Debt as a new form of currency

I knew it would only be a matter of time before the newly-ascendant left applied some postmodern linguistic constructivism to make our problems go away.  From Zachary Karabell in the Washington Post:

Debt is simply a new form of currency that is issued, bought, priced and sold like any other currency,and the fear that it will fatally undermine the nation is much like the belief in the 19th century that paper dollars would destroy value and rob the middle class, or the fear that silver would do the same, or the concern in the 20th century (and now) that unless all value is tethered to gold, economies will collapse. The debt freakout is the latest installment, the only difference being that those who believe debt will destroy us have more political power. Debt may not undo us, but actions flowing from the fear of it could come close. . . .

Debt can be a fatal liability if used unwisely, but used well it can be a powerful tool. It allows governments, businesses and individuals to expand what they can do in the present in the belief that future gains will ensue. It can fund education, underwrite infrastructure and fuel research and innovation. The fact that debt is so often used poorly, to paper over problems or fund ephemeral spending, represents a serious and potentially crippling problem. But that is not an indictment of debt; it is an indictment of what is done with it.

The current assumption is that debt is out of control and has been for many years. Consumer debt in the early 2000s gave way to sovereign debt today, and Greece and its Mediterranean brethren are held up as Exhibit A in the prosecution’s case. Yet this animus harkens back to moments when shifts in the financial system have triggered anger and panic. Our debt fixation, then, may be less a product of debt itself than one of adjusting to a new currency.

via Another way to look at the national debt – The Washington Post.

If debt is a new form of currency, that means we’re rich!  We can spend more and more and more!

But read the rest of his argument.  Are there elements of truth in what he says, or is this ludicrcous?

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • http://www.facebook.com/mesamike Mike Westfall

    “Debt can be a fatal liability if used unwisely, but used well it can be a powerful tool.”

    I think that’s true. That is, of you are responsible and keep making the repayments for your debt in a timely manner, then you your lender will trust you and let you borrow more.

    If you aren’t so wise, don’t be surprised if the lender repossesses your sleek, shiny new nationalized health care system when you fail to make the payments.

  • helen

    They’ll have to sell “debt as a good idea” to the next generation. My parents, who came of age in the 30′s Depression, gave me a horror of debt that a long life has not dispelled. [When everyone who bought houses had 20% of the price invested, there was a lot more thought about what they could really afford and hang on to. Easy bankruptcies, which pass the losses to others, don't help either.]
    Of course, thinking of the many 20′s and 30′s burdened with credit card debt for things they didn’t really need, I realize that they have sold it. :(

  • Kirk

    Debt as currency is definitely not some “postmodern linguistic construction” of “the newly ascended left.” Ever heard of bonds? They’re debt that’s valued and traded based on the issuers ability to repay them. They’re a chit that governments use to raise a lot of cash in the short-term, that they then pay off in the long term at interest. They’re basically as old as debt itself and have been used by essentially every form of government that has ever existed.

  • Patrick Kyle

    War is peace. Up is really down! Yeah, this will end badly.

  • Patrick Kyle

    War is peace. Up is really down!

    I have some mortgage debt that I can to use to buy a car, and I want to buy a vacation with some business debt I accrued.

    Yeah, this will end badly.

  • http://jdueck.net Joel D

    +10 to Kirk (comment 3 above). This isn’t just a semantic game, it’s a historical fact! The U.S. dollar is and always has been a debt-based currency. All the dollars in your bank account and in your wallet are nothing more than “promises to pay,” and it’s been that way since the beginning. That’s what paper currency is, essentially a promissory note. Learn your history, people!

  • Steve Billingsley

    Kirk and Joel D…

    The current issue with debt (sovereign debt, not consumer debt or bonds in the common understanding) isn’t a bunch of panicked rubes who don’t understand words or numbers. It’s about whether the debt that is being incurred (and the future promises to pay that are implied) by our current budget deficits and entitlement promises (much of which is hard to quantify) can possibly be repaid without resulting in the dilution of currency and the crowding out of the economic activity of other, more useful kinds. At some point, you can’t just keep issuing future debt to pay for past debt without consequences to current economic activity.

    Debt isn’t just another form of currency – it is built into all currency. But if currency becomes overly diluted or essentially meaningless than it can be disastrous for all society. This isn’t just an irrational fear.

  • http://www.bikebubba.blogspot.com bike bubba

    Along with others, it is worth repeating that all of our money really bears the mark of debt, today especially with fiat money. It’s a simple artifact of fractional reserve banking, whether practiced by your bank/credit union, big banks, or the Fed.

    But in that vein, the trouble with “debt as money” is what happens when people (Weimar, Hungary, Austria, most of Latin America in the 1970s, etc..) lose faith in the value of the money. Given that we don’t have a lot of options when (not if) interest rates rise, we may be facing that reckoning here. I hope I’m wrong, but it is what history suggests.

  • Kirk

    @7 A note that bonds can be a form of sovereign debt. Governments issued bonds are a big part of the bond market, albeit not the most profitable part.

    As to the thrust of your point, you’re absolutely right. Once sovereign debt reaches a certain percentage of GDP, it becomes untenable and can destroy a country’s economy. I don’t think anyone disagrees with that. But the disagreement lies in where that percentage is (or should be be) and how it can be reached. It’s not really a known number and that’s where the question of rationality comes in.

  • DonS

    What history, exactly, are we supposed to be learning, Joel D. @ 6? The point you are making is very unclear. It is true that FDR unhinged our currency from any backing by treasury gold or silver, and it is also true that this action resulted in the inflation that has occurred since that time. But our currency is backed by our GDP — it’s a representation of the productivity of our economy. The dollars in my wallet are representations of payments already made, not promises to pay. And to that point, the government does NOT promise to pay on its currency, and hasn’t since it abandoned the gold standard — it only promises to accept its currency as legal tender for debts incurred.

  • DonS

    According to Nancy Pelosi, on Fox News Sunday, our debt problem has been solved. Obama apparently agrees — as he has put forward no plan to reduce the federal debt levels below their current projections. The funny thing about this article is that it fails to point out that the Obama administration’s own projections do not support this notion:

    Debt can be a fatal liability if used unwisely, but used well it can be a powerful tool. It allows governments, businesses and individuals to expand what they can do in the present in the belief that future gains will ensue. It can fund education, underwrite infrastructure and fuel research and innovation.

    Were this idea to be true, the “future gains” would eventually pay back the accrued debt, and more. But government forecasts uniformly show that the national debt accelerates next decade, once the baby boomers retire in force, with no end in sight.

    Immorality knows no bounds on this earth, and there are seemingly an endless number of apologists like Mr. Karabell who are willing to go to any lengths, using the foolishness of man’s darkened hearts, to justify this theft from future generations for our pleasure.

  • SKPeterson

    Okay, first. Debt is not now, nor has it ever been, money. Joel @ 6′s protestation not withstanding, the notion is ludicrous on its face and is an example of the sort of semantic sophistry that empties words of meaning and places into those words something else, something alien. The dollar, historically, has been a measure, a unit of weight, usually in terms of physical gold specie. From time to time, the dollar has also been denominated in silver, creating a bimetallic commodity standard. The paper dollars that are in your wallets used to be redeemable for actual, physical gold. This convertibility was ended when Nixon famously closed the gold window and we’ve been enjoying the “debt-backed” fiat dollar ever since (so successful we’ve had 544+% inflation since 1970, i.e., you need just over $5440 2013 dollars to buy what $1000 bought in 1970). Debt can and does have a benefit as Mr. Karabell rightly notes, but the debt is best managed when the supply of loanable funds is directly correlated with the real savings of individuals and firms. When debt is divorced from this reality due to money supply injections in the form of newly minted, unanchored currency, the signals that match debt markets and savings markets (i.e. interest rates) no longer communicate accurate information. This in turn leads to economic instability and the prospect for increasing recessions and lackluster recoveries that have been much the norm since 1970. However, there are vested interests in maintaining this fiat standard.

    Who benefits from this decoupling of the dollar from a commodity backing – the transformation of the dollar into just another debt instrument? Well, the bankers for one. Who gets this money first? Who gets to lend it out? We create money for nothing and lend it at interest. How convenient. The other party to this dirty little business is the federal government. How does it benefit? Well, with a dollar that doesn’t have an anchor in reality, our friends in public office can support massive expansions in government programs. Welfare State? Paid for! Warfare State? Paid for! Interventionist State? Paid for! An anchored currency does the one thing politicians of most every stripe hate: it limits their capacity to spend other people’s money on themselves and their friends because there is a limit on how much of other people’s money they can confiscate and squander. With fiat dollars, the government can keeping issuing debt, it can keep spending, it can reward its cronies in the welfare-warfare industrial complex, and the only people who get hurt are the taxpayers who see their savings eroded, their purchasing power slowly eviscerated, and their debt loads steadily increasing. It is in short, a policy of fiscal mischief of such dubious moral quality that it verges on being a pernicious evil that is declared to be a public good and benefit. It is the equivalent of the false scales and improper weights the prophets such as Amos railed against in ancient Israel, and Mr. Karabell is not just an observer of this evil, but an encourager, an enabler, and an advocate for visiting misery upon his fellow men.

  • http://jdueck.net Joel D

    The dollar, historically, has been a measure, a unit of weight, usually in terms of physical gold specie. From time to time, the dollar has also been denominated in silver, creating a bimetallic commodity standard. The paper dollars that are in your wallets used to be redeemable for actual, physical gold.

    The key word in your quote is “redeemable.” This very fact is what made the dollar a debt instrument. The whole point of paper currency was to serve as a debt instrument. That way, instead of lugging around actual gold and paying people with it, you could just hand them a promise to pay that gold on demand.

  • http://jdueck.net Joel D

    SKPeterson I think you may be thinking of “debt” solely in terms of “debt not backed by anything”, which is looking at it too narrowly. Debt is debt, whether it is backed by real assets or not. Fiat money and commodity-backed money are both debt instruments.

  • DonS

    Joel D @ 13, 14:

    The U.S. dollar is and always has been a debt-based currency.

    This is what you said @ 6. Sure, it was true that you could redeem paper currency for precious metals until FDR, and governments and financial institutions could continue to do so, at least theoretically, until Nixon, but that hasn’t been the case for 40 years. The dollar today is not a debt-based currency. The government promises NOTHING when it issues said currency, except that it will accept that currency in payment for debts owed to it.

    Today, the dollar is merely a representation of labor already performed, which we as a society have agreed to accept in exchange for the performance of other labor. It is a convenient medium of exchange, nothing more, backed by the productivity of the American people. As long as our productivity and the money supply remains in balance, and the same is true for our international trading partners who also deal in fiat currency, it tends to retain a relatively steady value respective to those currencies. However, when the government inflates the money supply, relative to GDP, that will eventually lead to inflation and devaluation of the exchange value of the dollar.

  • http://jdueck.net Joel D

    Today, the dollar is merely a representation of labor already performed, which we as a society have agreed to accept in exchange for the performance of other labor. It is a convenient medium of exchange, nothing more, backed by the productivity of the American people.

    Well here’s the thing, though: even though the dollar is no longer commodity-backed, it’s still a debt instrument. Why? Simply because it serves as a stand-in for something of direct, real value to you, that you later redeem for something you need. In fact, even actual gold becomes a debt instrument when used as a medium of exchange. There are only two ways to do transactions: redeemable promises to pay (i.e. debt, also known as “money”), or pure barter.

    I wouldn’t belabor the point except it goes directly to Prof. Veith’s question of “are there elements of truth” in this perspective or is it mere “postmodern linguistic constructivism.” The answer is that economics has held for decades that currency essentially is debt. Yes, you can also look at it as a “representation of labor performed,” (this would also hold true for any items transacted in an exchange). But it’s still debt.

  • DonS

    Joel @ 16: Whose debt is it, Joel? The thing is, when someone pays you in currency, they have discharged their debt, and there is no other party, including the government, which owes you anything for that piece of paper in your hands.

  • SKPeterson

    Exchange is not debt. Pretending that it is is a slipshod way of understanding basic finance and economics. “Economics has held for decades that money is debt.” Calling b.s. on that. Some economists might have done so. to say that “economics” has held such a view “for decades” is a contention wholly unsupported by history.

  • Dave

    The US Dollar is not debt – it is sovereign equity. As DonS points out, the dollar isn’t debt because you can’t redeem it for anything.

  • SKPeterson

    Dave @ 19 – Even if you could redeem a dollar for something (say gold) it is still not debt. The paper note that you would redeem is merely a certificate of ownership, or a right to claim a physical something that is noted by the definition of what the dollar is. Effectively, paper dollars under a commodity standard are claims to real money. Their money claim status though does not make them debt, unless we redefine debt to be any sort of paper instrument that is redeemable for an underlying commodity.


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