The Death Knell of Austerity Cannot Come Soon Enough

John T. Harvey at Forbes: “Why Our Current National Debt is not the Largest in History

Now add to this story the simple accounting fact that when the public sector is in deficit, this necessarily means that the private sector is in surplus.

That is probably the most important sentence in the entire piece. Most people who complain about deficits and public debt simply do not understand this, at all. They think of money in zero sum terms. That is the root of all this ignorance about money, wealth, debt and where all this gold buggery comes from.

When governments go into debt, the proper way of thinking about that debt is that governments are selling debt to the private sector which eventually gets a return from its investment when the bonds mature. In the short and medium term, the government is capable of spending that money to invest in what the people will it to through their representative government.

The most powerful way to use this money is to invest in the nation’s economy during times like these:

“The key issue is the fact that, in a mature, capitalist economy, the private sector does not consistently generate sufficient demand to create jobs for all those willing to work. Hence, we can have periods such as we see today, where we have the capacity to produce output for those going without, but it is not profitable to do so because they lack the income to purchase it. And because profit is what drives the private sector, this means that we are stuck where we are. Our problem today is not that we have too many regulations or too high taxes on firms; they don’t have enough customers.

When such situations arise, only an entity capable of spending more than it earns without the prospect of bankruptcy is capable of breaking the stalemate. And that, of course, is the government, which can never be forced to default on debt denominated in its own currency…”

The reason the initial quote is the most important is because the usual deficit hawk forgets that debts owed are also debts paid. Governments are always paying back debt – every day, every month, every year – that they have sold to the private sector in the past. It may take 5, 10, 30 years for notes and bonds to mature, but the debt sold to the private sector 5, 10, and 30 years ago is being paid back with interest today. The private sector is wealthier today for it.

The reason there is such a concept as government crowding out the private sector is because a fiscally irresponsible government may increase interest rates to the point where it would be more profitable for investors to buy government bonds instead of investing in businesses and technology. Right now, interest rates are as low as they are because investors have near zero faith in economic growth in the next several years due to the prolonged recession and depressed aggregate demand.

We had a drop of 9% GDP in late 2008 thanks to the Federal Reserve dropping the ball, fearful of inflation that would have never come about. What came before that drop and the results of that drop are still being felt and that $1.8 trillion investment economists had been urging the federal government inject into the economy would have helped to fill much of it up, especially when the fiscal multiplier kicked in.

That $1.8 trillion would have been borrowed and injected right back into the economy. Is that difficult to understand? No money would have left the private sector – it would have simply been filtered through the government into projects that would not have been invested in because the recession called for investors to hold and save their money and buy government bonds with it. That means the money would have been sitting there collecting dust. Not only that, but the money would have been multiplied through normal market transactions.

Going back to the original quote, not only would that money not exited the private sector, it would also have been multiplied in the long-run through interest payments when government paid back the borrowed money that it borrowed and gave back to the private sector.

This is yet another example of why the austerity-hungry Austrian conservative movement needs to disappear into oblivion.


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