David Graeber\’s debt solution

There\’s good bits in his analysis: he makes the same point I\’ve been making for years (thus it is obviously a good bit agreeing with my prejudices as it does) that the debt dynamics are entirely different in a country that prints its own money and in one that does not. Sadly he seems to think this is a revelation rather than a generally accepted truth.

However, he rather goes off the rails here:

Warren Mosler and Philip Pilkington are two economists who dare to think beyond the shackles of Rogoff-style austerity economics. They belong to the modern money theory school, which starts by looking at how money actually works, rather than at how it should work. On this basis, they have made a powerful case that if we just get back to that basic problem of money-creation, we may well discover that none of this is ever necessary to begin with. In conjunction with the Levy Institute at Bard College, they propose an ingenious, yet elegant solution to the eurobond crisis. Why not simply add a bit of legal language to, say, Irish bonds, declaring that, in the event of default, those bonds could themselves be used to pay Irish taxes? Investors would be reassured the bonds would remain \”money good\” even in the worst of crises – since even if they weren\’t doing business in Ireland, and didn\’t have to pay Irish taxes, it would be easy enough to sell them at a slight discount to someone who does. Once potential investors understood the new arrangement, interest rates would fall back from 4-5% to a manageable 1-2%, and the cycle of austerity would be broken.

Well, yes. This is based on the idea that fiat currency really only has a value because the state demands that taxes be paid in it. Very MMT that is.

But the value of the bonds will depend on the volume of bonds as opposed to the taxes that have to be paid with them. Which brings us right back to the same old problem: the volume of debt available to pay those taxes.

If debt were, say, 30% of GDP, then one can imagine, again just as an example, 10% of outstanding bonds being used to pay taxes each year. Say, 3% of GDP. Somewhere around the yield from corporation tax say: that would be a likely source of such redemptions. If corporate treasurers could see a discount on hte bonds then they might well buy them to feed back to the taxman.

Now think that the debt is 120% of GDP and the interest rate on the bonds is high (or, same point, that the discount on the bonds is high, yields moving inversely to price). Everybody sees that they can save 15% on their tax bill by buying the bonds and tendering them. The State can only take in 50% of GDP in tax in any one year (ish, ish). Now it gets all of that in olds bonds being tendered and none at all in cash. In extremis of course.

At whioch point the government is still fucked, isn\’t it? It\’s received no cash at all in taxes that year, only managed to retire some of its debt. To actually pay for anything it must therefore…..print more money or issue more bonds. It can\’t print more money because it\’s in the euro. If it issues more bonds to cover the bonds that are being submitted then the stock of bonds hasn\’t changed and nor has the ability to finance that debt stock over time.

So nothing, in the end, has really changed, has it? They\’re still fucked because they\’re in the euro with a very large debt to GDP ratio.

8 thoughts on “David Graeber\’s debt solution”

  1. I rather thought that that was the appeal. Overspending governments would get into trouble quite quickly this way. Might slow them down a bit.

  2. Which just goes to show that keeping your debt to GDP ratio manageable, is a good idea. Funnily enough someone thought of this one and made all the eurozone countries sign up to do just that. Then they spent their way through the ceiling anyway.

  3. James V

    Which just goes to show that keeping your debt to GDP ratio manageable, is a good idea. Funnily enough someone thought of this one and made all the eurozone countries sign up to do just that. Then they spent their way through the ceiling anyway.

    Yes, Germany had a debt to GDP ratio above the stipulated 60% ratio every year from 2003 – 2008. Spain and Ireland started at 47% and 31%, and ended that period at 36% and 25%. A fat lot of good being virtuous did them.

    http://www.tradingeconomics.com/germany/government-debt-to-gdp

  4. I am well aware that Germany was first and worst at breaching the Maastricht criteria. I don’t condone it.

  5. Umm, I rather think that Mosler and Pilkington have it in mind that the countries concerned wouldn’t be locked into the quasi-gold standard we call the Euro.

    However, there is an obvious problem with making govt bonds redeemable as tax credits: most of the buy-to-hold investors would be elderly people saving for retirement, who are not likely to need much in the way of tax credits. I suppose they would have to sell their govvies to someone who did need them.

  6. Frances,

    *most of the buy-to-hold investors would be elderly people saving for retirement, who are not likely to need much in the way of tax credits.*

    Is that really true? I have no idea, but I reckon (on no investigation at all) that the percentage of government bonds held directly by such elderly savers is tiny. How many of your (non-banker) friends and acquaintances own govt bonds? I don’t know anyone who does . OK I have not actually asked anyone, but why are the elderly moaning about low interest rates rather than celebrating the fact that their extensive bond portfolios have leapt in value?

    Now they may own funds/insurance policies have company pensions that own govt bonds, but such funds can presumably find someone to sell them to.

    Not v important, but (admittedly on no evidence at all) I find the idea of of huge numbers of 50+ sitting on huge gilt portfolios implausible. The tiny proportion (1-2%?) who own some probably do pay tax.

  7. Mosler and co are just talking about making the bonds into something much more like money. It could work. But it still suffers from the simple problem that printing money causes inflation. It also tempts governments to do deficit spending which also causes inflation.

    It would be an interesting test of the tax-demand theory of demand for money. I think holding demand is more important than tax demand. That is, demand for money is about demand for the most liquid asset.

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