[Soixante-Retard]

From The Freeman Online

Debt Can’t Burden Future Generations? It just ain’t so!

Paul Krugman and other advocates of government spending have recently claimed that the layperson’s approach to government debt is all wrong. (I summarize the debate here.) Contrary to the moralizers, Krugman and his allies claim government debt per se can’t burden future generations as a whole. Our descendants will “owe it to themselves,” at least if we disregard Treasury bonds held by foreigners. Any taxes raised to service the debt would simply flow into the pockets of Americans in their capacity as bondholders. Krugman argued that the “national debt” was not just a liability, but also an asset.

One major problem with this viewpoint is that it ignores a government deficit’s tendency to divert resources out of private investment and into consumption chosen by the political process. Deficits therefore cause future generations to inherit fewer tractors, tools, and other equipment, reducing their ability to produce and making them poorer.

Besides the effect on physical investment in capital goods, James Buchanan showed that there is a completely independent route through which government budget deficits today can impoverish future generations. Once we realize “the nation” is composed of different individuals who enter the scene at various points, live for varying lengths of time, and then die, to say “we owe the debt to ourselves” is a complete non sequitur. To repeat, Buchanan put his finger on an effect that operated above and beyond the fact that government deficit spending today would tend to lower private investment. Even if we imagined that all government deficit spending today were paid for through a reduction in private consumption—so that we bequeathed the same stockpile of capital goods to our heirs—it would still be possible for our descendants (taken as a whole) to be made poorer by the policy.

To understand how this works, imagine the government in the year 2012 is going to spend $100 billion throwing a gigantic party. Other things equal, the people alive in 2012 would love this massive bout of consumption. However, if the government were to levy a tax on the people in 2012 to pay for it, they would revolt.

Now instead, suppose the government issues an official piece of paper that declares: “In 2112 the U.S. government will count up how many taxpayers are in the country. It will then assess each of these x taxpayers a head tax of $10 trillion/x. The $10 trillion in tax revenues thereby collected will then be handed over to whoever owns this piece of paper at that time.”

After making everyone aware of the official piece of paper, the government in 2012 could then auction it off to the highest bidder. Assuming investors trusted the promise and used a long-term nominal interest rate of about 4.7 percent, the government in 2012 could raise $100 billion—the present discounted value of the $10 trillion cash payment that wouldn’t occur for another century—and thus pay for the party.

In this scenario the layperson is right to say that the present generation threw their party and made the poor saps in 2112 pay for it. The taxpayers collectively in 2112 are going to hand over $10 trillion to some of their own members—they can’t wire the funds back through the decades. However, this observation doesn’t render the whole enterprise a wash.

The reason is that the people in 2112 who are getting paid the $10 trillion aren’t getting it for free. On the contrary, they would have earlier paid the present discounted value of the bond in order to acquire it. So when we do the accounting correctly, we see that the taxpayers in 2112 are clearly hurt (because of the gigantic tax bill), but that their loss doesn’t translate into an equal gain for the bondholders. That’s why their generation as a whole is poorer because of the wild party the people in 2012 threw.

Losing Proposition

This critical point is worth spelling out. Consider an individual who participates in receiving the tax receipts in the year 2112. Perhaps this person paid $955 the year before (in 2111) in order to have a claim to $1,000 (that is, one ten-billionth of the face value) of the gigantic bond when it matured. The full $1,000 he received in 2112 would not constitute a net gain to the person, since most of it would just be the principal he had given up the year before. The actual benefit to this person from the whole operation would be to receive a higher interest rate (given the risk of default) than he would have earned had he lent his $955 in the private sector. So this person could reckon that the tax-and-distribute operation in 2112 was worth (say) $5 to him.

It is against this $5 (give or take) benefit to the bondholder that the full $1,000 in tax collection must be contrasted. In other words, the individual taxpayer (responsible for one ten-billionth of the gigantic bond) is out $1,000, while the bondholder to whom that money is transferred only gains about $5. Now if we focus on some different bondholder, who perhaps got into the game earlier (say in the year 2085), then his gain would be higher than $5 because he earned above-market interest rates for a longer period. Even so, the only way the $1,000 loss to a taxpayer would be exactly counterbalanced by a full $1,000 gain to a bondholder is if the bondholder initially got the bond for free. This could happen for children who inherit their claims from their parents, but that’s about it. Anybody else who had to put up his or her own money to get a piece of the big bond would not have had gains equal to the losses of the taxpayers. Thus the group “people alive in 2112” is collectively made poorer by the scheme.

Now consider the original generation who threw the party. Yes, there were investors in 2012 who had to reduce their potential consumption by $100 billion when they bought that piece of paper from the government. But as those investors grew old, they could have sold the paper (a financial asset) to younger investors and used the funds to finance their retirement. Thus the investors in 2012 didn’t actually lose out from the deal, which was voluntary for them, when we consider their lifetime income.

To sum up: Many people alive in 2012 gained and nobody lost, while the people alive in 2112 had losses that outweighed the total gain. This is true even though the people in 2112 “owed the $10 trillion to themselves.”

If an imperialist government paid for popular spending programs by levying a tax not on its own citizens but on a conquered land, the scheme would of course be a gigantic theft working across space and through the currency markets. Deficit finance is similar, working across time and through the bond markets. It allows today’s citizens to pay for government goodies by levying a tax on unborn generations who have no say in the political decision.

In short, there's no such thing as a free lunch. There is always a cost.

If you're interested in more of this, there is a podcast explaining the burden of public debt here.

[Ash Faulkner]

I agree. But deficit spending (spending more than revenue) need not entail debt. Consider this quote from Thomas Edison:

That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.

Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost.

But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 per cent, whereas the currency pays nobody but those who directly contribute...

It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.

[Soixante-Retard]

I agree. But deficit spending (spending more than revenue) need not entail debt.

That'd be true for monetized debt for the reasons that you quoted from Thomas Edison. Yes? My point of the original post was that deficit financing diverts resources from the marketplace to government - and future generations would have less resources than otherwise (had there not been a diversion). Party now - pay later. Then we get back to the old question: which sector makes better use of resources (efficiency), government or the marketplace?

[Ash Faulkner]

Well that is debatable. It depends to what ends the money would otherwise be spent. If there are idle resources, for cyclical or even structural reasons, it is more efficient for the government to use them than for nobody to use them. Broadly though I agree that the government is less efficient than the private sector. But this is absolutely not the argument that is usually made against government debt. The argument is that it is unjust to burden future generations with debt payments, not that a) such debt shifts use of resources to the public sector which is b) generally less efficient at using them than private actors.

[Soixante-Retard]

If there are idle resources, for cyclical or even structural reasons, it is more efficient for the government to use them than for nobody to use them.

I'm not entirely convinced that ought to follow. If there are idle resources it does not necessitate that if government used them it would be better - they maybe idle for very sound reasons, perhaps the demand for them in the market has slowed recently because everyone has been satiated. So I think "it is more efficient for the government to use them than for nobody to use them", is a non sequitur.

Broadly though I agree that the government is less efficient than the private sector. But this is absolutely not the argument that is usually made against government debt. The argument is that it is unjust to burden future generations with debt payments, not that a) such debt shifts use of resources to the public sector which is b) generally less efficient at using them than private actors.

Yes I agree that is not the usual argument put forward against government debt, but I was invoking all three:

a)such debt shifts use of resources to the public sector which is b) generally less efficient at using them than private actors and c)that it is unjust to burden future generations with debt payments.

Again, the debt may not be monetized debt but resources are consumed such that later generations have less. So we, the current generation, are the debtors and the future generation are the creditors insofar as resources go. Our gluttony means future generations have less. But, that is not to say it is completely less, the pie can grow so to speak (greater efficiency in the use of resources) but they would have more resources at hand in the absence of our gluttony.

[Paradigm]

This article is based on a fundamental misunderstanding of government debt. When we talk about government "borrowing," what's really going on is that they're auctioning off treasury bonds, which are essentially savings accounts at the Fed. The interest on the bonds is payed out through a few keystrokes, just as regular spending is. Treasury bonds are the means by which the Fed reaches its interest rate target. Banks buy bonds at the chosen interest rate with their excess reserves. This raises the overnight interest rate, and leads to a corresponding rise on interest the banks can charge for loans. Thus, the extra money the government spends into the economy through treasury bonds is soaked up by the interest paid by borrowers. It's always circular. There can be too high a deficit, but this has nothing to do with leaving a debt for future generations. The deficit is always a current matter of price stability. It is operationally independent of taxes, so it is not a matter of taxpayers paying off the deficit. Taxes simply serve to regulate the value of the currency. Future generations will not be sending goods and services back in time, so their burden will always be based on what conditions are like on the ground, not on what we spend today. Future generations shackled by our spending? It just ain't so!

[Ash Faulkner]

This article is based on a fundamental misunderstanding of government debt. When we talk about government "borrowing," what's really going on is that they're auctioning off treasury bonds, which are essentially savings accounts at the Fed. The interest on the bonds is payed out through a few keystrokes, just as regular spending is. Treasury bonds are the means by which the Fed reaches its interest rate target. Banks buy bonds at the chosen interest rate with their excess reserves. This raises the overnight interest rate, and leads to a corresponding rise on interest the banks can charge for loans. Thus, the extra money the government spends into the economy through treasury bonds is soaked up by the interest paid by borrowers. It's always circular. There can be too high a deficit, but this has nothing to do with leaving a debt for future generations. The deficit is always a current matter of price stability. It is operationally independent of taxes, so it is not a matter of taxpayers paying off the deficit. Taxes simply serve to regulate the value of the currency. Future generations will not be sending goods and services back in time, so their burden will always be based on what conditions are like on the ground, not on what we spend today. Future generations shackled by our spending? It just ain't so!

Absolutely. But would you agree that this understanding makes long-term bonds essentially redundant, and just a form of
welfare for the rich? Clearly short term bonds would be necessary if the central bank wants to maintain its interest rate targets, but what's the value of bonds longer than, say, a year?

Ps. You might want to take a look at this thread where I got caught up in an MMT argument a few days ago.

[Paradigm]

Absolutely. But would you agree that this understanding makes long-term bonds essentially redundant, and just a form of
welfare for the rich?

Certainly. They serve to keep interest rates artificially high, and thus provide a source of surplus value to capitalists. This serves as a strategy for delaying the inevitable collapse of capitalism.

Ps. You might want to take a look at this thread where I got caught up in an MMT argument a few days ago.

Cool. I'll check it out later.

[Rich]

It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency.

Indeed its a scandal of the first order, but one few people seem to really care about as a priority. Vast amounts of money are created so that the thieving banks can make money charging interest on money that doesn't belong to them. The trouble is that it seems that the majority of the people who have noticed and who object to this unbelievable outrage, believe 9/11 was an inside job and a significant proportion seem to believe that the world is run by shape shifting reptiles. Another significant proportion of those who object to bank theft are Libertarians who believe that Hitler's armies could have been stopped by charity financed volunteer militias and that nuclear power should be regulated by the free market and private tort law.

[Nunt]

Future generations will not be sending goods and services back in time, so their burden will always be based on what conditions are like on the ground, not on what we spend today.

Government debt will be a burden for future generations of taxpayers. If the government issues bonds today, it has to repay these bonds tomorrow. Issueing debts today, increases current government spending. But since the government has to repay these debts in the future, this creates an additional tax burden in the future.

Your statement is true if we by future generations consider the whole of human kind. Then there is no general increase in debt burden, as one person pays debt to another, the net effect of both persons combined is 0. However, if we take a more relevant group (ie the taxpayer), then it is obvious that they are burdened in the future by current government spending.

[Soixante-Retard]

This article is based on a fundamental misunderstanding of government debt. When we talk about government "borrowing," what's really going on is that they're auctioning off treasury bonds, which are essentially savings accounts at the Fed. The interest on the bonds is payed out through a few keystrokes, just as regular spending is. Treasury bonds are the means by which the Fed reaches its interest rate target. Banks buy bonds at the chosen interest rate with their excess reserves. This raises the overnight interest rate, and leads to a corresponding rise on interest the banks can charge for loans. Thus, the extra money the government spends into the economy through treasury bonds is soaked up by the interest paid by borrowers. It's always circular. There can be too high a deficit, but this has nothing to do with leaving a debt for future generations. The deficit is always a current matter of price stability. It is operationally independent of taxes, so it is not a matter of taxpayers paying off the deficit. Taxes simply serve to regulate the value of the currency. Future generations will not be sending goods and services back in time, so their burden will always be based on what conditions are like on the ground, not on what we spend today. Future generations shackled by our spending? It just ain't so!

Paradigm, I suspect you didn't read the article in it's entirety because Robert Murphy was making your exact same point.

...The taxpayers collectively in 2112 are going to hand over $10 trillion to some of their own members—they can’t wire the funds back through the decades. However, this observation doesn’t render the whole enterprise a wash.

...the scheme would of course be a gigantic theft working across space and through the currency markets. Deficit finance is similar, working across time and through the bond markets. It allows today’s citizens to pay for government goodies by levying a tax on unborn generations who have no say in the political decision.

[Baff]

The key here is to "some" of our own members, so if you were a country like Japan where government bonds were all owned by the domestic population, your government would indeed only be in debt to it's own people.
But most countries are not.

And frankly what difference does it make to me who owes me the money?
I am not my government, my government is not me. It's money is not my money. It's resources are not my resources.
I didn't lend them any money, my children did not lend them any money, I and my children will not see any of the money they have borrowed and spent, but both I and my children will be expected to help them pay it off. (At gunpoint if needs be).

With regards to saddling future generations with debt, we just finished paying off our Napoleonic war debt. That was paid off by future generations. Our WW1 and WW2 debts are being paid off the same way. This can and does happen.

The old adage remains true, if it sounds too good to be true, it is.

Printing money lowers the monetary value of resources for that currency.
So if you print money, I will not accept the devalued currency as an equal exchange for the same resources as before and I will readjust my prices to match.
So it doesn't get you anywhere. It's just an attempt to con people.
You can print more money, but you can't add value to your currency by doing this.
Controlling monetary supply may be centrally managable, but controlling the value of goods that money is used to measure, this is the sole decision of the individuals involved in any transaction.

@ Rich, the banks make money on lending money that does not belong to them. Part of the money they make, they pass on to those people who the money does belong to.
They didn't steal the money, people like me gave it to them.
The money isn't created to give to the banks. And the people who created it aren't the same people as those who gave it to the banks.

[Decky]

Another significant proportion of those who object to bank theft are Libertarians who believe that Hitler's armies could have been stopped by charity financed volunteer militias

Nonsense, Libtards just think that the US should have let Hitler get on with it. After all how could anything he did be worse than the government raising and army, that is the worlds worse evil.

[Paradigm]

Government debt will be a burden for future generations of taxpayers. If the government issues bonds today, it has to repay these bonds tomorrow. Issueing debts today, increases current government spending. But since the government has to repay these debts in the future, this creates an additional tax burden in the future.

Wrong. The tax burden is always a matter of taking enough money out of circulation to prevent excessive money from going into circulation. Treasury bonds are not paid off using taxes, because taxes don't contribute money to the federal government. Instead, they are used to destroy money. Treasury bonds are nothing more than savings accounts at the Fed, and they are paid off by doing the equivalent of moving numbers from savings to checking. There is no increased tax burden associated with this. Taxes are always simply a matter of taking the right amount of money out of circulation to prevent inflation, and the proper level of taxation for accomplishing that is independent of however much debt we have.

Paradigm, I suspect you didn't read the article in it's entirety because Robert Murphy was making your exact same point.

No, I read it just fine. It's just that he's wrong.

[Baff]

That doesn't sound correct to me, since not all treasury bonds are issued by governments or area's of government with monetary control.


For example, I think municipal bonds in the US are issued by individual state governments who have no control over the fed.
And in Eurozone countries, the national governments currently have no control over the printing presses either.

I understand that in some countries national governments buy back their bonds by printing money but I doubt all their bonds are repaid this way or even the bulk of them. LMAO in my country they just issue more bonds to cover the repayments I expect. (Although they do indeed print money for buybacks too).
Pass the buck to the next elected government... ad infinitum until the system crashes. As long as the crash is not on their watch, they don't have to worry.

[Paradigm]

That doesn't sound correct to me, since not all treasury bonds are issued by governments or area's of government with monetary control.


For example think municpal bonds in the US are issued by individual states who have no control over the fed.
An in Eurozone countries, the national governments have no control over the printing presses either.

I understand that in some countries national governments buy back their bonds by printing money but I doubt all their bonds are repaid this way or even the bulk of them. LMAo in my country they just issue more bonds to cover the repayments I expect.
Pass the buck to the next elected government... ad infinitum until the system crashes.

My comments are specifically related to the federal government. They are only meant to apply to currency issuers, and not currency users like the EU countries. As for municipal bonds, obviously states have to worry about that, but that doesn't seem to be the issue at hand here.

[Baff]

Why not?

It still has to be repaid.
California has debts. If it doesn't repay them in this generation it will fall to the next generation to do so.
I don't think there is some magic cop out where debts don't have to be repaid at all.
It's one of those sounds to good to be true things.

Why would anyone lend money if this was the case?
I can see why people would want to fiddle the monetary system so that they didn't have to repay anything, but why would anyone lend?

I lend you money valued at X amount of goods, and you use goods of that value and then repay me money of a lowered value in goods?
This is a nonsense.

Firstly you would have to repay me money of zero value in goods for your own maths to make sense, and secondly I have no intrest in lending you any money for a lowered return anyway.
You might be able to print your way out of the odd debt or two, but if you start doing it for all of them, no one will lend to you and ultimately your currency will become valueless as money is a promissary note. It's value is measured against the goods you can trade them for, not the number on the piece of paper.

[Paradigm]

California pretty much fucked itself with Prop 13, and ever since then, they've been trying to push the tax burden onto "undesirables" like smokers. So if anything, I take that as an object lesson about how not to set up your tax system. As for the rest, I'm not talking about refusing to repay debts. I'm talking about the fact that for the federal government, repaying debts is simply a matter of shifting numbers from one column to another. Taxation does not pay for the federal government's debts. It merely regulates the value of the currency.

[Baff]

It isn't simply a question of shifting numbers fom one column to another.
I require goods back in exchange.

Shift all the numbers you like, but if I don't get any goods back, I'll never lend to you again.

I regulate the value I place on any currency. Not the Fed.
Ultimately that decision is mine and mine alone. The Fed may attempt to manipulate this to some minor degree, but that is the best it can ever hope to do.

[Nunt]

Wrong. The tax burden is always a matter of taking enough money out of circulation to prevent excessive money from going into circulation. Treasury bonds are not paid off using taxes, because taxes don't contribute money to the federal government. Instead, they are used to destroy money. Treasury bonds are nothing more than savings accounts at the Fed, and they are paid off by doing the equivalent of moving numbers from savings to checking. There is no increased tax burden associated with this. Taxes are always simply a matter of taking the right amount of money out of circulation to prevent inflation, and the proper level of taxation for accomplishing that is independent of however much debt we have.

The assumption you make here is that increased debts are the result of short term monetary policy by the fed. This is of course not true as many institutions and people besides the FED buy debt. China for example is sitting on a mountain of US government debt. This means that the US will have to levy taxes in the future to pay off these debts and interest to the Chinese. So yeah, the US taxpayers is burdened by excess government debt.

Second, taxes and government debts don't decrease the money supply and do not prevent inflation. As the goal of government debts is of course not to take money out of circulation, but to spend money. Thus, taxes take money out of circulation, but immediatly bring it back into circuluation when the government spends the money. And as the US government spends everything and is not creating huge fiscal surplusses, the effect on the money supply is neutral.

The FED can reduce the money supply by selling bonds that it has currently in its possession. But that is totally unrelated to government spending and borrowing.

Im sorry, but there is no free lunch. We can't have the government borrow money to buy everyone a car, shuffle some savings and checkings and nobody needs to pay the price for the cars.