A Primer on Fiscal Policy, Government Debt and Deficits (June 13, 2018)

by Bill O’Grady & Mark Keller

In our travels we are almost always asked about the government debt and deficits.  If there is any area of confusion and misunderstanding, public finance could easily top the list.  In response to these persistent questions, we are publishing this Frequently Asked Questions paper to address some of those concerns.

#1.  I don’t see how the government can continue to borrow money and not go broke.  I can’t do that; my company can’t either.  Won’t the government eventually go broke, too?

No entity can borrow an infinite amount of money without repercussions.  However, the repercussions for central governments are different than those for households, businesses or even state and local governments.  The two key differences are:

  1. Central governments borrow in their own sovereign currency. Thus, the debt they create can be serviced by simply printing money.  This is only true for governments that borrow in their own currency.
  2. Legitimate governments have a monopoly on violence. It is the only entity to which the people grant the power to use deadly force to enforce peace and order.  All other entities in society are restricted to use force in cases of self-defense.

What this means is that a central government can (a) print money to service its debt, and (b) use force to collect money from citizens to service its debt.  Thus, the potential fallout from government borrowing isn’t default but inflation.

It should be noted that state and local governments are not in the same position.  Although they do have similar coercive powers of the central government, they don’t issue their own currencies.  Thus, they can “run out of money” and default.

View the complete PDF