It’s not the kind created by government spending on social programs, however, says economist Michael Hudson, a professor of economics at the University of Missouri-Kansas City and the president of the Institute for the Study of Long-Term Economic Trends.

Private debt is the real problem. The bills racked up by credit card and mortgage holders, students and people who can’t pay medical costs are sucking away income that would otherwise be spent on manufactured goods and services in the market. What results is described by an esoteric term, “debt deflation,” in which too-large debts held by the consuming public creates a drag on the overall economy. Demand decreases, business revenues fall, layoffs commence and the whole economy stalls.

Hudson says public debt, which can be used to finance social programs via deficit spending, is part of the solution. Another is the writing down of debts to a level that people can pay or reducing the amount owed on a product like a home to the current market price. “The administration has bailed out the banks for their bad loans, but has kept the debts in place for most of the population. Its promise of debt write-downs has been empty,” Hudson writes.

The government can fund public debt to put people to work, provide essential services and end the recession easily. Why? Because sovereign governments (the U.S. is one, while Greece, which is subordinate to the European Union, is not) print their own money, and this sort of wealth creation, Hudson asserts, can be done without inflating the value of currency.

— Posted by Alexander Reed Kelly.

Michael Hudson:

[T]he one kind of debt we are not worried about is government debt. That’s because governments have little problem paying it. They do not need to balance their budget with tax revenue, because their central bank can simply print the money. On balance, the overall public debt rarely needs to be paid down. As Adam Smith noted in The Wealth of Nations, no government in history ever has paid off its public debt.

Today, governments do not even have to pay interest on money their central banks create. (Think of the Civil War greenbacks.) Even for borrowing from bondholders, Treasury borrowing costs are now the lowest in history. As for the monetary effect of governments running budget deficits, there is little threat of commodity-price inflation. Price rises are concentrated where special interests are able to indulge in monopoly pricing and rent extraction.

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