12. Do public debts need to be repaid? Should they be repaid?
Of course, the individual government bond must always be returned when it matures. But as we have just seen, if the bond is denominated in a country’s own currency this is no issue for a state with its own central bank. In contrast, the government debt as a whole does not have to be repaid but can simply remain on the balance sheets and be pushed further into the future. This is because there is no original creditor waiting for the money to be paid back.
The origin of the money is the balance sheet of the national central bank, where the money came into existence by being registered. And the central bank is not like a normal creditor who urgently needs their money back. On the contrary, the central bank can produce new money indefinitely. It creates money by a simple balance sheet extension – and no harm is done to anyone. As long as the government does not overdo it with money creation and does not provoke inflation, public debt is not a problem and can simply remain peacefully on its balance sheet. It can even continue to grow moderately – as long as there is no sign of inflation.
To allow the national debt to peacefully exist is also in the self-interest of households and companies. For in fact, public debt on the balance sheet is only the flip side of private savings. National debt rises when the state makes expenditures and does not tax them back in the same amount. The money corresponding to the public debt is therefore still out there on private checking accounts, constituting the savings of the private sector. If the state now wanted to reduce the public debt in absolute numbers, it would need to tax these private deposits.
The state would have to have budget surpluses for a long time, meaning that the government would always tax more than it spends, thus reducing private savings year on year. Only then parts of the national debt would disappear from the balance sheet it originated from. Is it worth it, though? Disregarding the individual inconvenience, there is a high probability that the economy as a whole would react badly to this strategy. Households and companies will respond to the pressure of a high tax burden and little government investment by feeling pessimistic and by saving more.
Very soon not only would the state try to save money and reduce investments, but the private sector would too. Demand would decrease and therefore production and employment would suffer. When a recession sets in, the experiment of public debt repayment would probably come to an end, and the government would decide on new deficit spending to support the economy, beginning the cycle all over again.
Actually, government debt has generally not been repaid. Only the so-called ‘government debt ratio’ has regularly fallen. The government debt ratio is a way to represent government debt relatively, as a percentage of gross domestic product (GDP). This means that it is enough for GDP to rise for the public debt ratio to fall. By contrast, government debt in absolute terms almost never decreases. Contrary to all the good intentions expressed, it is not being repaid, as in practice any serious attempt would soon lead to recession.
After all, returning the national debt equates to reducing the amount of the existing money. And as a final consequence, the repayment of all public debt would mean taking all the money from the accounts of private individuals and banks and making it disappear from the large public balance sheet from which it originally came. All debts would be gone and with them all savings, and all money.
