(c) by Mark Dempsey
1. The Conventional Economics Narrative
The conventional story says national debt is a (growing) problem. The bigger it gets, the worse it is for the economy. The cost to pay it off, in higher taxes or lower spending--probably Social Security benefits and Medicare--would crush the economy. To top it off, the interest bill is compounding the problem, finally exceeding military spending.
This narrative is so ingrained in conventional economics that two respected, conventional economists--Reinhart and Rogoff--have even theorized about when such debt becomes too much of a burden for any economy to bear. They normalized the comparison of different currencies and historical periods by comparing economic performance with the ratio of debt to GDP.
Their conclusion? When a nation's debt exceeds 90% of GDP, the economy suffers in its wake. The constantly cited example is Greece, whose debt was roughly 125% of GDP. This led to bond markets demanding higher and higher yields (35!) until the European Central Bank stepped in and backstopped the Greeks' debt. The Greek economy suffered a worse downturn than the Great Depression.
So...is that an accurate story? Short answer: No.
2. Debunking the Conventional Narrative
First, the assumption behind the debt panic in the US is that dollars grow on billionaires. This is obviously untrue; the government makes all the legal dollars any time it needs them. This is called monetary sovereignty, and the US has it. Greece does not.
That's right, Reinhart and Rogoff were comparing apples to oranges, not separating monetary sovereigns (US, UK, Japan) from non-sovereigns (Greece and the rest of the EU). Not only that, the spreadsheet on which they based their conclusions had a mistake in its formulas, pointed out by a graduate student. Their work is so slopping, I wouldn't let them mop my kitchen.
Perhaps the most convincing refutation of their 90% figure, however, is Japan. For decades, Japan has had debt that is roughly 240% of GDP. Conventional economists would say the bond markets would treat this as a sign Japan is a risky borrower, and predict those markets would demand a risk premium to fund BOJ (Bank of Japan) debt. Would the bond vigilantes demand more than 35%?
The truth is that the BOJ debt sold, until recently, for nearly 0% yield. That rate has increased to near 5% in recent months, but it's still nowhere near the Greek experience. The BOJ can issue yen at will, and there is no risk BOJ bonds will become unpayable.
3. What is National Debt, Really?
So, what is national debt, really? It's like bank debt. Your bank account is your asset, but to the bank, it's a liability, a debt the bank owes you. You can ask the bank to reduce its debt because you hate the word "debt," but they would just make your account smaller. Not exactly sensible.
National debt is the mirror image of the private sector's surplus. That's not exotic economics, it's double-entry bookkeeping.
The conventional economic narrative obscures two other significant facts. First: monetary sovereigns do not need to borrow the money they make literally without limit. This means no interest payments are necessary. Such payments are "welfare for rich people" says one heterodox economist (Warren Mosler).
4. Inflation Limits Debt Issuance, but only in theory
An entirely theoretical argument says that the central bank issuing too much currency is what causes inflation. Its most eloquent advocate was Milton Friedman ("Inflation is always and everywhere a monetary phenomenon").
But a study of 56 historical hyperinflations published by the libertarian, right-wing Cato Institute demonstrates that those were initiated by central banks run amok, printing too much money, exactly zero times. That's zero!
This is the final conventional objection to the unconventional narrative that sovereign currency issuers can pay any debt, no matter how large. Why that would cause [hyper] inflation! Except the historical hyperinflations always begin with a shortage of goods, not a surplus of currency. This is true of Zimbabwe (food) and Weimar Germany (manufactures). Even the US inflation of the '70s began when OPEC restricted its shipments of that critical commodity, oil.