It’s a hard life without interest bearing government debt

A rather interesting US article has surfaced commenting on a report published during Clinton’s presidency when the United States government was running a budget surplus and it seemed possible that by 2012, there could be no more US government debt at all.

The world would have to do without government bonds known in US parlance as ‘Treasuries’.

The article points out that “the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.”

“I probably thought about this piece easily 16 hours a day, and it took me a long time to even start writing it,” says Jason Seligman, the economist who wrote most of the report.

The Americans were most worried about implications for ‘social security’ investment (largely private healthcare). For the British that would predominantly affect, not only the (now compulsory) private pension provision, but also the need for government bonds by businesses who do not trust the solvency of banks and who, unlike private customers are not covered by any guarantees, so they will purchase government bonds for the duration of keeping deposits with banks.

This all clearly demonstrates that governments that issue currency cannot go bust and that that security is known and required in certain businesses.

Now one can maintain (as I would) that except in a trade deficit, interest bearing government debt isn’t really necessary – the government could create proper state pensions for all if it so chose, or the Americans could create healthcare for all.

But it speaks volumes, I suggest, that this report from 18 years ago only came to light at all through a recent US Freedom of Information Act request.

Clearly the powers that be felt that suggesting that government debt can be a good thing would frighten way too many neoliberal horses.



  1. Bruce Gray -

    One interesting point about the Clinton surpluses is the lack of government issued Treasury securities at that time led many institutional investors to seek other safe haven investments. Since Clinton and the GOP congress had previously deregulated the banking industry, the banks were able to offer investors these new AAA rated mortgage backed securities. Since they were backed by real property assets, what could be safer? The rest of course is (painful) history.

    Another point that gets lost on most, is that all government issued monetary instruments (i.e. treasuries, reserves, currency) represent government liabilities (debt) and private sector assets. The only difference between treasuries and reserves (or currency), is treasuries earn interest and reserves do not. This is analogous to bank demand deposits and certificate of deposits (CD’s); both are bank debt, but the CD pays interest, while the demand deposits (generally) do not.

    When a treasury security is sold, all that happens is money is transferred from a reserve account at the Fed to a treasury account, just as an individual can move money from a demand account to a CD at a bank. No change in the balance sheet from an asset/liability standpoint. The real purpose of treasury securities is to control interest rates and indirectly money supply to support the central bank’s monetary policy. There is certainly no fiscal need for them to fund government spending.

    1. Peter May -

      Nice point about the resulting rise in AAA mortgage backed securities – I’ll be not a lot of people knew that (me included). Thank you.

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