Keynesians say it’s No Problem to owe Money to Ourselves even though they’d be Miffed if we Defaulted
Week in Review
Keynesians have all sorts of ways to justify deficit spending. One of their favorites is to note that the additional amount of interest owed on new debt is so mall in the big picture that we’d be fools not to borrow more. So the government can use that new debt to stimulate the economy. Or so they say.
Another thing they love to say is that a high level a debt is not a problem because we owe it to ourselves. And therefore it doesn’t really exist. Because it’s just for all intents and purposes money moving from our left hand to our right hand (see We Refuse to Lend to Us by Don Boudreaux posted 1/2/2012 on Cafe Hayek).
Like the mid-20th-century economists whose reasoning in terms of unwisely chosen aggregates led them to argue that public debt owed “to ourselves” is not much of a problem…
All that today’s government need do when faced with the need to raise marginal tax rates today in order to pay off yeterday’s [sic] debts is to default.
Insofar as we owe the debt to ourselves, default simply means that we choose not to repay ourselves. Right-hand owes left-hand; right-hand refuses to pay what it owes to left-hand – no big deal: the entity to which both hands are attached possesses the same amount of money with default as it would with payment.
If the Keynesians are right in their theory that owing money to ourselves is not a problem then they shouldn’t mind a default from the U.S. taxpayer. But they would mind a default. And wouldn’t allow one. Which can mean only one thing. Owing a large debt to ourselves is a big problem.
It’s not the same as borrowing from your savings account. You can default on that. You just have less in the bank. And earn less interest. Public debt is more like borrowing from a credit card. The more you borrow the more you pay in interest. And defaulting has consequences. The difference? In one we borrow from ourselves (our savings account). The other we borrow from someone other than ourselves (the bank holding the credit card). Who expects to get their money back. Just like sovereign debt holders.