Ever Growing Debt! Yes, Please!

Ever-growing debt! Sounds a like tea-party sign… a warning of what faces us if we don’t soon mend our profligate ways.

I’d like to state a startling conclusion which follows from MMT: in a growing economy (an economy that continues to add more goods and services over time), the debt will need to grow to keep pace with that economic growth in order to provide enough money to purchase those goods and services. So, if you want the economy to grow more or less continuously, the debt will need to grow more or less continuously, to infinity. It should never be paid down, and attempting to do so would be at best contractionary and at worst disastrous.

How then will our proverbial grandchildren ever pay down our debt?  They won’t, hopefully. Just as our grandparents left us a federal debt, we’ll leave an even larger one to our grandchildren. But if that debt grows in a measured and proportionate way, in a growing economy, that need not concern us.

As I stated here before: you buy the debt of someone who has a future. It’s the future growth and/or earnings that you care about when you fund someone’s debt. As long as our country has a future, as long as its economy continues to grow year after year, there should be no concern on any debtor’s part or any citizen’s part about a national debt that grows without bound – as long as that growth is measured, and commensurate with the growth in goods and services.

The main policy driver should be economic growth: do whatever it takes to allow continuous growth in the production of goods and services. (Note that I haven’t said anything about making “economic equality” a driver – that’s the egalitarian goal, and one which has been shown time and again through history to be inimical to both human freedom and advances in the standard of living. An essay for another day.) The incoming Republicans, tea-partiers and otherwise, need to understand this before they take measures that may sound good on the surface, but in fact be at best counter-productive. While we need to get the rate of debt growth under control, we don’t need to reverse it.

If you want a quick explanation of why the money supply must grow to allow growth in prosperity, you could do worse than read part 1 of a six part series by the estimable Skeptical Optimist. If you want to see a nice chart showing, historically, what has happened when we’ve tried to pay down the national debt, see part 6 in that series. If you want a quick and easy explanation of fiat currency in a laboratory economy, check out Coupon Clipper’s series at ESM’s blog, here. If you want to learn how debt growth is synonymous with money growth in a fiat currency regime, you should check out the mandatory readings section at http://www.moslereconomics.com.

For those who have neither time nor patience for those other readings, here is a brief sketch of the argument I am making:

1) In a fiat currency regime, the money supply is increased by increasing the national debt
2) In order to maximize prosperity in an economy, the money supply must grow commensurately with the growth in the supply of goods and services
3) A growing economy is good for everyone, because it results in more goods and services being available, to increase our standard of living
4) Therefore, if we wish to increase our standard of living without bound we will need to increase our national debt without bound

Yes, I know it sounds weird: but that’s because as individuals, we are not in the position of a national government which issues a fiat currency. Households should not increase their debt without bound.

To check the validity of the premises in this argument, you’ll have to do additional reading.

When will the mutually beneficial curves of increased national debt and increased economic activity come to an end? Well, hopefully never, but in the real world, something will eventually occur to bring an end to the nation and/or civilization. And then we’ll have to learn all of this all over again.

Please tell your incoming congressmen to do what they can to keep the Bush tax cuts in place for all income levels – even though that will result in a temporary increase in the national debt. But please don’t encourage them to make ill-considered attempts to balance the budget, or to pay down the debt. And please don’t blame them when they eventually see the sense in what I am saying and decide to perpetuate deficits and debt – I’m thinking that although few in Congress understand MMT or macroeconomics, they have developed a feel for what happens when you enact contractionary policy. At least I hope so.

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4 thoughts on “Ever Growing Debt! Yes, Please!

  1. So, what is “measured and proportionate” and does the economic situation in which we are in today reflect that definition? It sure doesn’t feel like it, but that may just be an intestinal reaction. Further, what are the implications of government displacing private industry with its own services, healthcare in particular? Will tax revenue be realized as a consequence, or will it be obviated and how will that distort our “Island” (thank you ESM) economy?

  2. @QuickRiposte

    As much as it pains me to say it, I do agree with Paul Krugman on this one: last year’s situation called for even more drastic levels of fiscal stimulus and debt creation than were implemented by our Democratic overlords. In addition to under-funding the stimulus, they implemented it in a particularly ham-handed, partisan and ineffective way, all but blowing an opportunity to turn the economy around. As I’ve stated before, I tend to favor fiscal stimulus in the form of tax cuts, but in order to work around the liquidity trap to the extent that it exists, I favor some measure of real infrastructure spending too: highways, bridges, power grids, military, etc. This is stuff that doesn’t need to generate new bureaucracies and hordes of useless government meddlers: they merely inject the funds into the economy via the existing channels (which are no doubt corrupt, but what are you going to do?)

    As far as health care, the PPACA was the worst horror to emanate from Washington in our history. We need to repeal it, or as much of it as possible, as soon as possible. I am not in favor of government spending that creates new bureaucracies, millions of new government employees, and thousands of new restrictions on the liberty and choices of Americans.

    So, what is “measured and proportionate?” It’s a technical question, and I certainly don’t pretend to know the precise answer. That is best left to the economists at the Federal Reserve. Again, unlike the typical tea-partier, God bless them, I don’t think the Fed is the locus of all evil. Given that we’ve got the kind of monetary system we’ve got, the independent Fed isn’t as bad an idea as some people make it out to be. It’s essentially a benevolent dictatorship of technocrats – hopefully competent ones.

  3. Pingback: Alexander Hamilton Anticipates Me by 200 Years « Draco von Faust

  4. Ok, so my first and most obvious question would be, if the objective is to grow the money supply, why do it with debt? Why not just print more money and spend it?

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