In part one of this three-part series, we consider why a country that issues debt in its own currency can’t default unless it chooses to. We also explore how central banks can control interest rates on the national debt and whether it is possible for government borrowing to crowd out the private sector.
Show Notes
Money In The Modern Economy: An Introduction—Bank of England – Q1 2014
Money Creation In The Modern Economy—Bank of England – Q1 2014
Congressional Budget Office 2017 Long-term Budget Outlook
Going for Broke: Deficits, Debt, and the Entitlement Crisis—Michael D. Tanner
Bernanke’s Paradox: Can He Reconcile His Position on the Federal Budget with His Recent Charge to Prevent Deflation?—Pavlina R. Tcherneva – Levy Institute (includes quotes referenced in the episode by Ben Bernanke and Michael Woodford)
Japan’s Debt Burden Is Quietly Falling the Most in the World—Bloomberg
The Bone Clocks—David Mitchell
Venezuela Is Starving—Juan Forero – Wall Street Journal
Curse or Blessing? How Institutions Determine Success in Resource-Rich Economies—Cato Institute
Forget Taxes, Warren Buffett Says. The Real Problem Is Health Care.—New York Times
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478: National Debt Masterclass Part Two
Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 477. It’s part one of our national debt master class.
National Debt Master Class Introduction
In the next three episodes of Money for the Rest of Us, in conjunction with our 10th anniversary, we wanted to have an in-depth discussion of one of the greatest potential long-term risks for investors, the US national debt.
It’s a topic we’ve covered over 15 times on the podcast, and the reality is my view and concern regarding the national debt has changed in the past decade. In the past 10 years, I estimate I’ve written and spoken at least 3 million words in conjunction with the Money for the Rest of Us free podcast, Plus episodes, investment guides on the website, the Insiders Guide email newsletter, and in one book. That’s equivalent to writing 50 books, five books a year.
With all that speaking and writing has allowed me to look at a specific topic such as the national debt from many different angles, to go back to it again and again, trying to really understand the topic, and get better at explaining it as they come to understand it.
For this national debt series, I really listened to a number of the episodes we released on the topic to see what I said, and whether it still applied. Those earlier episodes are helpful in setting the stage for this national debt series. I’m going to share with you in part one portions of episode 1 and 4 from Money for the Rest of Us, released in May 2014, as well as a portion of episode 157, released in May 2017. The audio has been remastered, although admittedly in 2017 my delivery was a little too intense. How I speak on the podcast is one of the things that has changed in the past 10 years.
Part one then of this series, our national debt masterclass, focuses on the idea that a country that issues debt in its own currency can’t default on that debt unless it chooses to. A country can always create the money to make interest in principal payments. By doing so, it replaces interest-bearing debt with non-interest-bearing currency, fiat currency. Likewise, a country working through its central bank can control the interest rate; it pays on its debt. And we’ll see, in the case of Japan in this episode, how that’s done.
And finally, the ability to create unlimited amounts of money through government spending, quantitative easing, and issuing bank loans means federal government borrowing can’t crowd out the private sector, sucking up all the savings so the private sector can’t get access to capital. It just doesn’t work that way. There’s an unlimited amount of money.
What there isn’t an unlimited amount of are real resources: land, people, projects, ideas. When the supply of money overtakes the private sector’s ability to produce goods and services, that leads to inflation, or potentially hyperinflation., when a government actively destroys the private sector economy, as we’ll see in this episode with Venezuela.
At the conclusion of this episode, I’ll give you a preview of what we’ll cover in part two of our national debt masterclass.
What Is Money?
So when we talk about money, we’re not talking about theory money. It’s now just digits, so mechanically, what happens? They just can change the digits, because it isn’t anything. Money is nothing. Why then do we invest? The main reason we invest is because we want to take this nothingness, which is money, which are just numbers, which are just digits, and we want to buy real resources. We want to take this nothingness and buy something of value that creates income, that will hopefully outpace inflation.
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