In Defense of Borrowed Money

BY Paul Solman  June 15, 2012 at 11:15 AM EDT

Credit Card Issuers
Photo by Philip Taylor PT via Flickr Creative Commons.

Paul Solman answers questions from the NewsHour audience on business and economic news here on his Making Sen$e page. Here is Friday’s query:

Name: Jason Copping

Question: Has the U.S. ever paid for anything? I looked at this site, inflation adjusted, and it shows we have not paid for anything since 1940.

Paul Solman: What do you mean “we have not paid,” Jason? Of course we’ve paid. When you buy something with a credit card, have you not paid for it? Have you not paid for your home because you have taken out a mortgage on it?

When the U.S. spends more than it earns, it makes up the difference with borrowed money, just like pretty much every other country (and person) in the history of the modern world.

When you take out a mortgage, your loan is backed by the value of your house. When you borrow via a credit card, the “collateral” is your future earnings. Same for a country. A government’s IOUs (bonds) are backed by its ability to tax, which in the case of the U.S. at the moment is pretty substantial. Note the estimate of Nobel Laureate Peter Diamond and Emmanuel Saez about top tax rates, for example, in of all places, the Wall Street Journal. You can also watch Diamond spell out the argument for me on the NewsHour.

And don’t forget collateral such as federal assets — land and natural resources, e.g. — which we could sell in a pinch.

One more point. When the U.S. government pays for something, it does so with U.S. dollars, which it alone has the right to create. That’s not paying? Sure it is. Admittedly, it increases the likelihood of inflation, in which the dollars lose value over time. That’s not good for those with dollars. But then, it’s not bad for those who owe them. I.e., it’s a mixed bag.

I could be wrong, and sometimes even have been, but I expect the U.S. to inflate its way out of the huge debt hole we’ve dug, illustrated on the website you cite. Both yesterday and the day before, the Treasury sold new bonds — borrowed money, that is — within hours of the Fed buying Treasury bonds. That’s called “monetizing” the debt. Critics claim it will fuel inflation. If it does, our national debt will be cheaper to pay off. That, plus some fiddling with Social Security and Medicare and raising taxes, should allow us to pay for enough of what we buy to keep borrowing.

But here’s a question for you, Jason. As an investor, where exactly would you put your money these days? In the stock market? Lend it to a company? To another country? In fact, just this week the United States paid the lowest interest rate ever to borrow money for 10 years: 1.62 percent. Apparently, the world’s investors are not asking “Has the U.S. ever paid for anything?” Compared to whom, they must be asking.

This entry is cross-posted on the Rundown- NewsHour’s blog of news and insight.