Really Bad Ideas: Government Debt Isn’t Actually Debt – John Rubino

August 9, 2017

The failure of fiat currency and fractional reserve banking to
produce a government-managed utopia is generating very few mea culpas,
but lots of rationalizations.

Strangest of all these rationalizations might be the notion that
government debt is not really a liability, but an asset. Where personal
and business loans are bad if taken to excess, government borrowing is
not just good on any scale, but necessary to a healthy economy. Here’s
an excerpt from a particularly assertive version of this argument:

What if every government paid off its national debt?

( – IT might make you feel better but tomorrow if the US
Federal Government, or Australia or the UK repaid the entirety of its
national debt, it would make not one dollar’s difference to your bank
In fact the economy would tank.

“If America repaid all its national debt tomorrow, we very likely
would crash into the mother of all great depressions long before the
debt is ‘paid off’”, says economist, Professor Randall Wray.

There were six times in US history in which budget surpluses were
achieved for long enough to retire a significant amount of debt. Five of
those were followed by depressions, the last of which culminated in the
Great Depression of the 1930s.

The last time America ran a significant budget surplus (about 2.5
years) was under President Clinton. The 2002 recession is a direct
result of Clinton’s 1999 surplus which forced the domestic private
sector into deficit. Consumer spending fell, unemployment rose and a
recession occurred.

The economy crashed first in 2000 and then onwards into the Great Recession that began in 2007.

Economist Ellis Winningham concurs with Professor Wray that the
economy would ‘crash’ long before the outstanding debt would be retired.

“The surplus would then become a deficit again,” he said.

“But reducing or retiring the debt isn’t what caused the economic
downturns. It was the surpluses that caused it. Simply put, you cannot
operate an economy with no money in it.”

So why have we convinced ourselves that government debt is the mother
of all evil? That somehow, if the government is in surplus, our bank
accounts will automatically improve?

In fact, as we shall see, the precise opposite is what would probably happen.

What is debt?

Anyone who has ever been chased by a debt collector has come to
associate the word ‘debt’ as necessarily scary, bad and to be avoided.
If you are a household, this is likely to be true.

But debt has an entirely different meaning for governments.

To whom is the national debt owed? That would be us: the people.

But this truth has been avoided in favour of eliciting a Pavlovian
response based entirely on the principle that a government budget is the
same as that of a household.

“People think that public debt is like a household debt, hence, they
buy into the neoliberal nonsense about the government going ‘bankrupt’
and then it’s financial armageddon and we will all die,” says
Winningham. “It’s total nonsense. The public debt is just a bunch of
savings accounts that pay interest.

“People think it will improve their lives because they believe that
the government’s debt is their debt. In reality, the government’s debt
is the private sector’s asset.”

In truth, there is no such thing as the national debt beyond a rhetorical device used to scare the public into submission.

In the US, the National Debt is the sum-total of all US dollars ever
issued by the Federal Government, from the nation’s founding up until
this very moment, that have never been taxed away by the Federal

The national debt is actually the government’s savings account

“From around the 1790’s until today, 2017, the US government has
issued, after taxes, $18 trillion dollars for everyone in the
non-government sector to use,” says Winningham. “In fact, the national
debt has been around for over 170 years now, so at some point, you’re
going to have to start understanding that it is not an actual problem.

“Further, you need to start understanding that when you accuse Obama,
or Bush, or Trump of adding to the national debt, you’re actually
accusing them of adding US dollars to the US economy. Or, more
precisely, you’re accusing them of adding US dollars to our national

Let’s start with the idea that the 2000 tech stock crash was caused
by the tiny (and in any event fictitious) surpluses run by the Clinton
administration in the 1990s.

What actually happened in that decade was a massive increase in
societal debt via the private sector – encouraged by the Federal
Reserve’s decision to bail out every entity anywhere in the world that
ran into financial problems. Long Term Capital Management, Russia’s
default, Mexico’s peso crisis, and the Asian Contagion were all met with
lower rates, loan guarantees and aggressive money printing.

The result was a torrent of hot money, much of which flowed into US
tech stocks, sending their valuation to stratospheric, completely
unsustainable levels (while filling government coffers with capital
gains tax revenues. The inevitable crash had nothing whatsoever to do
with those temporary surpluses and everything to do with equity
valuations that had exceeded anything seen during even the Roaring 20s.

As the following chart illustrates, US total debt rose from 235% of
GDP in 1995 to 250% in 2000, producing the tech bubble. And then it
really got going as the government responded to the subsequent bust with
even easier money, producing a housing bubble that in its own way was
as historically extreme as the tech bubble. When this burst we got the
Great Recession – which was then countered with massive increases in
government debt worldwide.

Through these booms and busts, the entity doing the actual borrowing
didn’t matter. What did matter was the amount of new debt being created.
The government could be the main borrower as it was post-2008 or it
could use lower interest rates and loan guarantees to encourage the
private sector to borrow as in the 1990s. Either way the result was a
destabilizing credit bubble.

As for the assertion that governments paying off debt lead to
depression, a quick stroll through US financial history paints a
different picture, with long periods of more-or-less balanced budgets
during which debt/GDP fell steadily.

Especially interesting is the half century between the Civil War and
WW I, in which government debt plunged in relation to GDP – to pretty
close to zero — but the global economy grew steadily with minimal
inflation. This was the age of the Classical Gold Standard in which the
supply of money – and by implication the borrowing power of governments –
was limited by the dominance of sound as opposed to make-believe fiat
money. It was ended not by a financial crisis related to government
budgets but by war and ideology — and could probably have been avoided
by a few personnel changes atop several European countries.

So here’s an alternative explanation for the relationship between
government debt and financial crisis: Excessive debt in any sector –
government, corporate, household, whatever – produces asset bubbles that
inevitably burst, yielding recessions, depressions, and – in response –
massive increases in new government borrowing. Avoid debt binges and
you avoid asset bubbles and speculative manias. Avoid manias and the
government has little need for crisis borrowing.

Instead of lurching to another level of New Age financial
experimentation when the current bubble bursts, a historically-literate
society would go return to the classical gold standard and perhaps even
ban government debt entirely.

But of course if we were historically literate we wouldn’t be in the
current fix. So expect the “government debt not only doesn’t matter,
it’s actually a form of wealth!” argument to win out during the next
crisis, ushering in the final, fiery act of the fiat currency

The previous articles in this series are here and here.

John Rubino runs the popular financial website He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

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