What is a national debt?

There’s been an awful lot of mainstream media analysis of the Greek debt crisis, with most economic “experts” incessantly arguing for the necessity of austerity and the apocalypse that will befall us all if Greece defaults. Rather than add to this I want to ask some different questions, like why countries such as Greece have a national debt in the first place and whether or not an austerity package is a sensible idea (even in mere financial terms, to say nothing of how it destroys people’s lives).

So here goes: the reason there is national debt is because governments will go to extraordinary lengths not to create their own money. Rather than write its own cheques and spend them into circulation, the government effectively gets banks to write cheques for it, in exchange for “gilts” – basically government issued IOUs. These IOUs must be paid back with interest to traders, who purchase them on the market, using money originating from bank “loans”. The backing for the government’s IOUs is the future earnings of its taxpayers, so one might think the arrangement has a dubious claim to moral legitimacy from the outset – “gilts” are essentially a market in selling the future labour of our children and grand-children to the institutions of finance.

So why can’t the government (or say an independent monetary policy committee) write its own cheques? At this point, the argument that any other system is impossible usually rears its head. After all, as every right-thinking person knows, a government cannot write its own cheques, because this would lead to [insert favourite doom-laden superlative here]-inflation, and the nation / world / universe would be destroyed.

One often hears this argument, but the following fact is always omitted: we already have a system with a tremendous amount of inflation built into it, not because the government creates some money debt-free, but because the banks create much more money via “loans”. Actually, banks do not lend money – a loan would involve the transfer of an existing thing from one person to another – a bank does not transfer already existing money when it “lends” it – rather the bank creates new money: a new bank deposit.

A system where an independent monetary policy committee created, debt-free, the quantity of money deemed appropriate for economic activity, would almost certainly be much less inflationary than the current method of money creation – commercial bank loans for private profit – where the only factor “regulating” the increase of the money supply is how much debt the population can be persuaded (coerced? forced?) to take on by banks.

If the monetary policy committee wished to avoid inflation completely, it could perfectly well destroy some amount of money equivalent to an amount the government collected in taxes. An institution creating the electorate’s money supply would view taxes solely as a means of redirecting the flow of that money, not as a source of income to pay the vast sums of interest due on the government’s debts. So we would probably all pay far less tax. There is also the small matter of whether it is morally justifiable for the financial sector of the economy to charge interest on the entire nation’s money supply, which they are currently allowed to create out of commercial bank debts, for their private profit.

Under today’s monetary system however, it is quite impossible for a government to pay off its national debt. Where is the money to do this supposed to come from? Taxes? Taxes come from wages, wages come from people having jobs, jobs come from productive investments in the economy made using capital deriving from bank loans, and finally, bank loans come from debt.

Laid bare, any plan to pay off a national debt under the current monetary system amounts to a plan to borrow your way out of debt – it simply cannot be made to work! It might have been somehow feasible back when the public could go into more debt – then the government’s debt could have been swapped for more personal debt. But the level of personal debt today has become so crippling that even this frankly absurd strategy is rendered impossible.

Furthermore, the debt on gilts is actually owed twice, once by the borrower of the initial bank loan that created the money to purchase the gilt, and again by the government (i.e. by us, the taxpayers) on the gilt itself. Because of this, if one adds together the national debt and total personal debt, you get a figure that is far larger than the total money supply! In fact, if all the money in the economy were pooled tomorrow to pay these debts, we would still owe around one trillion pounds on them! Also, we would have no money! In the process of trying to repay these debts, every last  bank deposit in the economy would have been wiped out.

For all mainstream news sources to simultaneously refrain from any discussion of these points is, well… “elephant in the room” doesn’t begin to cover it. Asking seriously why the media don’t cover these issues can lead to some some disconcerting conclusions about both our “liberal”, “free” press and our education system.  It doesn’t have to be this way, as it is perfectly possible to have money created debt-free for public benefit rather than as interest bearing debt for the private profit of banks. For example Bill Still, monetary reform advocate and documentary film maker, has proposed a simple legislative solution – to make it illegal for a government to go into debt ever again!

More generally, we should recognise that a national debt is not a sensible concept. It is an absurdity – when economists talk to us in stern tones about how the national debt must be repaid, they should be ridiculed by everyone! Where did the banks get the money that generated our national debt in the first place? They made it up! We can similarly make the debt go away, if we choose to. Nothing was really lent, so nothing is really owed! Whatever sophistry economists may concoct in its defence, there is no reason for populations to suffer through austerity. Our poverty exists only on a balance sheet; it is the invention of bankers . We are rich nations in real terms, with vast productive capacities and powerful technologies. Everything meaningful, industrial, physical, that existed before the financial crisis still exists after it – it is only in the limited imaginations of our economists and politicians that we must now be made poor.

This is why I hope protesters in Greece, and now in other nations with the occupy Wall Street movement, succeed in rejecting austerity and defining their own democratic alternatives in place of it.


~ by freedomthistime on June 30, 2011.

2 Responses to “What is a national debt?”

  1. Interesting thought I had earlier. Aliens come down from outer space to observe the earth a few years ago and watch us all contently extracting mineral wealth from the planet and generating food to eat whilst others procreate and develop the science that pushes our civilization forward. Then one day we all start working less, some people stop altogether, there are riots on the streets and tensions all over the globe. Why, the aliens wonder, have they stopped? They were doing so well, advancing their civilization and science and culture?

    Maybe it’s because we have this crazy little system called “money”, which is supposed to represent a given chunk of service to our fellow human. Yet somewhere along the line through incredibly complex systems of transfer of this “money” we decide to stop doing stuff to improve our lives!

    Perhaps money is just a fundamentally flawed system of distributing output!

    • Thanks for commenting 🙂 . I like your thought about aliens observing the earth and what they would make of our species – actually, I often think of myself like this, as a bystander from another world, observing some very strange human behaviour!

      I think also that it’s really good to look at things in purely objective, physical terms in the way you did – like I said, there is absolutely no need to suffer through austerity, since all the real physical wealth and the means of generating more of it that were in place before the crisis, are still here now, just as they were during the great depression of the 1930s. Any rational alien would surely notice this and find it strange!

      I don’t think that money in of itself is a flawed concept, but I absolutely agree that the way it works today is behind a lot of problems. Money is a really good idea, if and when it acts as a means of exchange to promote trade and a system of accounts to keep track of who owes what things of actual physical value to whom. LETS and community credit schemes can do this kind of thing to help promote local community development, which is what money ought to be about.

      However, money exchanges have increasingly moved away form this initial purpose and mutated into something incredibly abstract that often harms and retards community development, rather that promoting it. I read an interesting book recently called The Cancer Stage of Capitalism that develops this idea in detail, going through the various mutations our money exchange sequences have undergone. Maybe you’d find it interesting too?

      So I’d say not that “money is just a fundamentally flawed system of distributing output”, rather that it is the particular form of money we have today, debt-based money, that is a fundamentally flawed system. Debt based money promotes an unsustainable, cancerous if you like, growth in material through-puts and is pro-cyclical in nature, throwing millions out of work periodically. Alternative forms of money, ones that work in the interests of society, are needed desperately.

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