Nobody Understands Debt… Least of All Paul Krugman


Good evening, freedom lovers!

A friend of mine posted a link on Facebook to this Paul Krugman article in the New York Times.  Call me an onerous libertarian, call me a stickler for the Austrian school of economics, but honestly, it blows my mind that people listen to this man.  What he says has no basis in reality at all.

If you don’t feel like reading it, the basic idea behind it is that the US debt is irrelevant, because it’s mostly money that we owe to ourselves.  He also says that it’s not that big a deal because as long as our tax base is growing faster than our debt, we’re fine.  Does this sound like shaky ground to anyone besides me?

He talks about people waiting for interest rates to go soaring, citing the Heritage Foundation in particular as a group that has been waiting for this very action.  Well, the Federal Reserve holds the key to the interest rates; it keeps them artificially low.  Were it not for the Fed, interest rates likely would be soaring.  Interest rates serve as a marker for malinvestment, but when those rates are kept low such as we are seeing right now, there is no cue for businesses to stop investing in an area that doesn’t serve the market.  Instead, the malinvestment continues, and the market never rights itself.

What Krugman never points out here is that continual debt creation is a necessity in a fractional reserve banking system.  I have explained in previous articles how banks create money out of thin air to be loaned to other people.  I am not going to give you a re-tread, but you would like a refresher on how the fractional reserve system works, check out this article from the Mises Institute by Robert P. Murphy.  Essentially, if all debts, government and private, were to be paid off, the money supply would effectively cease to exist.  As such, the debt is a fairly decent indicator of how much money exists on the market today.

So why is that problematic?  Easy.  Hyperinflation.  Remember Weimar Germany?  They turned on the printing presses, and look how that worked out for them?  By the time it was all said and done, their money was better suited for heating the house than for buying goods and services.  And unfortunately, we are running headlong down a path that ends with the same fate.

This is not some ruse to scare people.  I am not irritated and going against Krugman just for the sake of being contrary.  When the money supply continues to expand at ever-increasing rates, it is natural that the value of the money will go down because the money is not scarce.  Now, that might not be easy to see in the eyes of the average American.  A lot of folks are struggling to put food on the table.  Money, for these people, does seem like a scarce thing.  However, it isn’t scarce for banks and other direct benefactors of the Federal Reserve’s policy of easy money.  It’s interesting that most Keynesians are so vehemently against “trickle down economics” when it seems like that’s what they’re advocating: pump more money into banks and hope that the American people get some of it!  Well, the middle classes and the poor are the very last people to see that money.

As for the WWII debt not mattering, well, our economy flourished in spite of our debt after the war.  Why?  Because most every other country in the world had to buy goods from us to get their economies up and going again.  America mobilized in a way never before seen in history in order to help win the war.  We were a manufacturing powerhouse, and that’s not bragging; it’s a simple fact.  Because we suffered very little on our home soil, we were in an excellent position to bail others out in the post-war era.  Thus, we were able to pay down our debt.  As everyone knows, the times have changed.

My final (major) beef with this article is the insinuation that the government should be spending money on unemployment.  The government should be doing no such thing.  Taxes do not create wealth.  The government never has and never will be the creator of wealth.  Only the private sector can create wealth, and by increasing taxes on the American people, the result will only be a further destruction of jobs.

For example, let’s say that the rate of taxation for small business is increased by 6%.  That seems like a relatively small number, right?  Let’s then assume that the business has an annual gross income of $950,000.  Now, let’s say that the business has three employees, plus the owner-CEO.  The owner pays himself an annual salary of $75,000.  The three employees are each paid an annual salary of $32,000.  This amounts to exactly 18% of the company’s gross.  An annual 6% tax increase would cost $57,000 for that business.  That is nearly equivalent to the yearly pay for two of the three employees.  When looked at from this perspective, it is much easier to see why that business owner might want to keep that money for the business.  Maybe the business needs new equipment.  Maybe the employees need/want a better health or dental plan.  Maybe the owner wants to increase the size of the business and hire another employee.  These prospects potentially go out the window with the tax hike.

When you judge Krugman’s logic from all angles, it makes you wonder what he’s thinking.  In a nutshell, he is advocating that the Fed continue printing money, that the government raise taxes on all Americans, and that the government spend more money.  How the hell does he think we got into this mess, anyway?

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About The Lady Libertarian
I am American, currently expatriated but hopeful about getting back home one of these days. Besides reading and writing about politics, I enjoy camping, sailing, canoeing, making pie, and traveling. I hope you'll enjoy this blog and find it informative and accessible.

One Response to Nobody Understands Debt… Least of All Paul Krugman

  1. Beth says:

    I was definitely shaking my head at that. Of course it matters that the government is spending us into a big hole. I really do think the private market is better off to create wealth and jobs. The efficient businesses will survive and the inefficient go bust- that’s how it is supposed to work. You can’t forever prop up things artificially forever. What goes up, must come down. Depressions are a natural way to clear out the market, and right now by trying to keep things from crashing I think it’s just being prolonged. I think things need to be allowed to crash in order to go back up. It’s a necessary evil to clear out the wastefulness and inefficiencies.

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