Worrying About the Deficit Is So 17th Century

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By the staff of the Institute for New Economic Thinking

In “celebration” of the late Pete Peterson’s 92nd birthday (see guest list), an excerpt from 19th Century historian Lord Macaulay’s History of England, on hundreds of years of unwarranted panic about government debt.

* * *

Such was the origin of that debt which has since become the greatest prodigy that ever perplexed the sagacity and confounded the pride of statesmen and philosophers. At every stage in the growth of that debt the nation has set up the same cry of anguish and despair. At every stage in the growth of that debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing; and still bankruptcy and ruin were as remote as ever. When the great contest with Lewis the Fourteenth was finally terminated by the Peace of Utrecht, the nation owed about fifty millions; and that debt was considered, not merely by the rude multitude, not merely by foxhunting squires and coffeehouse orators, but by acute and profound thinkers, as an incumbrance which would permanently cripple the body politic; Nevertheless trade flourished; wealth increased; the nation became richer and richer. Then came the war of the Austrian Succession; and the debt rose to eighty millions. Pamphleteers, historians and orators pronounced that now, at all events, our case was desperate. Yet the signs of increasing prosperity, signs which could neither be counterfeited nor concealed, ought to have satisfied observant and reflecting men that a debt of eighty millions was less to the England which was governed by Pelham than a debt of fifty millions had been to the England which was governed by Oxford.

Soon war again broke forth; and, under the energetic and prodigal administration of the first William Pitt, the debt rapidly swelled to a hundred and forty millions. As soon as the first intoxication of victory was over, men of theory and men of business almost unanimously pronounced that the fatal day had now really arrived. The only statesman, indeed, active or speculative, who did not share in the general delusion was Edmund Burke.

David Hume, undoubtedly one of the most profound political economists of his time, declared that our madness had exceeded the madness of the Crusaders. Richard Coeur de Lion and Saint Lewis had not gone in the face of arithmetical demonstration. It was impossible to prove by figures that the road to Paradise did not lie through the Holy Land; but it was possible to prove by figures that the road to national ruin was through the national debt. It was idle, however, now to talk about the road; we had done with the road; we had reached the goal; all was over; all the revenues of the island north of Trent and west of Reading were mortgaged. Better for us to have been conquered by Prussia or Austria than to be saddled with the interest of a hundred and forty millions.  

And yet this great philosopher—for such he was—had only to open his eyes, and to see improvement all around him, cities increasing, cultivation extending, marts too small for the crowd of buyers and sellers, harbours insufficient to contain the shipping, artificial rivers joining the chief inland seats of industry to the chief seaports, streets better lighted, houses better furnished, richer wares exposed to sale in statelier shops, swifter carriages rolling along smoother roads. He had, indeed, only to compare the Edinburgh of his boyhood with the Edinburgh of his old age. His prediction remains to posterity, a memorable instance of the weakness from which the strongest minds are not exempt.

Adam Smith saw a little and but a little further. He admitted that, immense as the burden was, the nation did actually sustain it and thrive under it in a way which nobody could have foreseen. But he warned his countrymen not to repeat so hazardous an experiment. The limit had been reached. Even a small increase might be fatal. 

Not less gloomy was the view which George Grenville, a minister eminently diligent and practical, took of our financial situation. The nation must, he conceived, sink under a debt of a hundred and forty millions, unless a portion of the load were borne by the American colonies. The attempt to lay a portion of the load on the American colonies produced another war. That war left us with an additional hundred millions of debt, and without the colonies whose help had been represented as indispensable. Again England was given over; and again the strange patient persisted in becoming stronger and more blooming in spite of all the diagnostics and prognostics of State physicians. As she had been visibly more prosperous with a debt of a hundred and forty millions than with a debt of fifty millions, so she, as visibly more prosperous with a debt of two hundred and forty millions than with a debt of a hundred and forty millions.

Soon however the wars which sprang from the French Revolution, and which far exceeded in cost any that the world had ever seen, tasked the powers of public credit to the utmost. When the world was again at rest the funded debt of England amounted to eight hundred millions.

If the most enlightened man had been told, in 1792, that, in 1815, the interest on eight hundred millions would be duly paid to the day at the Bank, he would have been as hard of belief as if he had been told that the government would be in possession of the lamp of Aladdin or of the purse of Fortunatus. It was in truth a gigantic, a fabulous debt; and we can hardly wonder that the cry of despair should have been louder than ever. But again that cry was found to have been as unreasonable as ever.

After a few years of exhaustion, England recovered herself. Yet, like Addison’s valetudinarian, who continued to whimper that he was dying of consumption till he became so fat that he was shamed into silence, she went on complaining that she was sunk in poverty till her wealth showed itself by tokens which made her complaints ridiculous. The beggared, the bankrupt society not only proved able to meet all its obligations, but, while meeting those obligations, grew richer and richer so fast that the growth could almost be discerned by the eye. In every county, we saw wastes recently turned into gardens; in every city, we saw new streets, and squares, and markets, more brilliant lamps, more abundant supplies of water; in the suburbs of every great seat of industry, we saw villas multiplying fast, each embosomed in its gay little paradise of lilacs and roses. While shallow politicians were repeating that the energies of the people were borne down by the weight of the public burdens, the first journey was performed by steam on a railway. Soon the island was intersected by railways. A sum exceeding the whole amount of the national debt at the end of the American war was, in a few years, voluntarily expended by this ruined people in viaducts, tunnels, embankments, bridges, stations, engines. Meanwhile taxation was almost constantly becoming lighter and lighter; yet still the Exchequer was full. It may be now affirmed without fear of contradiction that we find it as easy to pay the interest of eight hundred millions as our ancestors found it, a century ago, to pay the interest of eighty millions.

It can hardly be doubted that there must have been some great fallacy in the notions of those who uttered and of those who believed that long succession of confident predictions, so signally falsified by a long succession of indisputable facts. To point out that fallacy is the office rather of the political economist than of the historian. Here it is sufficient to say that the prophets of evil were under a double delusion. They erroneously imagined that there was an exact analogy between the case of an individual who is in debt to another individual and the case of a society which is in debt to a part of itself; and this analogy led them into endless mistakes about the effect of the system of funding. They were under an error not less serious touching the resources of the country. They made no allowance for the effect produced by the incessant progress of every experimental science, and by the incessant efforts of every man to get on in life. They saw that the debt grew; and they forgot that other things grew as well as the debt.

A long experience justifies us in believing that England may, in the twentieth century, be better able to bear a debt of sixteen hundred millions than she is at the present time to bear her present load. But be this as it may, those who so confidently predicted that she must sink, first under a debt of fifty millions, then under a debt of eighty millions then under a debt of a hundred and forty millions, then under a debt of two hundred and forty millions, and lastly under a debt of eight hundred millions, were beyond all doubt under a twofold mistake. They greatly overrated the pressure of the burden; they greatly underrated the strength by which the burden was to be borne.

Macaulay, Thomas Babington. The History of England, from the Accession of James II — Volume 4 (1848). Public domain: http://www.gutenberg.org/ebooks/2613

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  1. Watt4Bob

    Can somebody explain why a hundred and seventy years after this was written, we’re still listening to deficit hawks?

    Other than it is a religious dogma.

      1. Robert G. Valiant

        I’m interested in economics, but my background is in linguistics, so I’m pretty ignorant. Commentors here seem very thoughtful, so I have a question (my question is completely unloaded).

        Is there any upper limit to “deficit spending?” If so, why?

        1. Harrold

          Technically, there is no limit as long as the government printing presses are able to run.

          1. Wukchumni

            Who needs a printing press when all you really need to do to create money in our age is pressing down on this keyboard an appropriate amount of times in order to make it so?

          2. MyLessThanPrimeBeef

            Government money printing must always be mentioned along with the material medium through which such money travels.

            That will determine the quantity and speed limits to money printing, in contrast with a theoretical limit.

            Sometimes, there is only so much you can shove money down a hole (even an MIC hole), so fast.

          3. jonboinAR

            Okay, I’ve got one. Supposedly, according to MMT, one of the very few major constraints on a monetarily sovereign nation printing money is inflation, which danger is in no way omnipresent. But then, we might imagine on one day inflation does rear its sleepy, but ugly, head. So, all this wise and sovereign nation needs to do then is to raise taxes and slow the printing presses. But… It has allowed the deficit, because deficits don’t really matter much at all, to grow so extremely huge that just servicing this debt now requires the presses to continue running at full clip. What then?

            Is there no possibility of a monetarily sovereign nation having to default in order to control inflation?

            1. Patrick

              In a world where the non-interest deficit is zero, the central bank prints sufficient money to pay off all the debt plus interest. The debt falls to zero and the printing presses stop. I don’t think there is a scenario where the printing presses would have to run continuously forever to service the debt.(assuming the debt is not infinite)

        2. Mel

          Lewis Carroll wrote a novel Sylvie and Bruno, with a Professor as a minor character. The Professor had a cunning plan to deal with his tailor bill. At the end of the year he offered the tailor double at the end of next year. Of course the tailor accepted. Any businessman will be delighted to double his money in a year. After that year The Professor offered double again. And again.
          The debt is not the problem so much as the paying back.

          1. larry

            You are conflating microeconomics with macroeconomics, which is the economics of the nation state. We should ignore anything having to do with Peterson.

          2. Procopius

            The debt is not the problem so much as the paying back.

            But there is no reason to “pay back.” This is the genius of financing government through issue of transferable bonds, rather than personal loans from rich goldsmiths and bankers. The “debt” never has to be paid back.

        3. Other JL

          For a nation with a sovereign currency, there is no technical upper limit to deficit spending. In the US, the government can issue as many treasury notes as it likes and the Federal Reserve Bank is obligated to buy them. Additionally the Treasury can produce as much currency as it can mint.

          The “danger” of either of these strategies is inflationary pressure. Printing more currency to increase the monetary base is by definition inflation. If investors perceive treasury notes as riskier, they may demand a larger risk premium.

          The extent this is a problem depends on the economic circumstances. There are a number of times when some extra inflation is desirable.

          1. John Zelnicker

            @Other JL
            June 7, 2018 at 11:50 am
            As I noted in my comment below, it’s not the creation of money that carries the inflation risk, it’s spending beyond full employment.

            Also, you have a misconception of Treasury interest rates. The Fed sets those rates, not the “market”.

            1. voteforno6

              Aren’t those interest rates the result of an auction to the primary brokers? If someone has a link to a site that describes this process, that would be helpful.

              1. Mel

                AFAIK the FED sets interest rates that it pays on balances in reserve accounts, and rates that it charges for emergency loans into reserve accounts., but those aren’t the Treasury rates.
                The FED rates might influence the rates that banks would bid for on Treasury securities, but only indirectly.

                1. rd

                  The Fed effectively sets overnight rates to banks. That then influences the free market rates for short-term Treasury bills. The market expectations for growth, inflation etc. set the longer term Treasury bond rates.

                  The big innovation that Bernanke et al came up with was the Fed buying large quantities of long-term T-bonds in order to push those rates down. In the absence of sane fiscal policy, this seemed to be a decent fill in. The long-term ramifications are still playing out and it will be interesting to see how history views it.

              2. John Zelnicker

                June 7, 2018 at 12:58 pm
                Try this: https://www.treasurydirect.gov/instit/auctfund/work/work.htm

                This site is mainly for individuals who want to buy Treasury securities, but it explains the process for all purchases.

                And, yes, the Treasury accepts the highest yield bid in the “competitive” bidding and issues that yield to all purchases of the particular security.

                However, if the Fed wants to lower or raise the market yield on outstanding Treasuries, it can offer to buy or sell whatever quantities are necessary to move the yield to where they want it. These are their Open Market Operations. See Warren Mosler for a more complete explanation of how this is done.

          2. paulmeli

            Printing more currency to increase the monetary base is by definition inflation

            What you are calling “inflation” is growth of the money supply. Growth ≠ Inflation. There is no correlation between growth of the money supply and inflation.

            Economic inflation is defined as a general rise in the price level.

            The one tracked by the CPI or the Billion Prices Index. A consequence of spending as others have noted.

        4. John Zelnicker

          @Robert G. Valiant
          June 7, 2018 at 10:38 am
          There is no theoretical limit on “deficit” spending per se. The limit applies to overall spending whatever the source, e.g., government, businesses, or individuals and it is the amount of real resources available to be purchased and deployed for the benefit of the public. Once the economy is at full employment additional spending by any sector can cause inflation.

          Also, there is some confusion caused by conflating the creation of money by printing press or keystrokes and spending that money into the economy. It’s not the “printing” that carries an inflation risk, it’s the spending beyond full employment. If the Federal Reserve bank increases the amount of reserves held by commercial banks, that’s money creation, but that money never gets spent into the economy so it carries no inflation risk.

          1. MyLessThanPrimeBeef

            Speaking of theoretical limits, what is the theoretical daily customer limit of a restaurant with a seating capacity of 50 doing business from 6 pm to 10pm?

            It depends.

            If the average dining time is 30 minutes, then, you can have as many as 400 a night.

            If the average dining time is infinitesimal, then the limit is infinite. That is, no theoretical limit.

            Of course, people will object to that statement, because in the real world, there are no ‘infinitesimal dinner time’ customers.

            And the same with money printing.

            You can print infinite amount of money, instantaneously, in theory. But money has to travel through the real world, at a certain velocity or velocities . Any time you generate more or faster , at the source, than it can travel down the path, it will cause blockage, at the source.

          2. animalogic

            My understanding of US WWII monetary policy is that with the nation at effectively full employment, but with vastly reduced areas to spend all those (often good) wages (ie war restrictions on consumer production) that War bonds were pushed so hard, not so much to raise revenue, as to soak up all that excess liquidity before it started seriously pushing up prices.

        5. Susan the other

          The upper limit to sovereign deficit spending does come when you run into a corresponding deficit in real/natural resources. Then inflation. I think there is an equivalence between a lack of natural resources and skimming the system by the financiers in the back room. So maybe two things. No doubt we will encounter more things which throw things out of balance. I personally think that we suffer for a proper definition of prosperity. And profiteering fills the void. Hand-in-hand with profiteering is externalizing costs. That is a deficit of a different color – of the well being of society upon which all prosperity is based along with a deficit to the environment upon which all life is based.

          1. Robert G. Valiant

            Environmental limits have always come to my mind when I hear arguments stating that deficits don’t matter. It seems to me that those limits are hard to define accurately, at least in a non-political context. Tipping points?

            Thanks for the response, and thanks for all the other responses, too.

            1. MyLessThanPrimeBeef

              Two limit types.

              For example, you can estimate your crude reserves in the ground. That’s one limit. The quantity limit.

              Then, you have the limit of how fast you can pump it. That’s the speed limit.

              So, you can say there is no quantity limit to government printing money.

              And the printing speed today is the speed of light.

              But printing a lot of money in one day is different from printing that same amount of money in one year.

              And so, unlike the speed of light which is the same in all mediums, the light of sound is dependent on the material through which it propagates.

              For example, if printed money only travels through the stock market, you see an instantaneous equity bubble.

          2. readerOfTeaLeaves

            I personally think that we suffer for a proper definition of prosperity. And profiteering fills the void. Hand-in-hand with profiteering is externalizing costs.

            Yes, yes, and yes!

        6. David Swan

          A monetarily sovereign country “can” sustain “debt” to the level of infinity minus one, in the sense that it can always service its debt obligations as a matter of typing the keystrokes which issue payments. The easiest way to look at it is that sovereign “debt” is functionally equivalent to “printing money”. A currency issuer can “print” its money to the point of worthlessness (or can issue “debt” to the same extent), but nothing will compromise its ability to “print” more or issue more “debt”.

          Generally we want to maintain a stable value for the currency and thus it’s a bad idea to “overdo it”, but that is an inflation constraint, not a financial constraint. Most states are well short of the inflation barrier, even though there is much hand-wringing over their “debt”. Even when a state reaches inflationary levels of spending, it is the current spending (“deficit”) that is the issue, not the “debt”.

          1. Wukchumni

            When countries print paper money until the cows come home, it becomes very obvious, and i’m looking @ you Venezuela & Zimbabwe…

            On the other hand, when the various mouse cliques do the same, who’s really the wiser?

              1. Wukchumni

                Usually that’s the case, but not always.

                Look at our hyperinflations, in the case of Continental Currency, it was a combination of printing way too much, along with the English counterfeiting it and flooding the marketplace.

                Whereas, the CSA hyperinflation was largely on account of the war not going their way, as the value of a Confederate dollar plummeted even though it was backed by the English pound somewhat, and what must be remembered, is that the CSA only issued fiat paper money, while the Federal Government issued paper along with coins struck in precious metals, a key difference.

                1. Yves Smith Post author

                  *Sigh*. You are proving the case.

                  The South experienced a loss of productive capacity by being cut off from the North and by being way less close to an autarky. It had very little in the way of manufacturing capability. It was also blockaded, and was having trouble getting essential goods.

                  1. Wukchumni

                    The CSA was a one-trick-pony.

                    All the south really had for export was cotton, and as stated once blockaded, game essentially over.

                    That didn’t stop the English from backing their currency though, in what had to be one of the worst investments ever for the crown.

                    That said, you could watch the Confederate $’s value wax and wane when measured against gold, by it’s performance on the field of battle.

            1. Synoia

              Zimbabwe collapsed because it’s main industry was agriculture. Mugabe snatched away the land, the farmers collateral, and it was acquired by people who did not farm, and did not understand the rewards of farming come from betting with or against mother nature.

              See Yves’ comments on loss of productive capacity.

              1. MyLessThanPrimeBeef

                I think the global reserve currency status nature of our currency explains why we have lost our manufacturing productive capacity, and yet have no hyperinflation.

                And now, China is said to want to buy, and people in this country ask, “What do we have that we manufacture that we can sell?”

              2. Wukchumni

                My sister was in Zimbabwe in the early 80’s and the Z$ was almost @ par with the US$, and then began the merry ride into hyperinflation well before Mugabe started taking away white farmers productive farmland, it only got really stupid with $100 trillion banknotes and the like about a decade ago, but they’d been in financial purgatory for quite some time.

        7. readerOfTeaLeaves

          My two (US) cents:
          It is a political term encoding the power of those who control financial assets, and who assume that it is their God given right to hold even more. Those who wail about deficits claim that it is an economic concept, but I’d argue that it is more accurately viewed as a [false] claim to power, that ‘deficit mantras’ justify pernicious policies that have long term, serious implications for public health. (And for the health and well-being every single member of a society; rich and poor alike.)

          Is there a limit to deficits?
          Not so far.
          Both legacy parties wail about the deficits, and then keep spending.
          You may as well ask whether there is a limit to greed. Theoretically, there may be, but we have not seen it yet.

          Inherent in the notion of ‘deficits’ and ‘budget limits’ are at least four toxic assumptions:
          (1) that the economy is a closed system that never evolves,
          (2) that people are ‘costs’, and therefore any social expenditures are ‘unrecoverable costs’
          (3) that financial capital is the single most critical factor in ‘productivity’,
          (4) that debt is a sign of sin or moral weakness, and must always and everywhere be repaid by borrowers, even if the interest is usurious.
          Basically, IMHO, the term ‘deficits’ is an intellectual landfill of dehumanizing assumptions that lead to terrible outcomes.

          ‘Deficits’ in a fixed, closed economic system translate into an assumption that the Internet, spaceships, widespread public K-12 education, laser surgeries, transistors, MRI machines, greenhouse tomatoes, and iPods should not exist. Each of these technologies is an innovation that has evolved within an open economy, which is an open system. Direct government investment in basic science and education over generations ‘seeded’ the potential, within an economic ecosystem, for the evolution of new and useful things. (You also need a legal system to protect copyright, patents, and lots of other amenities, but my main point is that *flourishing* economies are open systems that evolve. Deficit hawks cannot come to terms with this simple and obvious fact, so they denigrate it and/or deny it.)

          “Deficit spending” is code for privatizing resources (cable lines, telecomm, satellites, roads and infrastructure, power grids…) In this sense, it is about a claim by capital markets and finance that *they* are the critical, essential, primordial factor in innovation and economic growth.

          That claim of financial capital to control all ‘investment’ is a political claim, an argument about power , which has nothing whatsoever to do with the actual functioning of economic systems; because if you think of an economy as an ecosystem, then you realize that its capacity for renewal, regeneration, and evolution has far more to do with the quality of the (political, cultural, educational, social) environment than with ‘starving’ a system of resources. I find it simpler to think of ‘deficit claims’ as the political equivalent of what the Romans did when they poured salt on the soil of their enemies: it guarantees that you kill the soil, so that nothing can flourish for the foreseeable future.

          Perhaps another commenter can give you a more insightful, or concise, explanation of ‘deficits’. But IMVHO, it is actually much more an instrument of power than a means of helping humans solve problems in a practical fashion. I’m not advocating reckless spending, but the claims of power that are contained in threats of deficits ‘blowing things up’ really need to be exposed, dismantled, and tossed into history’s dustbin. They are terrible claims that damage economic ecosystems.

          Well, okay, that was more than two cents.
          Maybe someone else will offer you a better explanation ;-)

          1. Robert G. Valiant

            Thanks! Your perspective is clear and really helpful to me in thinking about these questions.

            This is a positive place. I really didn’t think there were any left on the internet :)

            1. beachcomber

              @ Robert G. Valiant

              A suggestion:- enter “Bill Mitchell – billy blog” in a search engine. You’ll find the answers you’re seeking there.

          2. paulmeli

            “Deficit spending” is code for privatizing resources (cable lines, telecomm, satellites, roads and infrastructure, power grids…)

            Don’t you mean bringing resources into the public sphere?

            1. readerOfTeaLeaves

              Apologies for not being more clear.
              I meant that ‘deficits’ and threats of ‘blowing up the economy’ are used to intimidate people, and to claim that privatizing everything is always and everywhere ‘more efficient’ than lower cost public systems. (How many 200 foot yachts does it take to put the nails in that coffin…?)

              — Robert Valiant — yes, NC is a treasure.
              I can’t fathom how hard the moderators and authors must work to keep it that way, but it is quite a wonderful intellectual ecosystem ;-)

          3. saurabh

            I disagree that you need legal constructs like patents and copyright. These are there to guarantee accumulation; the idea that you need accumulation to have prosperity would seem to me a cousin of the notion that debt is a catastrophic burden. Both imagine a world of fixed resources that we must squabble over rather than an ever-expanding bounty fueled by human creativity.

            1. Normal

              Patents and copyrights are what fuel creativity. Without patents, we go back to alchemists keeping their processes secret and constraining technical progress. Accumulation is a by-product, and is the price we pay for a high standard of living.

              1. blennylips

                We all too frequently hear that the copyright monopoly is supposed to encourage creativity and that the patent monopoly is supposed to encourage innovation. Most lawyers whose jobs depend on the belief in these myths even claim that the monopolies fulfill these functions to the letter. But when we look at history, a different pattern emerges.

                History Shows That Copyright Monopolies Prevent Creativity And Innovation, By Rick Falkvinge on March 5, 2012

              2. Xan

                I see copyrights and patents as a brake rather than fuel. Creativity can outpace capital investments. Something needs to slow that down to pay that off in the private sector. Imagine spending $$$ and years developing the perfect environment for manufacturing vacuum tubes, and just as your are ready to start production, someone pops their head in the door holding something very small and says, “Hey, look. Transistor!”

                Lawrence Lessig has discussed how AT&T has sat on tech for decades – coaxial cable (1882); phone dials, multiplexing, (before 1900); fm radio (around WWI, I think), etc.

                Things that the government provides: a legal structure for complex organizations (corporations), and, of course, a stable debt instrument in the form of a national currency.

          4. 10leggedshadow

            Government deficits equal the private sector surplus. So England’s growing debt was reflected in the growth and investment of the country, making it easy to pay the interest. Invest in your population and infrastructure and that what happens.
            That to me, was a concrete example of that concept at work in the real world.
            Finance has too much influence already in our economy.

          5. eg

            Very insightful. And the fear fuelled by misconceptions about the nature and function of currency and debt is itself a tool in the power dynamic at play.

        8. Greensachs

          Yes, there are restraints. Is there enough resources?
          Base metals?
          Rare earth metals?
          Political will?
          …and above all the historical recognition that:
          1. The powerful prey mercilessly upon the powerless, up to and including mass murder.
          2. The powerful lie constantly about their predations.
          3.The natural instinct of the media is to let the powerful get away with it.

          1. jrs

            If we are talking about natural resources it seems we are already WAY BEYOND the limit.

            1. Greensachs

              There would be those inclined to respond if all caps “way beyond the limit” wasn’t so unconditionally ambiguous. Sounds depressingly dire though.
              Remember, there is much sustainable work to be done in creating an economy that trends toward neo-literacy.
              Think in terms of a shift from a thing-oriented society to a person-oriented society. One in which a civil society looks after each other in sustaining ways, thus ensuring human existence.

        9. Jeremy Grimm

          This is slightly off-topic from your question — but I think you received plenty of better answers than I might offer. As a student of linguistics you might find Phillip Mirowski’s short lecture: “Dictionary of Now #9 | Philip Mirowski: Markets as Computer Programs in a Theory of Markets” at [https://www.youtube.com/watch?v=sMDrVR59mTQ] interesting. If this is the same lecture I watched before he relates his ideas for economics to Chomsky’s hierarchy of linguistic structure and automata theory. [I’m still not sure what I think about this approach to economics.]

    1. rd

      For the same reason we are still listening to people demand a return to the gold standard. It worked so well in the late 1800s and early 1900s in keeping the economy and financial system stable that it is clear that it should be returned to. That will help promote those beneficial cleansing depressions and financial panics that occurred every few years in those years.

      As far as I can tell, the primary benefit of the gold standard was that it would help in creating the occasional crash that would bankrupt the wealthy speculators so that inequality would temporarily drop down to levels that would allow the economy to reconstruct itself productively for a couple of more decades (e.g. post-Gilded Age and Roaring 20s).

      1. Wukchumni

        One thing that really doomed the gold standard was the idea that the USA alone owned a big chunk of the above ground supply in the 1920’s, something around 80% if memory serves. That made it difficult for other countries to abide by the golden rule.

        A great book on the subject is Liaquat Ahamed’s Lords Of Finance, 2 big thumbs up.

    2. WheresOurTeddy

      what good is being rich if it’s not super hard to get out of grinding poverty?

      or as monty burns would put it, “What good is money if it can’t inspire terror in your fellow man?”

    3. icancho

      Perhaps because it gives a ready, plausible-sounding, “common sense” “explanation” for why we can’t have nice things (even though the the powerful and the military can)?

    4. Altandmain

      So that the rich can impose austerity on us and get even richer.

      That is pretty much what this is all about. The media, owned by the rich, needless to say portray this as responsibility when it is really making society a worse place to live in.

      1. JBird

        The current craze for Austerity is being used much like the current perversion of modern American Conservatism, Liberalism, and even Libertarianism. The same for the politicized pseudo definitions of Communism, Socialism, Social Democratic, and so on. Twisting the words, definitions, even the very ideologies and philosophies into a web of lies that have repeated so much that they are believed more than the truth.

        The new perceived meanings always work for the elites, or at least for the different leadership classes be it wealthy elites like the Purdues, Kochs, Pritzkers, the Democratic Party’s neoliberal leadership, the Republicans, Wall Street, or the smaller subsets like the Black Misleadership Class, the Israeli Lobby, the mainstream conservative Protestant churches like the Southern Baptist or their assorted fellow ilk especially those of the Prosperity Gospel, ALEC, and on and on.

        They make so you cannot say what you mean, because what you say does not mean what it says, because you cannot think what you need to for understanding, because you no longer have the words you need, those words which no longer have their meanings anymore. A subtle form of Newspeak.

    5. frank scott

      capitalism is the religion that can only be sustained by debt beyond description – carried by masses – with interest payments going to a tiny minority of the unprincipled rich …and it isn’t the debt that is the problem but what it is incurred for..if you owe a hundred thousand in order to house, clothe and feed a family, that is very different from owing a hundred thousand in order to murder your neighbors..the cathedral of international capital’s high priests at the IMF recently warned that combined public and private debt was far beyond what it was at the last semi-collapse ten years ago, at more than 164 trillion dollars – twelve zeros after the 164 – and it had them worried..billions of us are poorer than ever, and hundreds of millions cannot put food on the table without using plastic and increasing their debt to a point at which it will soon be unpayable and beyond any bail-out for banks and necessitate a revolution among the people. hurry.

  2. James

    Worrying about what politicians are going to be able to get away with due to the fact that nearly all of their constituents have been conditioned to worry about the deficit on the other hand…

    As in most things, it’s not necessarily what’s empirically true that will get you, it’s what the great mass of people believe to be true that’s the problem.

    1. Livius Drusus

      The comparison that politicians make to household budgets is very powerful and many people really cannot break out of that kind of thinking even if you go into MMT and sovereign currency when trying to argue against that comparison.

      There is also a certain moralistic element that deficit spending is somehow immoral and a sign of profligacy even if the spending is going toward the common good.

  3. Wukchumni

    The financial world of back then largely revolved around precious metals in commerce, with paper money being not so important.

    Pre 1900 European banknotes are pretty scarce compared to the onslaught that happened as WW1 was coming about, and afterwards.

    You can’t compare epochs of then and now, completely different rules or lack of.

    1. Wukchumni

      Here’s an example of what i’m talking about…

      The 1898 German 1,000 mark banknote had a face value of close to $250, quite a large denomination for the time. They are rare and worth about $500 to collectors currently.

      Now on the other hand, the 1910 issue looks pretty much the same in terms of design, but they are only worth a few bucks, as they are incredibly common.

      More than likely the later issue was printed in the midst of WW1…


    2. Synoia

      I believe the American and Napoleonic wars started paper money in England. Pounds (promissory notes issued by the Bank of England) circulated in conjunction with of guineas (Gold).

      1. Wukchumni

        It was mostly private banks that issued currency in the UK in the 19th century, not dissimilar to our ‘broken banknotes” that were sometimes accepted as payment, sometimes not.

        This right was rescinded in 1844, allowing only the Bank of England to issue banknotes, again not that different from what went down here, after the 1st Federal greenbacks were printed in 1861,

  4. Michael

    I’m sorry for my naiveté but this piece seems to be published as a piece of sarcasm, and if so, please excuse me for attempting to explain a joke.

    Although an obvious classic piece of literature, it fails to distinguish how the stated debt is utilized. From my own parochial perspective it seems to me that if monies are spent and debt incurred to shovel into a hole, and make a few rich with no widespread return on investment, such as war armaments at the expense of national impoverishment, which is occurring currently in the US, a self destruction of the nation due to no internal investment would occur.

    It would be different if the debt was spent in increasing the health and well being of the nation, as this would generate more tax dollars to pay off said debt.

    Of course the humanitarian imperialists will claim that the former is good, as it allows the enlightened to enslave (aka “liberate”) conquered populations and make them more “productive” with little compensation to the benefit of those not losing their livelihood in the exceptional nations.

    1. Synoia

      Modern Monetary Theory postulates that “Sovereign Debt,” for example dollars issued by the Fed, is actually Money.

      It also postulates that money has worth because it can settle taxes.

      I recommend Modern Monetary Theory by Randell Wray to get a better understanding of the theory. Other Economist have other theories.

      On a contentious note, it could be considered that economists actually have competing dogma, as there appears to be no mechanism known which can apply the scientific method to economics.

      In addition there is the human condition of “telling the boss”, the paymaster, what they want to hear. Such behavior appears to produce lucrative careers (eq Alan Greenspan).

      1. Wukchumni

        Ever read the reassuring wording on a FRN?

        It states on said banknotes:

        “This Note Is Legal Tender For All Debts Public And Private”

        That’s right, they are merely instruments of debt, nothing more.

  5. Jim Haygood

    Despite a notorious spreadsheet error for which they were pilloried, the central conclusion of Reinhart and Rogoff’s “Growth in a Time of Debt” — which asserted that higher debt corresponds to lower GDP growth — was only marginally affected.

    In a subsequent paper, Mariusz Maziarz found that the spreadsheet error had limited influence on the claimed 2.3% GDP growth gap between high and low debt economies, of up to 0.3%. By contrast, data exclusions accounted for up to 1.4% of the gap, while the weighting scheme choice accounted for up to 1.7% of the 2.3% difference.

    Maziarz contended that neither of the two averaging schemes, whether that employed by RR or the alternative by their critics HAP, is clearly methodologically superior.

    Today Japan, the United States and Italy all exhibit triple-digit gross government debt-to-GDP ratios, at 253%, 132% and 106% respectively. In a reprise of the famous ten-year Simon-Ehrlich wager, I will bet all takers that an equally-weighted average of real GDP growth in these three countries will rise less than 2.0 percent annually compounded during the ten years beginning on Jan 1, 2019 and ending on Dec 31, 2028.

    Loser buys a round of drinks for all at an NC meetup in 2029.

    1. Plenue

      Do you ever get tired of arguing in bad faith? You have to know the Japan example is completely dishonest. Japan essentially can’t grow anymore, and what growth it does have has a lot to do with that high level of deficit spending, constantly building new infrastructure and the like.

      1. Jim Haygood

        Japan essentially can’t grow anymore.

        Exactly what I asserted. Glad we agree.

        1. animalogic

          Sorry, but why can’t Japan “essentially” grow anymore ? Could someone explain ?

          1. Plenue

            Because it’s an overcrowded island. It has nothing to do with government ‘debt’; there’s only so much stuff people can buy and store.

            1. MyLessThanPrimeBeef

              With their declining birth rate, it is or will soon be less overcrowded than when Japan was ascending in the 70’s and 80’s.

    2. Synoia

      I will bet all takers that an equally-weighted average of real GDP growth in these three countries will rise less than 2.0 percent annually compounded during the ten years beginning on Jan 1, 2019 and ending on Dec 31, 2028.

      So would I as they are austerity constrained.

      One must be careful about cause and effect not being effect and cause.

      1. Jim Haygood

        Austerity constrained?

        Not sure what your definition of austerity is, but Japan’s long run of massive deficits (coupled with extreme QE which hoovers up ETFs along with bonds) leaves most countries in the back seat by comparison:


        Japan, whose 10-year govt bond yields 0.04 percent, is utterly dependent on ZIRP (Zero Interest Rate Policy) enduring forever. Normal positive interest rates would send Japan’s budget into an exponential, hockey-stick explosion as debt service gobbles up everything.

        1. Synoia

          The numbers you quote are explainable by the “austerity” mindset, squeeze the 90%, of our beloved leaders.

          Your “cause” is also easily explainable as austerity’s effect. That is, austerity, as in cutting poor people’s purchasing power.

          1. Jim Haygood

            One common definition of austerity is a sustained effort to reduce a fiscal deficit, with an objective of reaching a primary surplus.

            Neither Japan nor the US have any such plan. Indeed the US deficit will widen by about 2 percentage points next fiscal year, in an economic expansion.

            Japan’s consumer price index, which has remained nearly flat for 20 years, in fact has preserved purchasing power. Americans by contrast had their purchasing power cut by one-third over the same period.


            1. MyLessThanPrimeBeef

              Being a patriot, I believe our empire will last forever.

              What is Plan B, just in case, or actually I am just theorizing without implying it will ever happen (so those monitoring this discussion in order to protect this great country know), if we have to have trade surpluses in order to survive?

        2. animalogic

          Isn’t Japan’s debt in large part funded by Japanese citizens ? And doesn’t this fact alter the political – economic dynamic somewhat ?

          1. Plenue

            It isn’t funded by anyone other than the BoJ. Bond selling is as much a pointless sham in Japan as it is in the US.

            Regardless, getting Haygood to differentiate between different kinds of debt is a completely fruitless endeavor. In his mind there’s just ‘debt’; public, private, it’s all the same. It matters even less to him the minutiae of who holds what debt.

  6. Paul L.

    The way to stop worrying about the deficit is to completely eliminate this absurd paradigm altogether. The idea that an economically sovereign country like the US needs to borrow its own money that it is constitutionally empowered to create would cause an elementary school student to laugh.

    Read this translated article on the Swiss Vollgeld referendum. People are beginning to realize that the “king has no clothes”. The concept of sovereign money, promoted for years from our founding fathers through economic greats during the depression era to the current day, is going mainstream. Better bone up on it.


  7. hemeantwell

    For some background on England’s management of state debt via the Bank of England, I recommend Joseph Vogl’s “The Ascendancy of Finance.” He’s good on both the founding context and the gradual accretion of functions to include backstopping the lenders it was originally designed, in part, to protect from the Crown’s very capricious tax demands.

  8. Disturbed Voter

    Simple politics. When it helps a party, the deficit spending is good. When it hurts a party, the deficit spending is bad. Depends on circumstances and party … because any party want’s to disempower its opponents any way it can, not empower them. The budget, with or without deficit, is empowerment for those who control it.

    So I don’t see any way to generalize beyond party and circumstance. The Continental was bad economically for the American economy during the Revolution, but it was essential for the Continental Congress to provide. It didn’t help that it was widely counterfeited in NYC under British occupation ;-)

  9. blennylips

    They made no allowance for the effect produced by the incessant progress of every experimental science, and by the incessant efforts of every man to get on in life. They saw that the debt grew; and they forgot that other things grew as well as the debt.

    Isn’t this just capitalism 101? You need about a three percent growth rate precisely to be able to pay the loans back?

    Groaf is gone – that’s way different now.
    EROEI: then – Oil Rig in Titusville, Pennsylvania (1900), now – Pioneering Spirit Picks Up and Installs the Johan Sverdrup Drilling Platform in a Single Lift

    Surplus Energy Economics has a better take, IM(very uninformed & humble)Opinion.

    Please review Al Bartlett’s explication of the problems of growth:
    Arithmetic, Population and Energy – a talk by Al Bartlett

    I’m just another physicist who could well be totally wrong about it all!

    Note that Al is also a physicists and a telegenic curmudgeon who rants with style.

    Thanks for the ongoing education.

  10. Adam Eran

    I’d encourage all concerned about National “Debt” generally to compare it to bank debt rather than household debt. When you have a bank account, that’s your asset, but the bank’s liability (i.e. debt). One seldom hears of depositors marching down to their bank to protest the size of the bank’s debt (i.e. their accounts). You don’t hear depositors declaring “You must increase fees and decrease interest paid on accounts! Your debt will crush our grandchildren otherwise!”…but National “Debt” is another story.

    When we write checks, we assign a portion of the bank’s debt to the payee. Currency is just checks made out to cash in fixed amounts. It appears on our central bank’s books as a liability, too. Decreasing that National “Debt” diminishes borrowers’ ability to pay their obligations, leading to waves of asset forfeitures and foreclosures–great for a vulture capitalist like Peterson, but not so good for the population at large.

    I’ve actually attended one of the Peterson-sponsored “Budget Workshops” sponsored by Democratic Congressperson Benedict Arnold…I mean Ami Bera. It was push-polling to see which (needless to say deceptive) tactic to explore next in the ongoing campaign to reduce National “Debt.”

    1. Paul L.

      Who provides the funds for the “National Debt”? Those depositor “assets” you refer to are tied up in non-liquid gov’t bonds. The whole paradigm is circular and unsustainable.

      1. TroyMcClure

        Government bonds are as liquid as cash. You can sell at any time. Always a buyer.

        1. MyLessThanPrimeBeef

          Does it depend on which government?

          For example, the former USSR?

          And as with cash, the purchasing power is relevant. How much can be bought with Venezuela or Iraqi (under Saddam) government bonds?

  11. James

    Sovereign nation’s creating debt somewhat regularly based on an increase in public/private assets is fine. If anything, budget Hawks seem to play a valuable role in promoting the idea that money is not actually worthless.

    The problem arises for me when the private entities that make up Michael Hudson’s FIRE economy create private debt which later implodes and has to be serviced publicly with deficit spending, QE,or whatever we’re calling now. Not to mention the other commenters who’ve noted that costs are still externalized by liquidating every real thing for it’s monetary equivalence. We can print more money but haven’t been able to artificially create land/resources. In fact, looting everything natural is merely an excuse to create more money. What happens when overvalued inflation adjusted resources are ACTUALLY scarce?

    Forgive me if this piece doesn’t put my mind at rest.

  12. nothing but the truth

    obviously is depends on what the govt did with the money.

    in most cases either it spent it on war, or on bailing out real estate creditors.

    so what you see are symptoms of those.

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