What is debt?

Putting it down in black and white just to clarify thoughts:

The total debt is made up of private debt and public debt.  Private debt is what the private sector owes (to whom?) at a point in time.  The public debt is the debt of the general government sector.  A broader concept would be something like the private sector borrowing requirement (PSBR).  Is this so?  Must check.

Anyway, the private debt is debt in form of credit card debt, mortgage debt, overdrafts, etc.  It is owed mainly to commercial banks.  Since the commercial banks are mainly a conduit (albeit an amplifying one) of the deposits of others in the private sector (leaving aside for the moment government deposits in banks) the private debt is actually a lending of the private sector to the private sector mediated by banks.

The public debt is another matter altogether.  It is the borrowing by the government from the private sector and borrowing  by the government from the central bank.  To the extent that the borrowing by the government from the central bank is satisfied by creation of new money, this is adding permanently to the money supply and is thus inflationary.  This is the so called ‘monetized deficit.’  To the extent that government obligations satisfy a demand for claims on future production (the savings motive) that part of the public debt sold to the private sector satisfies a useful social function by allowing people to plan their retirements.  But the part of the public debt funded by creation of new money puts purchasing power in hands that add to the final demand for goods and services without having been caused by a restriction of consumption on anyone’s part.  There is no matching saving in the private sector for the increment in final demand that the additional money infusion is causing.  That is why deficits are generally bemoaned.  Because they are inflationary.

So the debt is good as long as it is private (on second thoughts, credit card debt is not a good thing all the time ) and the debt is bad as long as it is monetized.

But there is more to the story than this.  There is a concern for the stability of the purchasing power of the medium of exchange and store of value. Undoubtedly.  But fears of paying back the debt are surely overdone.  The debt has to be serviced.  Doubtless.  But inflation eats away at the nominal value of the debt, and the intergenerational transfer is not that onerous.

But the best part of the story is that the debt is basically a social relation between the labours of savers and the labours of dissavers.  It is a political matter.  It transcends mere economics.


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