Relativity Economics

© by Mark Dempsey (4/9/16)

In physics, among other things, relativity means that the observer’s viewpoint makes all the difference. That’s true in economics too. For example, if you have a checking or savings account, from your point of view, it’s your asset. But what is that same account to the bank? Answer: To their accountants, it’s their liability (they owe you the money). Whether the same dollars are an asset or a liability depends entirely on one’s point of view.

This means the national liability (“debt”) is different from what most people assume it is. It’s a liability of the U.S. central bank (“the Fed”) and Treasury. But whose asset is it?

The answer is not exactly intuitive: it’s the dollar financial assets out in the economy. That’s not exotic economics; it’s double-entry bookkeeping.

That means if government reduces the federal “debt,” with either higher taxes or lower spending, it reduces people’s savings. Reduce people’s savings, and they tend to become debt peons who owe any surplus over subsistence to those selling goods on credit. In the post-Civil-war South, they called such creditors Furnishing Men. Short version: “The Man.”

Federal “debt” is citizens’ savings, yet a well-funded propaganda campaign continues to spread panic about it, overlooking that it’s an asset too, or that Federal “debt” is completely unlike household debt. How many households do you know who can print the money they owe?

Economic relativity fools even important people. Congressman Ami Bera recently sponsored a budget workshop presented by the Concord Coalition, an organization whose sole mission is to reduce Federal “debt.” But we’ve just pointed out the obvious here: liabilities or “debts” for the bank are assets for the public.

Why would anyone lobby to reduce people’s assets? Because it leaves the public at the mercy of The Man. In this case, at the mercy of vulture capitalists, who can buy troubled assets on the cheap. Wall Street currently profits from the distressed prices on foreclosed homes they bought as the Great Recession hit in 2007-8. They also picked up distressed assets from the public--Chicago balanced its budget by selling its parking revenue for ten cents on the dollar to the Wall Street firm their mayor (Rahm Emanuel) worked for before he became mayor.

History demonstrates “debt” reduction for government is different from reducing household debt. Major reductions to Federal “debt” have occurred seven times since 1776. The last of these was the Clinton “surplus.” The reduction before that occurred in 1929. Andrew Jackson even paid off the entire “debt” in 1835.

Q: What happens every time after such “debt” paydowns? A: A Great Depression. The worst of these was the panic of 1837. It turns out dollar financial assets are very helpful in producing prosperity; reducing them correlates 100% with massive downturns.

So...let’s all calm down. One person’s debt is another’s asset. Public “debt” is not something fearful; on the contrary, it’s beneficial, unless you want to cool down an overheated economy. Furthermore, it’s owed in dollars, something the Fed literally creates at will. That “debt” needs to be bigger if heating up the economy is what’s needed.