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The Deficit, the Debt, and the Real World

The latest fad in business journalism is to sound the alarm about the United States having become the biggest debtor in the world.  This is intended to bring visions of our country sliding into a third world-type debt trap.  But even those who don’t draw such dire inferences nevertheless assume that a ballooning U.S. debt is in itself the prelude to economic disaster.  That too is far from reality.  In fact, both the size and the threatening nature of the debt burden are greatly exaggerated, largely the result of statistical mystification.  Furthermore, to the extent that there is a debt problem, it is a symptom and not a cause of the real problems, including the potential of a financial breakdown, facing the United States and other capitalist nations.

What is important about the current spate of scare stories is that they feed into the prevailing ideology — the notion that the federal budget deficit and the accompanying debt burden are what is blocking a renewal of long-term growth, that all would be well in the economy if only the deficit could be eliminated. . . .

. . . The most striking comparison of all is with the debt load produced by the Second World War.  At the end of 1945, the ratio of debt to GNP was more than 130 percent, almost three times larger than the current figure.

What these comparisons indicate is that a large debt need not hold back economic growth or bring disastrous results.  This is not necessarily a universal economic truth, since the ability to cope with debt varies from one country and period to another.  Here we are merely focusing on the United States with its enormous productive capacity and rich natural resources.  What appears at first sight to have been an overwhelmingly huge postwar debt was no obstacle to this country’s growth.  In fact the contrary was the case. The debt had been built up under conditions that created a backlog of effective demand, which together with successful postwar labor struggles for higher wages gave a substantial initial boost to a new era of growth. . . .

What is new today is not the acceleration of debt accumulation but its occurrence in a period of deepening stagnation.  When the prosperity-supporting postwar stimuli began to peter out, the economy was forced to rely more and more heavily on increasing debt, both private and public.  A growing national debt thus became a crucial instrument in the struggle to keep the economy afloat.  And under these changed conditions, the debt grew faster than the economy.  The debt-producing deficit was no longer a mere counter-cyclical tool, it became an essential prop in the upward phase of the cycle as well. . . .  What needs to be stressed is thus neither the magnitude of the debt nor the reversal of the trend.  Seen in their proper context, indeed, these are essentially the symptoms of an underlying faltering economy.  It follows that the focus of today’s debate is totally misdirected.  All eyes are on the size of the deficit and not on what makes it necessary.

Nor is proper attention being paid to the uses to which the deficit is put and the way it is financed.  It would be one thing if the deficit were being devoted to lightening the impact of stagnation on the poor, the aged, and the unemployed.  It is something entirely different when, as at present, the deficit brings about a waste of resources and an unconscionable investment in armaments that can lead to the destruction of life on this planet.

Equally absent from the debate is the method of financing the deficit.  Since it is wholly covered by the issuance of Treasury securities, each year’s deficit adds to the outstanding debt and the budget’s interest burden. . . .  What this means is that instead of being used for socially useful purposes, a growing portion of the deficit is siphoned off to fill the coffers of wealthy bondholders.

The conventional wisdom maintains that it cannot be otherwise.  That is based first on the belief that there is no sensible way of financing the deficit other than by borrowing — a fallacy we will discuss below. . . .

The discussion thus far has been based on the tacit assumption that the only feasible way to finance deficits and service the debt is by borrowing.  There is however an alternative — the issuance of currency on which no interest is paid and which would therefore eliminate the need for ever larger budgets to service the debt.  We are now entering upon a most sensitive area, one that has long been off-limits to respectable folk.  That printing currency to cover a deficit inevitably produces uncontrollable inflation has become an article of unquestioned faith.  There is of course considerable historical evidence of runaway inflation created by reckless use of the printing presses.  But it does not follow that it must always be so.

The cause of past hyper-inflations has never been the printing of currency.  Rather, such inflations are due to the issue of too much currency in relation to the capacity of an economy to produce goods and services to satisfy effective demand.  Thus, a country that finances a war by printing money and cannot, because of the war, produce enough consumer goods to absorb the resulting flood of currency opens the door to hyper-inflation.  Similarly, an irresponsible government that prints money without regard to the inflationary danger is asking for trouble.  But that is not necessarily the case for a country that has a surplus of food, idle productive capacity, and mass unemployment — as is and has for a long time been the situation in the United States.  Of course this financial method contains dangers and must be handled with caution.  For example, paying off the accumulated debt in one fell swoop might very well create monetary disturbances and initiate a dangerous inflationary trend.  But what if the annual deficit, or part of it, were financed by issuing new currency?  Under existing conditions this is a method which, if carefully handled and accompanied by appropriate controls on the creation of credit by the private economy, could be usefully introduced into the government’s management of the deficit and the debt.

In raising this issue, we are not offering a cure.  Rather, the purpose is to open up a subject that has, in a sense, been hypocritically closed.  The accepted doctrine that borrowing is the only way to finance the deficit brooks no questioning.  Yet the same kind of objection to considering the currency-issuance road can he equally applied to current practices.  The supposed advantages of the borrowing approach are based on a number of dubious assumptions: there is assumed to be a fixed supply of savings available for investment; when the government borrows a portion of this stock of savings, the amount available for private investment is supposedly reduced; hence there is no inflationary effect.  But the notion that there is a fixed supply of savings ignores the extent to which credit can be expanded (see “Money Out of Control,” MR, December 1984).  Moreover, the securities issued by the Treasury are widely used for precisely this kind of credit expansion. . . .

We are of course aware that we have been raising a lot of questions without attempting to provide definitive answers.  Our purpose is to try to shock people out of an all-too-easy acceptance of stock stereotypes that are imposed on us every day of our lives by the media and the certified establishment authorities.  The deficit and the national debt are, after all, bookkeeping entries.  We live in a real world of human beings a few of whom are rich and most of whom are either poor or barely making it.  We ought not to allow ourselves to get these two realms mixed up.  We shouldn’t be deterred from struggling to solve the real problems of the real world by the mystifications and obfuscations of those who run the show and whose main objective in life is to keep it that way.


Paul M. Sweezy (1910-2004) was a Marxist economist and founding editor of Monthly Review.   Harry Magdoff (1913-2006) was a co-editor of Monthly Review (1969-2006).  The text above is an excerpt from the Review of the Month of the May 1985 issue of Monthly Review (37.1).




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