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.)
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| 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.
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| 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#