Abstract

Upper and Lower Limits of Public Debt

It is not suprising that after bad experiences with public debt in Germany old fears are evoked in the face of increasing public deficits. This explains why even today the 19th-century ideas of a balanced budget are still widespread. According to these ideas public debt is detrimental and only acceptable under exceptional circumstances. However, such thinking is no longer adequate to present needs. In the sixties, the holdings of net monetary wealth by risk-averting private households quickly increased in the Federal Republic of Germany, which was accompanied by increasing indebtedness of the private firms. Due to the resulting “leverage effect” the firms are now much more vulnerable to business cycles. Thus the cyclical fluctuations of the whole economy are amplified. More economic stability could be obtained if the state - by increasing his debt - relieved the firms of their indebtedness by himself holding the offsetting positions to the private households’ net monetary wealth. At the same time, this would result in a transformation of economic risks: The private sector has to pay taxes on uncertain, fluctuating income and turnover; in turn it receives certain, constant interest yields from the state. Thus, an increased negative monetary wealth position of the state is the kind of public indebtedness we need. On the other hand, limits of public indebtedness are greatly exceeded as far as long-term future commitments (pensions, subsidies etc.) are concerned whose huge present value does not appear in any budget. In this sector possibilities for discretionary expenditure variations have almost entirely vanished. A strategy for public expenditure during the next years should consist in reducing these permanent statutory commitments for the benefit of interest payments on the simultaneously increased public debt. Finally, the financing of an increased public debt must be considered. The current “crowding out”-theory is only of little use in this context. This theory erroneously compares the functioning of the capital market to the functioning of a source. But since the state immediately spends the funds it borrows, it pımps - similar to an artificial fountain - back on the capital market what it has been absorbing just before. With each public expenditure surplus the private sector (which holds the corresponding surplus of receivables) therefore obtains funds that it seeks to reinvest. As long as public bonds continue to be a popular investment, there will be few problems for the state in financing future budget deficits.