Public Debt: A New Perspective


I just finished reading an article by Philip Bagus from a few weeks back regarding public debt, both internal and external, and I’ve a new perspective on the subject.

You can find the article here.

So, a question to start:  how is the value of a particular nation’s currency measured?

As Bagus claims at the end of his article in regards to the Euro Crisis,

A situation of persisting import surpluses such as in Greece can be interpreted as a lack of political will to reform labor markets and to regain competitiveness. Therefore, persisting import surpluses may cause a currency or public-debt sell-off. In this sense, the German export surplus supports the value of the euro, while the periphery’s import surplus dilutes its value.

As I said the other week, Greece stands to gain the most out of a division between it and the Eurozone, while Germany stands to lose. The commitments of the Eurozone nations (in particular, the wealthy northern ones) translates into subsidization of weakened or failing economies within the Union. Essentially, Germans are propping up Greeks and Spaniards by spreading around the wealth of excessive German exports via the European Central Bank dictating policy inside Germany.

Now, back to my question:  how is the value of a particular nations currency measured? Let’s take a look at something else Bagus said and apply it to the US.

In sum, high public (external) debts and persisting import surpluses are signs of a weak currency. The government may well have to default or to print its way out of its problems. Low public (external) debts and persisting export surpluses, in contrast, strengthen a currency.

So, a sign of a weak currency is a large amount of foreign trade deficit plus a high amount of external public debt. As evidenced by the 2011 year-end report from the US Treasury, US external public debt was at roughly $15 trillion. While our current trade deficit stands at $50.1 billion as of April 2012. In comparison, Japan’s external public debt is around $3 trillion (as of Q2 of 2011), with trade deficit at 907 million yen or $11.4 million (as of May 2012).

The contrast is stark, and it’s obvious which of the two countries has a weaker dollar. But here’s my new perspective on what most of us call “inflation” (or the excessive printing of money) — as Bagus say in the last quote, there are only two ways out for a government racking up debt:  1) they lay the cards down, say it’s not worth it anymore, and default on the receipts; or 2) they burn the midnight oil and keep printing money. The latter option is where I’ve had an epiphany. If the government chooses to print more money, all that is being done is reducing the value of the currency to the appropriate level based on the spending of said government. The only way for the economy to keep up with high levels of spending that incurs high levels of debt is to devalue the currency.

This flies in the face of economists like Paul Krugman and Robert Reich who claim that the only way for the government to get us out of all of our economic crises is to prime the pump by ramping up public spending. And, I would wage, it matters not if that spending is done internally (domestically) or externally (abroad). Bagus’ analysis of external debt being worse than internal debt does not apply here, as any amount of increased public debt requires the printing of more money to stay afloat. The advantage of looking exclusively at external debts and trade deficits is that you get a much clearer picture of how much a currency is worth than you would just looking at internal debts and GDP. Ironically, the latter two are the ones that are always spouted off by politicians and mainstream economists to show that their frivolous and demented economic policies are “working”.

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One Response to Public Debt: A New Perspective

  1. Pingback: Public Debt: Redux via Municipalities | Waldlichtung

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