PUBLIC DEBT : WAS KARL MARX RIGHT ?
Public debt in Europe will soon break through the 100% of GDP barrier. This is the most formidable threat looming over the continent, as public debt skyrockets in an economy devoid of growth and inflation.
This raises a question: what is public debt?
Some believe it is unconnected to citizens, as if it had no effect on our individual wealth. According to them, public debt is never repaid. Instead, it is diluted over the years in a permanent refinancing process. From this perspective, debt can be seen as something natural, representing a continuous transfer from the government's creditors to the public sector, not unlike a gigantic Social Security scheme. Public debt would be of little importance in this scenario. It would be to private savings what taxes are to professional income. It would be the embodiment of state solidarity itself, since its refinancing has a direct impact on fiscal and redistributory mechanisms.
Unfortunately, reality is much more complicated. Public debt is a form of capital for creditors. However, unlike capital arising from gradually saving past work, public debt also draws upon future work. More specifically, the state's creditor loans out savings from past work, whereas the state (the debtor) repays its own debt thanks to taxation on future work. It makes sense: public debt is backed by the state's power to levy taxes on, among other things, future professional income. By getting into debt, the state is effectively asking its creditors to extend credit to it because it will be able to demand a tax on the creation of wealth by future taxpayers. Therefore, excess debt is the main obstacle to capital flows and reductions in labour costs. If debt is refinanced through taxes, labour will inevitably take a hit.
Thus, Marx (1818–1883) thought public debt was not necessarily related to the capital production process and was not a title on real capital. He likened it to fictitious capital because he predicted its disappearance during the revolution, just before the triumph of the proletariat. Marx went even further: since public debt is accumulated past work secured by future work, it should be cancelled by abolishing private property, which he saw as a barrier to social equality. Proudhon (1809–1865), a nihilist, held similar views.
Extending the Marxist analysis requires recognising the connection between public debt and currencies. These concepts are two sides of the same coin, since they are both issued by the same states. Currencies are financial debt, whereas public debt is social debt. Just like public debt, currencies are sovereign. And yet we have the same confused view of currencies and public debt: we see the former as a private possession despite the fact that they represent a public asset. And, although we are individual debtors, we consider public debt to be a collective obligation which does not concern us, even though we make use of public assets.
Like public debt, currencies measure the stability of economic structures. Weak currencies are associated with less competitive countries and vice-versa. Therefore, monetary credibility is rarely the result of an act of governance. Rather, a currency guarantee is a state of confidence. From this perspective, it is foolish to believe currencies provide protection against systemic financial shocks. When an existential financial implosion occurs, currencies offer no guarantees for their own survival.
If, from Marx's point of view, public debt is a form of fictitious capital, are currencies not even more so? Is it not a huge accounting trick anchored to fragile conventions? The answer is not clear, as public debt and currencies represent shared convictions.
However, the alarming fact is that, once public debt has risen beyond a certain level, creditors no longer hold sway on debtors; rather debtors impose haircuts on their creditors. This is why excessive public debt puts currencies in grave danger. In order to reduce debt, it is necessary to either debase the currency (i.e. generate inflation) or to cancel debt, as occurred during the Greek default or when Cypriot bank deposits were bailed in. In such circumstances, out-of-control public debt cannot be repaid without corrupting the currency.
So, did Marx have a point after all? I do not think so. Or, more specifically, his view could have only been correct if the resorption of public debt requires the confiscation of private property, in other words, the antithesis of a market economy. If this madness is to be avoided, excess debt should be our leaders' sole concern, respecting social solidarity and economic competitiveness. This is why economic growth and stimulus —not austerity and rigour— should be their sole focus. It is also why we need to abandon the strong euro policy, which reflects a deflationist and recessionary currency.
To put it bluntly, the way out of the crisis should include a discount on public debt by the ECB, at the price of a reasonable dose of inflation, instead of a Spartan management of the common currency. It is therefore better to tackle excess public debt by gradually eroding the currency (while protecting people on low wages) rather than confiscation and other forms of debt cancellation, which are becoming more and more likely in the weak southern countries due to a dreadful management.
All in all, today is not the nihilists-Marxists' big day. Nevertheless, we are teetering on the brink of terrible socio-economic shocks. We must abandon our pathetic pipe dreams on the natural attrition of public debt by invisible growth. We will soon realise and be appalled at the error of judgment made by the politicians who enlarged the eurozone too quickly and the economists who incessantly preached the gospel of rigour and steadfast austerity during recession time. Keynes, opportunistically cited by misguided economists, would not have approved modern economic policies.
