Pondering debt.

Counterparties links to this blog post excoriating David Brooks.

David Brooks is again prominently displaying his misunderstanding of economics in the New York Times. He told readers in today’s column:

“Every generation has an incentive to borrow money from the future to spend on itself. But, until ours, no generation of Americans has done it to the same extent.”

He then goes on to tell us that we are borrowing because we are more secure, arghhhhh!

Okay, let’s try to put this so that even David Brooks can understand it. First, we are not borrowing money from the future. What does Brooks thinks this means, are we calling up the Ghost of Christmas Future and asking for a loan?

This critique is what seems terribly flip and awfully wrong.

Let’s say I am taking on debt. To me, I am making a promise about things that I will do going forward — namely coughing up cash regularly.

If you’re my lender, you’re also dealing with the future: you’re laying claim to my future income stream to reimburse yourself.

So yeah, practically speaking the transaction is taking place in the present but you’re basically fronting me my own future income. I have more money today, and less tomorrow. I took it from the future and brought it to the present, where it’s more valuable.

This is what Brooks means, and that doesn’t seem very hard to wrap my head around.

These seem like insecure times, but with respect to debt we are awfully secure. Even in the wake of financial crisis, there is a huge market for debt.

Now if I die, I never have to pay that back. This seems really important because Brooks is really talking about public debt. In general, our government finances a good portion of its consumption purchases, which in part to provide us with goods and services. That debt will be rolled over numerous times throughout our lives and I guess some of our taxes will help make interest payments, but for most of our lives our government will systematically pull money from the future to the present to finance our welfare state. Then we will die. And even after financial crisis, modern capital markets run so fluid and deep that governments and large firms can accumulate and roll over debt with relative ease. This is an appropriate sense of “security” and I imagine this is what Brooks is driving at.

This is how CEPR characterizes it.

Borrowing occurs in the present, from some to others. At present, the government sector is the big borrower. It is borrowing from the private sector, but also in part from the Federal Reserve Board. Because the economy is so far below its capacity, the Fed can simply create money to lend to the government to finance spending. And, this borrowing is aiding the future by sustaining demand in the economy. If the government spent less (or taxed more), it would simply reduce demand and increase unemployment.

This is right and wrong to me. Yes, the borrowing occurs in the present but that’s the point. We live in today and every day out from here is less and less certain. This is the foundation of why we have interest rates in the first place. But what does CEPR think happens to treasury bonds when the fed prints money to buy them? Surely it doesn’t think the fed directly finances government spending. Those bonds end up as assets on the fed balance sheet and as liabilities on the US Government’s. Yes, the fed can make cash appear from nowhere but crucially it still has claim to future government revenues, even if those revenues come from future bond sales.

I happen to be of the belief that people like Brooks are wrong that we need a dose of debt sobriety. It might be good for the soul, but in a nation with a sovereign currency I don’t think it has much practical significance. But as far as Brooks thinking about the dynamics of debt, he seems to grasp the intuition well.

CEPR ends with this:

btw, Brooks deserves special abuse for this assertion:

“Nations around the globe have debt-to-G.D.P. ratios at or approaching 90 percent — the point at which growth slows and prosperity stalls.”

Sorry, this is fairy tale stuff. Yes, some respectable economists say it, but it’s still silly.

I’m a little astonished an intellectual, whoever they are, would write those last two sentences without a sense of shame. I’m not even saying he’s wrong, but such arrogance is really off-putting to me, and truly demeans an incredible amount of scholarship that went into Reinhart and Rogoff’s work on debt and crises.


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