Public Debt

This is a a fictional dialogue where two people are arguing about why do governments borrow money. I’ve been running it in my head lately and it got suck at an unpleasant conclusion. Perhaps some of you can make the discussion go little further. Update: The initial version of this dialogue was missing a few replies in the middle due to a copy-paste error, I’ve fixed that.

Money Skeptic: Why do governments borrow money (and pay interests) when they can just print more money at no interest?

Finance Guru: Because printing more money devalues the money people already have in their hands, causing inflation.

Money Skeptic: But are you sure borrowing money doesn’t lead to inflation too?

Finance Guru: Why would it do so?

Money Skeptic: Well, think of the price for houses. Do you really think the prices for houses would be the same if banks were not lending money? If no one had access to credit, houses wouldn’t sell at these prices and sellers would make their prices lower. So if credit causes prices to go up, it’s inflation, right?

Finance Guru: Perhaps, but how does this apply to the government?

Money Skeptic: If the government borrows, it’ll be to buy products or services, to pay salaries or social programs to people who will then have more money to purchase things. Even if the money is borrowed, it’s still usable money injected in the economy, and so it causes inflation.

Finance Guru: But the money must come from somewhere, there’s no more money before than after.

Money Skeptic: If that was the case, the price for houses wouldn’t increase when credit becomes available. To be precise, borrowing increase the money in use by lending the money that would otherwise stay inactive in bank accounts or elsewhere; more money in use, more inflation.

Finance Guru: Ok then, let’s admit it causes inflation.

Money Skeptic: So why do governments borrow money (and pay interests) when they can just print more money at no interest?

Finance Guru: Not all governments are issuing their own money: most non-national governments, or countries in the Eurozone don’t have the control over the money they use.

Money Skeptic: Indeed.

Finance Guru: And governments can’t print foreign currency, they have to borrow it from somewhere if they need it.

Money Skeptic: Yes. Anything else?

Finance Guru:

Money Skeptic: So why do governments who needs more of their own money borrow it (and pay interests) when they can just print more of it at no interest?

Finance Guru: You keep asking the same question!

Money Skeptic: Because you only answer side-questions.

Finance Guru: Are you trying to make me say they crave to the financial lobbies who then collects the interest money?

Money Skeptic: Is there any other explanation?

Finance Guru: Let me see…

Anyone wants to help Finance Guru find a another explanation? Right now it seems like Money Skeptic is winning the argument.


Comments

Ölbaum

Isn’t there a rule that the government must at any time own enough gold (or foreign currency) to match the value of every note they print?

BCS

@Olbaum: not any more.

@Michel: It’s an empirical argument but I’d say borrowing money is working because the normal effect of printing whatever is needed is hyperinflation and we aren’t seeing that problem. Something must be working.

Another way of looking at it: given that our money is backed by, effectively, faith in the US economy, that is to say nothing, things will only work when the supply of money is somewhat proportional to the supply of wealth. If you print more, either the value of money goes down, or things quit working (or both). When you borrow money, it comes from somewhere and goes somewhere so the supply doesn’t change.

Michel Fortin

@Ölbaum: That’s the gold standard, and it is no longer in use nowadays.

@BCS: Perhaps I should do another dialogue about whether borrowing money from a bank effectively creates money…

But anyway, I just realized I posted the version that is missing two rounds of replies related to this subject… the French version of this post has them. I guess I’ll have to update the post.

Michel Fortin

Oh, and BCS, you say “something must be working” because there isn’t hyperinflation. But look at the deficit of your government and how much of that money goes to service the debt, then look at how the poor are slowly becoming poorer and the rich richer year after year. Servicing the debt gives money to those who have money to lend, so the debt is contributing to this trend. Perhaps inflation levels are well controlled, but I wouldn’t say the monetary system and the debt is working to the public’s benefit.

Alan Hogan

Michel,

Quite an interesting read! I’ll have to ask some economically-minded friends their opinions, too.


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