In The New Philosophy of Public Debt (1943), Dr. Harold G. Moulton, president of the Brookings Institution in Washington, DC, from 1928 to 1952, noted that Dr. Alvin H. Hansen, "the American Keynes" (and just as logical as the prototype) believed that the national debt could go to at least twice GNP with no problem. (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 68.) After all, as long as the debt is "internal debt," i.e., confined within the borders of the United States and not owed to foreigners, it is simply a bookkeeping matter, money we owe ourselves:
"There is little reason to fear that, with the sort of fiscal management we shall have a right to expect, the debt could not safely go well beyond double the national income if necessary. Certainly we have no occasion to think of the debt limit as being like the edge of a precipice from which we must always stay carefully away." (Alvin H. Hansen, Fortune magazine, November 1942, 175, quoted in The New Philosophy of Public Debt, loc. cit.)
Edge of a precipice? Fiscal cliff? Not to worry. The government can just print more money.
Moulton ably demolished this bizarre delusion by pointing out that individual citizens and institutions holding U.S. debt, even if they are within the United States, are not the government. (Ibid., 49-64.) An "internal debt" is not "money we owe ourselves." The government is a discrete "person." It seems obvious to us that if a government (or anyone else) makes promises, it has to keep them. Printing money is making a promise. It is stark, raving insanity to think that any government that doesn't keep its promises to its own citizens is going to last very long.
Be that as it may, however, we want to look at something else. That is, at what point does the private sector's necessarily limited capacity to produce stop supporting the public sector's unlimited capacity to spend?
There's probably some way to develop an algorithm to determine this, but we don't have the math or the time. We think, however, that the trigger for the final meltdown will come at the point at which the present value of the accumulated national debt exceeds the present value of the current and future taxes that can be extracted out of the present value of existing and future marketable goods and services produced or to be produced by the private sector. In other words, the meltdown will likely occur at the point at which the private sector can no longer produce enough to provide the taxes to meet current expenditures, and the government can no longer sell any bonds, even to a captive central bank.
At that point, all that is needed is for the government to fail to keep one promise. It won't be able to print more money, because government money creation is based on the ability of the government to collect taxes in the future to make good on the debts it's running up now. If there's no tax base, the money the government creates backed by the power to collect taxes becomes worthless.
This is because the value of each unit of currency is equal to the value of what backs the currency divided by the number of units of the currency. If the value of the government debt backing the currency falls to zero because the government is unable to collect taxes, the value of the currency is, obviously, zero.
But wait! There's more! — and we'll look at that on Monday . . . if you can stand the suspense. . . .
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