Thursday, October 6, 2016

Misunderstanding Debt


Almost exactly a month ago, on September 8, there were some comments in the Washington Post from Francis X. Cavanaugh, author of The Truth About the National Debt: Five Myths and One Reality (1996), in which he argues that a $5 trillion national debt is not really cause for concern, but perhaps there should be some reining in of spending . . . like before the debt rises to $10 or even $15 trillion!!  (It's just short of $20 trillion when we looked yesterday.)
Tyrannosaurus Debt
Cavanaugh was a bit more optimistic (some might say “delusional”) in his comments in “Misunderstandings of the National Debt” on September 8, 2016 than he was twenty years ago.  His take now is that the more government spends, the richer it is!!  Why?  Because all those government bonds are assets!!!!!  And they offset all the liabilities!!!!!!!!
Let’s get real. Cavanaugh’s comments reveal a profound misunderstanding of Generally Accepted Accounting Principles (GAAP), as well as money, credit, banking, and finance.  Cavanaugh’s basic error is the failure to realize that a government bond may be an asset to the private sector purchaser, but it is a liability to the government.  They are not offsets because they are on different balance sheets.
Party Pooper
Except in socialism, the government owes on bonds an investor owns.  An offset is not the same as a cancellation unless the same entity, public or private, is both the obligor and the obligee.  As Harold Moulton, then president of the Brookings Institution, explained in 1943 when refuting a theory similar to Cavanaugh’s, “The initial error in this proposition is that costs and income are not opposite sides of the same shield.  The costs are costs to the Treasury; the income is income to the public.” (Moulton, The New Philosophy of Public Debt, p. 61.)
Thus, a check I write to myself for $1 million does not make me a millionaire, because I both own and owe $1 million, and it cancels out.  A check I write to you for $1 million makes you a millionaire, and puts me in debt for $1 million.
Simple, no?
#30#

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