How Government Debt and the Deficit Works

Here’s an excellent video by Tschäff Reisberg on how governments debts and deficits work — as well as how these might be used to secure full employment and stable wages. Note, however, that this is not quite applicable to Ireland. Ireland, being a member of the Eurozone, does not issue its own currency — thus it relies on the ECB for this. The ECB, in turn, forces Ireland to service its debts on the international bond markets — this is the main problem the country faces at the moment.

Some people — myself included on some occasions — argue that this means we should leave the Eurozone. And perhaps we should. For an alternative solution, see this interview with the economist Warren Mosler. There he argues that the ECB could give governments a certain credit allowance every year so that they don’t have to go to the international markets to borrow — this allowance could then be used to ensure that the governments don’t simply spend themselves into an inflationary spiral.

It’s a wonderful idea that has my full support. My only criticism is that the EU is a crappy political institutions that’s overly geared toward national interests and petty infighting. It also has remarkably weak leaders with little or no vision (these days, at least). The idea that the drones currently running the Eurozone would even consider such a proposal seems quite fantastic to me.

The EU leaders like to think that the system that is in place is the only one that could possibly function (even though it clearly doesn’t function). This gives them an excuse to avoid formulating real political programs and simply vibe with the conventional wisdom. This is a topic in Adam Curtis’ new documentary which starts tonight at 9pm (GMT) on BBC2. The show is called ‘All Watched Over By Machines of Loving Grace’ and if it’s anything like Curtis’ previous documentaries, it will prove to be some of the best television aired this year.

In an interview with The Guardian Curtis explains the premise for the series. Here he discusses the problems that hiding behind a certain political or economic model causes:

On Greenspan’s watch, computers allowed investment banks to produce complex mathematical models that could predict the risk of making any loan or investment. If a risk could be predicted, it could be balanced by hedging against it. Hence, stability. There would be no more boom and bust. It was the “new economy”.

That stability was, of course, an illusion; it was followed by the greatest economic crash since 1929. But, as Curtis says, the price of the bailouts was paid by ordinary people, via the state, rather than by the wealthy financiers who lost all the money in the first place. That’s because, despite the illusion of ordered non-hierarchy, some people have vastly more power than others, and in many cases have had it for centuries.

He draws a parallel with those 1970s communes. “The experiments with them all failed, and quickly. What tore them apart was the very thing that was supposed to have been banished: power. Some people were more free than others – strong personalities dominated the weak, but the rules didn’t allow any organised opposition to the suppression because that would be politics.” As in the commune, so in the world: “These are the limitations of the self-organising system: it cannot deal with politics and power. And now we’re all disillusioned with politics, and this machine-organising principle has risen up to be the ideology of our age.”

About pilkingtonphil

Philip Pilkington is a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University. You can follow him on Twitter at @pilkingtonphil.
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One Response to How Government Debt and the Deficit Works

  1. Pingback: How Government Debt and the Deficit Works « Fixing the Economists -Political Fund USA

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