Tuesday, September 22, 2009

Money is debt (well, private money at least)

Just got back from Fox where we taped a show, but it won't be airing; it was for internal use. The discussions, however, were very real.

One of my co-panelists kept harping on the deficit and casting it as this terrible thing, like most people do, because it amounted to nothing more than heaping debt on the backs of our kids.

This is an oft' heard remark. ("Leaving a legacy of debt..." etc.)

Curiously, these folks have no problem with the fact that businesses use debt every day to make investments and to grow. The truth is, in the world of businesss, we really DO spend our way to prosperity. I wonder if my colleague thinks that News Corp Chairman, Rupert Murdoch, would be faring as well as he is if he couldn't use debt to grow his business.

Yet when it comes to the government, where the ability to issue money is unlimited, there is this view that it is bad, even if the money is used for needed investments, like health care, education, infrastructure, sustaining the production of real assets or even making payments to support incomes of people who are unemployed or disabled, when the private sector can't.

Notice I said, "issue money," rather than issue "debt."

That's because the money of the state (government) is different from private money because it is not an i.o.u. or a promise to pay per se. The only promise inherent in state money is that the state promises to accept it for payment of taxes. But that alone is a pretty important promise; it could keep you from having your assets confiscated or perhaps even from going to jail.

Let's start with a basic concept, which is, that all money private money in a modern economy is debt. Everything that we routinely use as money, such as checking accounts, loans or other forms of credit; they're all debt.

Your promise to pay "creates" a loan, which is merely a credit that the bank issues to you by simply entering it onto its books. You then use that money to either acquire some of the real assets (goods and services) you need to live or, to acquire financial assets that you will need later on in life.

Here's another important point: Your promise to pay also created an asset for the bank. So for every debt(liability), there is a credit (asset). That point frequently gets lost in these discussions. The analysis ALWAYS centers on the liability side of the balance sheet (the debt) and NEVER on the asset side.

When the government spends to acquire goods and services, pay interest or support incomes to retired or unemployed people, it supports GDP. Rsing GDP equates to greater wealth creation. That's a good thing.

What is often misunderstood is that government issuance of securities (like Treasuries) does not constitute borrowing, but rather, functions simply to sustain a desired interest rate.

That means there really is no, "legacy of debt left to our kids and grandkids." the statement is a complete fallacy. Spending today makes GDP higher than it would have been had the spending not occurred. All that means is that we have produced more goods and services (real wealth) and THAT is the true legacy passed along to our kids and grandkids. It's why the "debt" our grandparents ran up duing WWII didn't impoverish us, it made us rich.

What impoverishes us is poverty. That sounds silly but it's true. Poverty comes from sitting around and doing nothing...in other words, not engaging the capital of the nation to produce the wealth that we're capable of producing. When we do that we pass along a lower standard of living to our kids and grandkids. We make them poorer.


googleheim said...

i'd like to add that the supposed Lauffer success of the 1980's tax cuts did nothing compared to the credits Reagan doled out to the banks which is measured by the level of debt Reagan created -

debt created is wealth created

Reagan spent more in his 8 years than all administration combined prior all the way to George Washington. right ? straight numbers no adjustment for inflation.

supply side economics is a smoke screen hoax

Matt Franko said...

Should we get our hopes up that the show was some kind of "pilot" program?