If Dollars and Pounds are Really IOUs it Must Logically Follow that Government Debts Need Never be Repaid!

One common argument made by neoliberals is that government debts, and the interest payments that go with them, are potentially a burden to the next generation. You’ll hear that sort of thing all the time from politicians. Of course there is no empirical evidence for this assertion. The immediate post war generation don’t seem to have suffered from a collective war debt burden. That generation has been lucky and has done remarkably well, on the whole.

But why should this be? Let’s start from the understanding that dollars and pounds are no more than government IOUs. This view is now held right across the political spectrum. There is no real controversy. There’s no gold , no silver backing them up they are just government IOUs as described by the Bank of England.

So let’s just think about our own IOUs. Suppose we have run out of sugar and ‘buy’ a kilo from our neighbour by issuing an IOU. So our neighbour gives us the sugar and we give out an IOU. That’s how governments buy things of course.  Suppose we use up that sugar and need some more. What can we do? We can write out another IOU and give that to another neighbour and get some more sugar.

From a government’s perspective that would correspond to printing more money. After a while our neighbours lose confidence in these written IOUs , so the conventional argument goes, and therefore responsible governments should borrow funds in the market rather than just keep on printing new money. So how do we borrow back these IOUs? It’s really not possible. All we can do is offer to swap them for new IOUs called bonds. So we write out a new IOU to one of our neighbours promising that we will repay not just one kilo but two kilos of sugar but the catch is that our good neighbour has to wait 10 years to get them. If you do the arithmetic our neighbour will get approximately 3.5% interest on his bond over the ten year period. In return we get back our original IOU which we can then spend, responsibly, with a new neighbour.  Responsibly? Because we haven’t printed new money 🙂  But we have printed a new bond 😦   Its better not to mention that!

So the first logical conclusion to be drawn is that there is really no such thing as government borrowing. More correctly, it should be described as government issuing. Governments issue either currency ( one form of IOU) directly or issue bonds (another form of IOU with interest) in order to get back their currency IOUs to be able to respend them.

Incidentally, if they do it the other way around from normal, and issue currency IOUs and swap them for bond IOUs the process is then known as Quantitative Easing! That’s another story!

So governments are in this odd position of never having anything except their own IOUs, so how can they possibly ever properly repay the holders of these IOUs? Governments can’t create any sugar (real wealth)  directly, how can they? So how can they ever repay their debts in any meaningful way? They can’t. They can forcibly confiscate IOUs through the process of taxation but that is not at all the same thing as repaying debts.

That all needs a bit of thinking about, but logically it must mean that no matter what governments borrow today there is no need for our children to worry about ever repaying our debts at some future time. If the government of the future time tries to impose a too high regime of taxation, in relation to what it spends back into the economy, and thereby creating recession and excessive unemployment, our grown-up-by-then children will vote them out at the next future election. At least they will if they have any sense and don’t succumb to the neoliberals of their future time who will be spinning them a yarn about debt burdens to future generations!

It is that simple.

6 responses to “If Dollars and Pounds are Really IOUs it Must Logically Follow that Government Debts Need Never be Repaid!

  1. John S Churchill

    I like the use of IOUs being created and destroyed to explain how the money supply SHOULD work. If HMG really did issue money into circulation (debt free) like this, all would be well.
    When someone tears up an IOU it is because they are not intending to repeat the process. But more often than not we buy a loaf of bread and pay for it and buy another a week or so later. In the example the IOU would be re-issued (the correct term) time and time again rather than being torn up. This is how the money supply conceptually works. It gets destroyed and re-issued in the same amount to support the same productive activity time after time. If this level changes then so too should the money supply.
    The issued money would never need to be paid back nor bear interest so poses no burden on future generations. It goes around and around as does the blood in our bodies. Unfortunately that is not how it actually is. Banks in effect issue the currency by making loans, charge interest on it, and require it to be paid back before being re-issued by more lending. While today’s activity, even with this system, does not bear upon future generations, they still have to undergo the incessant repayment of the issue/loan and the interest on it as did their forebears! It is the delayed gratification aspect of money use (we put money aside for our pensions etc.) for others (pensioners) to use now. This process does transfer a monetary obligation across generations, the younger one providing goods and services to those retired, instead of benefiting from the fruits of their labours themselves, by themselves putting something away for their own pensions. Ignoring population and economic growth, this arrangement is stable.
    Positive Money (and maybe other schemes) attempts to create a money issue system in conformity with how it SHOULD work, above. Yes, it is that simple but “you can’t get there from here!”

  2. John S Churchill

    The above reply applies only to the provision of money for the rest of us to use in going about our business (the money supply). Governments may have need to borrow (for capital investment) from which future generations will benefit. The repayments of such loans (premium and interest) will bear on those generations so benefiting. This is the true meaning of National Debt, the repayments for Nation assets in use. For other revenue expenses, Governments should raise taxes from those who will benefit at that time. It is those same taxes that will be used to repay the National Debt e.g. to pay for hospitals now in use from PFI deals of old. Thus generations only pay for what they get. Some even benefit if assets last beyond the time of their repayment. It is however possible for Governments to borrow to pay for revenue spending thereby bribing us to vote for them with our children’s money. It is possibly that this underhand behaviour that has prompted the question.

  3. Pingback: America’s Level of Prosperity Is Not Sustainable | Traveling The Narrow Road

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