Rebuttal of the Uber-Keynesians

I haven't thought this through too much so this is just a first pass.

Uber-Keynesian is a term I invented to refer to those who believe that the government can freely spend and create money without any negative consequences. I doubt that Keynes would agree with their position.

1. Ok I agree that under our current system money equals debt. It still doesn't mean that debt is a good thing. If there were less debt in the system then this would make money more valuable, which would make prices on goods drop leading to deflation. For some reason, economists are scared to death of deflation, but that is another article. I don't understand why deflation equals a recession.

1a. Since money equals debt, it is impossible for all the debt to be repaid with interest. Therefore a certain number of defaults and foreclosures are built-in to the system and are inevitable.

2. Don't confuse money with wealth. Money is only a medium of exchange. With deflation, money becomes more valuable, with inflation, money is less valuable. What is important is what money can buy, not money itself. The economy will adjust to either an increase or a decrease of the aggregate money supply. Printing more paper doesn't create more wealth.

3. I agree that under our current system, a certain level of debt is needed for there to be money. However, that amount is relatively small. There is about $1 trillion of Federal Reserve Notes outstanding. (Notice that these are debt instruments that pay no interest - nice if you can do it). These need to be backed with collateral; however, the collateral doesn't have to be debt by the US government, as it could be municipal bonds, corporate bonds, or foreign government debt. Even assuming that it must be backed with US government debt, there is no need for this to be more than $1 trillion.

4. The belief that deficits don't matter ignores interest rates. Even at very low rates of interest, with a high enough debt, the interest amount becomes substantial. And investors want at least the interest to be paid. That is why the ratio of debt to GDP is important. Even assuming that the debt will never be repaid, investors want to know how much GDP can be potentially taxed to pay the interest.

5. The uber-Keynesians assume that the debt will never have to be repaid and that it will constantly expand. The first assumption is obviously absurd, since at some point all debt must either be repaid or defaulted on. The second assumption leads to unstability, since nothing can expand forever without constraint. The uber-Keynesians have made the US government debt their god - it is the source of all wealth, it lasts forever, and it fills all things.

6. At some point the limit of expansion will be reached, and at that point the system will collapse, since in order to exist it must continue to expand. It is not clear where the limit is. We obviously haven't reached it yet. I've speculated that it could be at 300% of GDP, but it really depends on the interest rates. But we shouldn't test the boundaries.

7. What I think is happening is that private debt is contracting, leading to a decrease in the money supply (the horrors!). So the federal deficit is expanding to try to compensate. At some point, the private debt will reach maximum contraction and will start expanding again. The deficit should then start contracting, but it is way more difficult to shrink the US government than it is to expand it. This will be the danger point, when inflation will start to kick in and interest rates will jump to try to fight it. Now the interest paid on the huge national debt will become a problem, causing the deficit to increase, and the debt to increase exponentially until it gets out of control.

8. Conclusion: Don't fear the recession. This is a natural part of economic life and is a necessary counterpart to the boom times. Instead, fear the next recovery. This is when the problems really will begin.

To be revised ...