Debate Magazine

Economic Myths: Debt Free Money

Posted on the 10 March 2016 by Markwadsworth @Mark_Wadsworth

Lots of people who refuse to accept basic principles believe there is such a thing as "debt free money". If you Google it and follow a couple of links you end in a sea of raving gibberish like this from zerohedge:
This organization (Committee On Monetary/Economic Reform) is demanding that our corrupt government and the nefarious central bank which rules above it return Canada’s monetary system to the issuance of debt-free money.
In turn, the phrase “debt-free money” is relatively easy to define: issuing currency from our central bank, into the economy, without (literally) “borrowing it” into existence – i.e. attaching debt to every unit of currency.
Again, some readers not familiar with our current monetary system may require some additional clarification (as they discover the horror/insanity of our present system)… However, at roughly the same time our (now) now corrupt governments began corrupting our economies, they also totally corrupted our monetary system. 


The gold standard was abolished (assassinated by Paul Volcker), and our governments began creating their so-called “money” from debt – i.e. our governments forced themselves to “borrow” our own currencies, from these corrupt central banks, as the mechanism for our money-printing.
As an aside, this person doesn't understand that the government doesn't and can't borrow from the central bank because the central bank is part of the government. You can't borrow from yourself or lend yourself money. He contrasts this with the central bank issuing currency without borrowing it. That is impossible. Whoever issues currency, be that coins and notes, money, bonds, IOUs or numbers on a computer screen is borrowing. He contrasts two scenarios which are exactly the same.
"But it's not borrowing!" squeal the nutters, "The government doesn't ever have to repay its debts, they can just mount up for ever."
Yes, fair point, in practice, governments don't ever repay most of their debts, they just get rolled forward again and again. But if interest is payable on those debts, that't a teeny tiny bit of a bit of a hint of a cluesy-woozy that it's borrowing.
Next argument, "But in today's world, government don't need to pay interest any more, or are even paying negative interest" (which is like a bank charging you an account fee even when your deposit account is in credit, which is not that unusual). That is also true, although this is an unusual situation and we don't know how long it will continue.
Nonetheless, even if the debts are interest-free and will never be repaid, it is still borrowing and that borrowing is debt. The flip side of money is always debt (physical gold is not money for these purposes).
Consider the simple question, everything else being equal, which government is "richer", Government A which has absolutely no public debt or Government B which is drowning in debt (or has issued endless paper money with nothing to back it up like Zimbabwe or Weimar Germany)?
It's not difficult is it? Government A is 'richer'. Why? Because it has no liabilities. Even if Government B never pays interest on its debts or repays those debts, then it has less scope for maneuver. If Government A were temporarily strapped for cash, it could issue extra coins and notes, or bonds or whatever and people would accept those as valid, so Government A can procure the services it needs.
Government B no longer has this option, it has already used up its credit line by, er, borrowing. If the absence of something makes Government A richer, the something that is absent is debt or borrowings or liabilities.
Here endeth.
Golden rule: the first person to use the meaningless word 'reserves' has lost the argument. I will delete all comments which include that word.


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