Re: Government Debt versus Private Debt

From: Peter Lawrence (peterl_at_netlink.com.au)
Date: 09/14/04 

Date: Tue, 14 Sep 2004 00:38:42 GMT

William F Hummel wrote:
>
> On Mon, 13 Sep 2004 07:46:55 GMT, Peter Lawrence
> <peterl@netlink.com.au> wrote:
>
> >William F Hummel wrote:
> >
> >> That's an illusion that almost everyone holds. If necessary the
> >> government could borrow from the Fed to cover its deficit spending, so
> >> the government doesn't "need" to borrow from the public. The fact
> >> that it does so is what creates the illusion.
> >
> >That's US-centric.
> >
> >In general, governments only tax and borrow to tame the inflation that
> >"printing money" would induce. But they don't have to borrow.
> >
> Every modern nation with a central bank (including Australia) operates
> in basically the same way. The government balances its books, and
> borrows from the central bank if necessary to do so. However the
> public will readily lend to the government at a market interest rate
> because its bonds are viewed as a riskless investment.

Irrelevant.

You are describing what governments do in practice. They do that for a number
of reasons, including convenience. It is NOT something they are somehow
constrained to do. I was pointing that out - that they do not "have" to
borrow, either internally or externally, whether they do that in practice or
not.

> >.
> >> The private sector needs the base money created through government
> >> spending in order to pay its taxes. On purely theoretical grounds,
> >> government (deficit) spending must come before the first taxes can be
> >> paid.
> >
> >No - that only applies in the rare case that there was nothing monetary
> >already in existence. In general, governments don't come along to such a
> >tabula rasa, they displace something from some earlier regime. Fiat money was
> >generally brought in by making bank notes that were convertible for bullion,
> >then ceasing to convert them (while still giving them backing by accepting
> >them for taxes). Variations on this theme happened in different countries,
> >but mostly something like that happened nearly everywhere during the first
> >half of the twentieth century.
> >
> If you had read more thoughtfully, you might have recognized that I
> was not arguing from a historical perspective. Why else would I have
> used the qualifier "on purely theoretical grounds"?

Hang on - I did read what you put. Your qualifier is precisely what I was
refuting, since you aren't now merely describing what actually happens but
what is constrained to happen in all situations. A historical counterexample,
or several similar ones, refutes the theoretical argument precisely because
it shows that that is not true. If your theory says "this is what happens",
and I can point to something different, your theory is wrong. You can't turn
round and say "I wasn't talking about anything real, my theory is purer than
that."

Your theory only applies in the special case where a currency is being
introduced from scratch and taxes cannot be compounded with payments in kind.
Even in colonial situations they usually found they had to allow for tax
debts to be worked off, e.g. on the roads, with currency coming in AFTER the
need for it was artificially generated. In some colonies there were stocks of
bullion around, or exploitable export resources, but not always and not
always enough. PML. 

-- 
GST+NPT=JOBS
I.e., a Goods and Services Tax (or almost any other broad based production 
tax), with a Negative Payroll Tax, promotes employment. 
See http://member.netlink.com.au/~peterl/publicns.html#AFRLET2 and the other 
items on that page for some reasons why.

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