The Myth of Debt

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Originally cross-posted on March 10, 2013 at the New Economic Perspectives blog.

(Cross posted from

FROM the latest cuts to the economic forecasts to the Italian elections to the gathering debate about how George Osborne should play this year’s Budget, all discussions about the financial system now lead swiftly back to the world’s sovereign debt problem. It towers over every effort to get back to prosperity, threatening to take decades at best before it can be resolved, very possibly with an almighty crash along the way.But maybe that is because we are looking at a 21st-century problem in a 20th-century light. My research at University College London indicates that the answers might lie in modern versions of legal structures and instruments which pre-date the modern financial system and even the incorporating Union of England and Scotland in 1707. But before I explain this “back to the future” proposal for recovery, a warning: we’ll need to turn much of the received wisdom that underlies modern economics and politics upside down as we proceed.

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  1. Broge | March 10, 2013 at 10:36 am |Would you bet your next 5 years pay on your bet?
    If they keep huffing the idealogical ether and keep some shaky fath it will be alright. At least till some courageous common sense kid proclaims the Emperor os naked !!!

  2. Tweeder | March 10, 2013 at 11:23 am |Pretty much a Graeber riff. See “Debt: the first 5,000 years”

  3. joe bongiovanni | March 10, 2013 at 12:20 pm |I read the article twice.
    I missed The Myth of Debt.
    Can you say specifically in one sentence that – The Myth of Public Debt is ……such….and…..such – and then why this such and such is a Myth? A Debt to Equity Swap?Is the case being made here that because the BoE itself was the purchaser / holder of the British Treasury ‘bonds’, coupled with the nationalization of the BoE, that the government only owes all that debt to itself – and thus there would be no need to ever make any repayment?
    The private BoE “” was founded to create money backed by its gold holdings that could be exchanged for Treasury pledges over future taxes.””
    Because that’s the only way this would make sense to me – that the debt is a myth.But if the Treasury issues are marketable after purchase and some real body took his or her money and funded the government’s expenses as a loan, then I don’t see that the money does not need to get paid back to that real body.The major points that I see being bridged here have to do with who should issue the money that you say is 97 percent privately created and issued. With reference to Greenbacks, I see a potential that the Treasury itself could issue all the money needed for commerce. Viola.
    At that point, it would be totally unnecessary to ever issue any more public debt (or Equity) and there would be a mechanism for repayment of existing debt.
    That is all fine and as proposed in the US by Congr. Dennis Kucinich in the two previous Congressional sessions., did you gloss over the ‘fact’
    “as we have just seen, …….. that government spending has come first and taxation later.” I believe this ‘fact’ is drawn from the posit that the BoE lends to the government in order to to spend that which it has not taxed, and that later taxation will repay the BoE. Is that correct?
    Are you saying that government does not fund with both taxation AND spending? And does such a posit lead to the conclusion about taxation, being – “Taxation acts to remove money from circulation and to prevent inflation: it does not fund and never has funded public spending.”
    Because above, that taxation WAS for the purpose of supporting the government spending which the government might have borrowed from the BoE.So, it’s all a little confusing to me.
    What is The Myth of (Public?) Debt?

    • Frank | March 10, 2013 at 1:47 pm |A myth is a story that may or may not be true. Myths are generally very old. This means there are no records or other proof that they happened.I think that what Chris Cook is trying to convey is that government debt is actually totally unnecessary. The cultural myth that we are still laboring under, is that it is needed in order for governments to function, when in fact it is not. The financial industry wants to perpetuate this myth to its advantage and has plenty of resources to support the illusion.

  4. Tadit Anderson | March 10, 2013 at 3:35 pm |I need to understand if this author “Chris Cook” is the same person who operates the website “Open Capital”? Why? you might ask? It is because if so, he had a close association with Thomas Greco, who is an ideologically based “Libertarian” who has promoted pop-level economics based upon assertions for a very long time. That Chris Cook may have made a shift or this may be someone else entirely, or this is the same Chris Cook and he doesn’t understand what he is writing about.. CF This Chris Cook hasn’t posted .anything at this site since 2009

    • Tadit Anderson | March 10, 2013 at 3:39 pm |PS Or has whomever posted this paragraph, made a mistake in identifying something that seems friendly to MMT et al, but is actually not a reliable source of economic/monetary analysis.

  5. Auburn Parks | March 10, 2013 at 5:23 pm |Personally, I don’t understand why people have such a hard time ridding themselves of the public debt myth and thus understanding MMT.
    First of all, its no longer controversial that the FED has the capacity to create as much money as it wants (QE etc)
    Secondly, there are 3 ways in which the govt could fund itself with out issuing “new debt”…..repeal the law that prevents the treasury from overdrafting at the FED, simply repeal the gold standard law that says treasury must issue UST’s of equal value of new spending, or have the FED commit to buying an equivalent amount of UST’s as the treasury spends\issues.
    If you can accept that the govt can still spend money even with no net “new debt” or whatever through these simple mechanisms…..than how could you possibly worry about the US “debt crisis” when we have just established that the govt is under no financial obligation to issue more “debt”Of course, there are many different rationales and arguments that prove that public debt is a myth and the above description is simply one that I find particularly compelling because you cant admit the above without admitting the other

    • Frank | March 10, 2013 at 6:43 pm |The usual riposte of the banker stooges, is that debt free money issued by the US Treasury would be inflationary. They usually cite the example of Somalia to prove their point. However, inflation of a currency is dependent on the amount of money created and has little to do with who creates it.There is in fact little risk of excessive inflation, while unemployment is really at 19% of the potential workforce. Unfortunately, the money created by the Federal Reserve’s quantitative and qualitative easing is not flowing into the nuts and bolts economy, but is being used to pump up the stock market.

  6. Schofield | March 11, 2013 at 11:56 am |Auburn Parks.“Personally, I don’t understand why people have such a hard time ridding themselves of the public debt myth and thus understanding MMT.”It’s simply that they make the assumption that the domestic private sector automatically creates its own surplus. It does not. Attention to the principles of balance sheet accounting reveals that the sector always requires a net contribution from either the government or foreign sector or a combination of the two. See J. D. Alt’s recent article and Randy Wray’s MMT Primer Blog No. Two :-

    • Auburn Parks | March 11, 2013 at 4:15 pm |Schofield
      right on with regard to bank loans create bank deposits and reserves…..This is the surest sign that the notion of bond-vigilantes demanding higher interest for USTs is one of the silliest myths out there. If the Treasury stopped issuing dollar for dollar USTs then the overnight fed funds rate would immediately fall to 0% just as Mosler describes in the “natural rate of interest is zero”. The markets are provided default risk free finanical assets=USTs with interest out of the good will of the US people and govt.
      It never ceases to amaze me how backwards the “conventional wisdom” has the causality.

    • Frank | March 12, 2013 at 9:10 am |@Schofield
      “they make the assumption that the domestic private sector automatically creates its own surplus. It does not.”I assume that by surplus you mean a surplus of money. However, the private sector provides goods, which can be construed as wealth. For example, the building of a house or the manufacture of a car. There is then the issue of depreciation, repair and maintenance, which have to be paid for. I sometimes pose the question “Is the US better off by importing goods from China instead of making them domestically, when we receive material possessions and the Chinese receive Federal Reserve dollars?” The dollars decline in purchasing power, but can receive interest or can be invested in productive enterprises worldwide. The goods we receive depreciate and are generally worth nothing and have to be scrapped after ten years.Obviously the reason goods are imported from China is that corporations can take advantage of cheap Chinese labor and the added advantage of keeping profits offshore by routing the transactions through an intermediary tax haven company. All costs of production are actually labor costs, directly or indirectly. By reducing these labor costs, greater profits can be reaped. This increases unemployment in the US causing untold misery, a burden on other taxpayers, who receive some social support and reduced tax revenue to add to the difficulty. An economy not firing on all eight cylinders needs fixing, but no one seems to want to. The right wing then argues that as a result of all this, we cannot afford further social support and government spending must be cut. This will cause further increases in unemployment. If this continues, the downward spiral of the economy will get worse, putting small companies out of business. There can be no improvement until more money is spent into the economy, which could be achieved by paying higher wages to the workforce and/or government spending using debt free money.I just cannot see that things will improve by leaving things as they are. In fact, the situation might get worse as advances in technology reduce the need for people to be involved in manufacture and administration. Large corporations are still shedding people even though they are profitable, notably the banks.

  7. Andy | March 11, 2013 at 12:01 pm |Starting to see signs that the UK is waking up to the realities of Accounting identities.
    Early days but …. About bloody time.

  8. Pingback: THE MYTH OF DEBT | The Social Life of Money |

  9. Mel Giles | March 25, 2013 at 12:05 am |FROM this article I understand two things. First, the clearing banks cannot be trusted to freely create the credit which is modern money. If money is to be created by a middleman or intermediary then it should be either the central bank or the Treasury itself.

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