Government Debt is a Problem

Australian Modern Monetary Theorist Bill Mitchell has explained in an eye-opening post how the private-sector desire for bonds was made very evident in his country in the early 2000s during the period of a conservative government that oversaw ten budget surpluses in eleven years. Since the budget was in surplus, it was initially supposed that there was less need to issue government debt – the assumption being that the purpose of debt is to fund budget deficits. The assumption was quickly revealed to be unfounded. The drying up of government debt caused disquiet in the financial community, which suddenly had less access to risk-free government bonds.

The government’s response was for the central bank to sell bonds (issue debt) even though there was no budget deficit. This should have demonstrated to orthodox economists once and for all that the issuance of public debt has nothing to do with funding government net spending.

In short, the government has no need of funding. It is in a position to create and destroy its own money as it pleases. Whenever it transacts with the private sector – a ‘vertical’ transaction – money is either created or destroyed. Whenever the government runs a budget deficit or surplus, there is a net change in private-sector holdings of financial assets. In contrast, when private sector agents transact among themselves – a ‘horizontal’ transaction – there is no net change in financial assets, because such transactions always create a private asset and a matching private liability, netting to zero. The government can create or destroy net private financial assets at will; the private sector cannot. Private-sector agents are financially constrained; the government is not.

This is an extract from Heteconomist on the Social Significance of Money.

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One response to “Government Debt is a Problem

  1. Happy to see that you have discovered Bill Mitchell. He and Victor Quirk along with other enlightened economists have been advancing Modern Monetary Theory for some time and urging economic policies which promote full employment as opposed to the current paradigm of having at least 5% unemployment (the real figure is probably closer to 16%) in order to ‘stimulate growth’.

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