifts money around within the economic system' has not, as historical evidence shows, eliminated the debt problem." (Ibid., 55-56.)
Moulton's analysis continues for several pages showing — in direct, contradictory quotes from the same people — that whether public debt is supposed to be an asset or a liability depends entirely on the audience the politicians are attempting to convince. Those of us who do not have the privilege of being credentialed economists may be baffled by the fact that the experts first say one thing and then another that contradicts what they just said.
That, however, is because (trapped by common sense) we simply don't understand that the basic assumption of Keynesian economics is that the State is all-powerful. Through its power to re-edit the dictionary (as Keynes put it), the State has the ability to change white into black, good into bad, and assets into liabilities and back again, simply by saying so. Natural rights such as liberty (freedom of association/contract) and property are changeable through redefinition at the will of the State. In the end was the Word . . . of the State. So let it be written, so let it be done. As Moulton detailed this magical transformation,
"It was at this stage [in the implementation of the Keynesian New Deal] that the idea of double and multiple budgeting gained popularity — with capital outlays segregated from current expenditures — without too careful a definition of what might properly be included in capital expenditures. It was about this time that emphasis began to be placed upon the 'assets' created by public debts — whether such assets be in the form of tangible properties or intangible services, whether they yield revenues or are simply useful to society. Whatever their character all public outlays are in reality investments. From this point it was an easy step to the proposition that all increases in public expenditures represent income to someone and that all reductions in public expenditures represent loss to someone; and that 'costs and income are just opposite sides of the same shield'." (The New Philosophy of Public Debt, op. cit., 17.)
Thus today we have "investment" in education, new cars, clothes, lunch, or anything else you spend money on, as long as you spend it and expect some benefit from it.
The obvious corollary doesn't seem to occur to people. If the State can change the natural law at will by redefining humanity's natural rights, there is no effective check on State power. Permitting the State to control the economy (and thus people's lives) by controlling money and credit — the means of acquiring and possessing property — allows the State to acquire absolute power. Thus, by the simple expedient of controlling the definition of both the substantial nature and the exercise of rights presumably inherent in the human person, the State becomes supreme in everything. The State becomes to all intents and purposes a god.
This explains the basis for what Moulton called "the new philosophy of public debt," although (as we might expect), it was not something he investigated or discussed. Understanding this, however, we can understand how Keynesians can believe, all evidence to the contrary, that there need be no limits to the public debt. The power of a god is presumably without limit. That being the case, the exercise of that power is also without limit. Since public debt is simply an exercise of divine State power, there is no reason why there should be any limit to the size of the debt, or why it should even be regarded as a problem.
Nevertheless, Keynesian economists are nothing if not flexible. Having asserted that there is no known limit to public debt, they hedge their bets by saying that there might, after all, be limits. As Moulton related,
"Notwithstanding the contention that the public debt is not a real debt and that we can be at ease because there is merely involved a shifting about of money income, Mr. Hansen [Alvin H. Hansen, the "American Keynes"] has come to have some reservations with respect to the ultimate size of the public debt. In a recent article — although he still argues most of the time that the growth of the public debt is of no real significance — he finally reaches the surprising conclusion that 'the debt should cause no anxiety so long as it is kept within safe limits'." (The New Philosophy of Public Debt, op. cit., 65-66.)
The limit? Approximately twice GDP should be perfectly safe — at least according to Hansen. (Ibid.) The riots and demonstrations throughout the world today, however, tend to suggest that the idea that a limit to public debt of twice GDP might be a trifle optimistic.
Obviously something is seriously wrong with "the new philosophy of public debt" if it can bring the world to the brink of economic catastrophe. Nor is the habit of the experts and the politicians — all of whom have a vested interest in maintaining the current system, if only to save face — of denying that there is even a problem of any real help in coming up with a solution. What is needed is something new, something that breaks out of the current Keynesian box and gives us an entirely new approach on which to develop a solution.
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