The Australian federal government’s debt level is expected to be more than 34% of GDP by the end of the current financial year, which means it will have more than tripled in 10 years. Cue the politicians decrying the ‘irresponsible spending’ and the crushing burden all that debt represents on future generations who’ll have to pay it back.
MMT explains why that is a myth, and why there is, in fact, no crushing burden.
A government that issues its own currency, like the Australian dollar, can never run out of that currency. Money itself is not scarce, but the resources that back it are limited, and that is the real constraint on government spending.
The federal government sells bonds, which are a form of debt. It’s been (wrongly) drilled into us that a government has to fill the gap between what it promises to spend (its budget) and what it raises in taxes, by selling government bonds to whoever will buy them. In fact, because our government can issue as much currency as it wants, technically, it doesn’t have to borrow a cent. Not one.
To illustrate that point, imagine you have a printing press in your garage, and you can issue dollars that are accepted in your neighbourhood. Come the weekend, you pop next door and ask your neighbour if they can lend you a couple of hundred of your dollars so you can do your weekly shopping. Your neighbour says, ‘sure, I know you’re good for it’ and hands over the cash in return for an IOU from you that says ‘I promise to pay you back plus a bit of interest’, which is precisely what a bond is. There is absolutely nothing stopping you from walking back into your garage, cranking off a couple of hundred dollars and going straight back to your neighbour and paying them back. As farfetched as all that sounds, the analogy to the Australian government is perfectly true.
This was one of the reasons I became so disenchanted with conventional economics, which tells us that if a government keeps borrowing more and more money, at some point the bond market will insist on higher and higher interest rates to offset the risk of that government not being able to afford to pay those bonds back. If that’s true, why is it that Japan can have 240% government debt to GDP and yet its 10-year bond yield struggles to stay above zero? Chart 1 shows that as US debt levels have risen, the interest rate it’s had to pay on its bonds has fallen, the complete opposite of what conventional economics says should happen.
Chart 1: as US debt levels have gone up, its bond yield has fallen
The reason it’s wrong is because conventional, or neoliberal, economics insists on equating a currency issuing government to a household, which overlooks the fundamental and crucial difference: that a household cannot print its own money (despite my analogy above!), it is constrained by what it earns or what it can borrow – borrowings that will have to be paid back.
As for being a burden on future generations, if Japan wanted to eliminate its national debt they could do so tomorrow, by simply printing a one quintillion Yen note. As ludicrous as that may sound, it’s absolutely true. Any buyer of a Japanese government bond knows full well there is only one source of repayment, which is the Japanese government, because there is no other entity on earth that can issue Yen. The same goes for the Australian government, and before you say ‘but no, the Reserve Bank can issue dollars’, who do you think owns the Reserve Bank? It’s simply another arm of government.
To go back to our analogy, if you get run over in your driveway on your way back to your garage, your kids could come out to find the money in your hand, know instantly that you’ve been next door to borrow money for the shopping again, head into the garage themselves and print off a couple of hundred dollars and hand them to your neighbour. Poof, the debt is extinguished and has not burdened your children at all.
Technically, outstanding government debt is simply money the government has issued that it hasn’t taxed back. Typically, governments just issue more bonds to pay back the old ones, and so they accumulate over time. Chart 2 shows the distinct relationship between accumulated debt, i.e. money that’s been issued, and GDP over time in the US.
Chart 2: it’s no coincidence that accumulated debt and GDP are so similar
This is worth keeping in mind when you listen to the reports of the wrangling between US politicians over the government’s debt ceiling. It is entirely political theatre. As former US Federal Reserve Governor, Alan Greenspan, once explained on NBC, investors in US bonds face “zero probability of default”. Why? As Joseph Wang, a former trader on the Fed’s Open Markets desk said, “The US Treasury has a printing press, so it can always meet its obligations.”
For an interesting discussion on an MMT solution to the US debt ceiling, have a listen to this episode of the Bloomberg Odd Lots podcast: This Is How the Trillion-Dollar Coin Could End Debt Ceiling Fights for Good
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