Some Thoughts on Thomas Piketty’s ‘The Question of Public Debt’

capital_in_the_twenty-first_century_front_coverThis is a chapter of Piketty’s (in?)famous Capital in the Twenty-First Century.

There’s a lot I can say about Piketty’s main thesis, and I have in the past.

But it surprises me to see a book so popular with the ‘thinking’ left to include a chapter that seems to misunderstand the nature of public debt in so many ways.

It all contributes to my general feeling that Piketty represents the inaccurate and self-serving worldview peddled by financial vested interests in order to blind the public to the real possibilities of economic organization within the capitalist system. I can’t avoid the thought that Piketty is just more Mammon dressed up as lamb.

Here are some thoughts.


There are two main ways for a government to finance its expenses: taxes and debt.

It is ambiguous to say that the government ‘finances’ its expenses, since it only ever pays with its liabilities. It pays for everything it buys by crediting the non-government sector (employees, companies, foreign governments, etc.) with financial claims. Some of these claims are returned to the government in order to settle liabilities to the government (for instance in tax payments). Others remain as financial holdings for the non-government sector. These are mostly held in the form of Treasury bonds or bank deposits; the deposits are themselves backed by Treasury bonds or by reserves that are officially backed by government debt (other bank deposits are of course backed by loans to private borrowers, but here I am discussing where the proceeds from deficit spending by the government end up). At any given moment such financial holdings constitute the whole of the ‘public debt’.

Tax revenue largely depends on the volume of private spending. Decisions to spend rather than save are largely at the discretion of non-government agents. It is therefore very misleading to speak, as Piketty does, as if the government chooses to ‘finance its spending’ through taxation or debt. The amount of government spending that remains as ‘debt’ is largely up to the discretion of non-government agents choosing whether to hold onto financial claims or pass them on so that they can eventually find their way back to the government.

There is also, of course, a very complex structure of mismatched maturities; spending and ‘funding’ operations (really just a reflux mechanism) are entirely asynchronous for the government, as they are for any complex financial unit. Piketty makes it sound as though there is a funding operation first, followed by an operation to spend the ‘finances’ thus ‘raised’. This is backwards, or at least it imposes an imaginary chronology on a system of asynchronous operations.


The problem with debt is that it usually has to be repaid, so that debt financing is in the interest of those who have the means to lend to government.

Since the government’s debt is just the non-government sector’s financial savings, ‘debt financing’ is in the interest of anyone who wants to save. If you earn €20,000 per year after tax and put €1000 of it into a pension fund that then buys government bonds, ‘debt financing’ is in your interests insofar as it allows you to save in a safe asset.


The rich world is rich, but the governments of the rich world are poor.

Most governments of the rich world have super platinum credit cards. What does it even mean to call them rich or poor?


The total value of public assets is approximately equal to total public debt (about one year of national income), so net public wealth is close to zero.

Piketty seems to think that this means that the public sector is ‘poor’. But the only significant measure of public wealth is the extent to which public assets serve the public purpose. If the government owns schools and universities that provide high quality education to everyone who wants it, transport links that are cheap and efficient, hospitals that keep people healthy, and national parks that preserve natural beauty and biodiversity, then the public is ‘rich’ in the only socially significant sense. The book value of the assets would only be relevant if the government intended at some point to flog off its assets to private interests, or at least were a ‘going concern’ trading on behalf of its equity holders like a company. Perhaps Piketty is here revealing a crypto-Thatcherite streak.

As for the liability side of the government’s balance sheet, if the government has outstanding (non-current) financial liabilities, that just means that the public is holding net financial assets (domestically or overseas). On the Whole of Government Accounts, you can see that the non-current liabilities of the UK government are listed as being ‘funded from future revenues’ which are entered onto the balance sheet, confusingly, as a negative liability. These ‘future revenues’ are currently the financial holdings of the non-government sector (if they were being spent, they would be current revenues). Thus if the government increases what Piketty calls ‘net public wealth’ by reducing its liabilities, the public must be running down its financial holdings and thus becoming poorer, not richer, in financial terms. If the government is making position in its currency, somebody else must be losing position. Who? Look within.


…how can public debt be reduced to zero?

Rephrase that question this way: ‘How can our holdings of safe financial assets be reduced to zero?’ You’ll now be inclined to think that the question is not how but why. Why should anyone want that? I encourage you to surrender to that inclination.


…it is important to realize that central banks do not create wealth as such; they redistribute it.

Agreed. In fact, central banks don’t even redistribute wealth in most cases. They swap more liquid assets – reserves – for less liquid ones – loans, Treasury gilts, etc., usually on a temporary repo basis. Unless they pay a premium on the less liquid assets there isn’t even a redistribution of wealth, just a liquidity adjustment.


If necessary, a central bank can create as many billions as it wants in seconds and credit all that cash to the account of a company or government in need.

Right, except then it also takes fairly liquid assets off the company’s balance sheet. So there’s no real increase in financial holdings, unless the central bank pays a premium on the assets it buys.


No tax authority can move that quickly to levy a tax: it is necessary first to establish a taxable base, set rates, pass a law, collect the tax, forestall possible challenges and so on.

This is irrelevant, since (see above) government spending and funding are asynchronous (think about those weird contingent negative liabilities on the Whole of Government accounts).


Given the power of central banks to create money in unlimited amounts, it is perfectly legitimate to subject them to rigid constraints and clear restrictions.

They can’t create money in unlimited amounts. They’re limited by the collateral banks and firms have to offer in exchange for liquidity. They can, of course, arbitrarily extend this limit by placing new types of assets on their lists of eligible collateral.

A Treasury, by contrast, has no such limitations. It can actually add to net financial holdings in the private sector. Sadly, Treasury departments are subject to ‘rigid constraints and clear restrictions’, rather than being empowered to do what the public interest requires subject to democratic control. Piketty is too technocratic to imagine that democracy might be a superior control mechanism to rules and restrictions determined by a financial elite.


If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again.

A good start would be for economists to stop misleading the public about how those institutions actually work.


11 thoughts on “Some Thoughts on Thomas Piketty’s ‘The Question of Public Debt’

  1. NeilW

    “Governments spend by having their central banks credit the reserve accounts of banks, so that the banks can then credit the deposits of the recipients of the spending.”

    There is perhaps a better way of expressing that. Forget about central banks and Treasuries. What government has the power to do is to *force* commercial banks to lend money to the state at an interest rate and for a term determined by the state. By creating the loan, an equivalent deposit is created and put into the account of the person the government wants paid (i.e. credited). And they have the power to *force* banks to repay those loans on demand – by virtue of taxation which works in the opposite direction.

    In return the banks are able to call their own liabilities ‘dollars’, or ‘pounds’ or ‘euros’ without having to do anything to maintain the price relative to any other institution under the same arrangement with the state.

    1. axdouglas Post author

      That was sort of my objection to free banking in the last post. Since the government has the power to force loans on its own terms (through its power to tax), it converts the whole banking system into its own bank.

      Kalecki actually got this right – he routinely spoke about the whole banking system as a single sector ultimately under the control of the government.

      1. Nathanael

        The history of free banking in the US demonstrates that the government was *forced*, by one crisis after another, to put the banking sector under the control of the government. They kept trying not to, but the results were disasters with massive unnecessary human suffering.

        You can have a banking sector which is not under the control of the government. It’s just a terrible, terrible idea.

  2. NeilW

    What really racks me off is that many of these commentators fail to understand that a bank note isn’t money itself. It is a receipt for money stored somewhere.

    Perhaps it’s because I’m British and our bank notes have always noted what they really are on the front: “I promise to pay the bearer on demand the sum of X pounds”.

    1. axdouglas Post author

      People really want to insist that bank deposits, because they are forward contracts on currency (itself just a forward contract on freedom from a tax liability), ARE currency.

      By the same logic, investment portfolios in those condominiums in Florida that never seem to get built are themselves luxurious residences.

    2. Nathanael

      No, they’re both money. Money has three meanings. Anything which has all three qualities is considered money.

      — Medium of exchange
      — Store of value
      — Unit of account

      Actually, anything which is a medium of exchange is considered money. By definition a medium of exchange can be used as a store of value (it is very, very hard to prevent this, and anyone who tries gets in big trouble). While you can use a unit of account which is not the same as the medium of exchange, it is awfully convenient to denominate your accounts in a medium of exchange, so everyone does.

      (The ancient Egyptians did NOT; their accounts were all denominated in actual physical goods. They had no medium of exchange, and hence they had no money. Instead they had an official chart of barter exchange rates: 1 cow gets you 3 pigs, etc. The government could change the rates and did so sometimes. This was of course a centrally planned economy, and perhaps the most successful centrally planned economy in world history.)

      A bank note is a medium of exchange, so it’s money. A check is a medium of exchange, so it’s money (you can keep endorsing it repeatedly… it could go around in a complete circle and come back to the issuer). A transferrable IOU is money. A bank deposit is usually a medium of exchange (I can bring my friend into the bank and ask to transfer money from my account to his and he can give me something in exchange), so it’s money.

      The interesting point — which the MMT scholars usually get right — is that *some money is better than others*, because various types of money can *stop being money*.

      The money in money market funds was money, *until one of those funds “broke the buck”* in 2008. Then suddenly nobody would accept money market shares as medium-of-exchange. They weren’t money anymore. They were suddenly *demonetized*, which was a massive shock.

      Government-backed money is usually less likely to *suddenly stop being accepted as medium-of-exchange*, which makes it better money. Though demonetization of government money has happened too.

      Leaving money creation in the control of unscrupulous private banks is usually a complete disaster because sudden demonetization events happen regularly.

      With a lack of medium of exchange, deals must be done by barter and the economy slows down massively because the coordination problem is so hard to solve. Eventually someone will create more medium of exchange, but that person has to build up massive social trust. (Someone named Paul Glover managed to create a successful circulating local currency in Ithaca, NY largely through sheer charisma but when he left town, it collapsed and stopped circulating.)

      It’s easy for a government which is actually and clearly in control to create that social trust. It’s not so easy for a government which *isn’t* in control (which can’t collect taxes, whose military is losing a war, etc.)

  3. Simon

    “So there’s no real increase in financial holdings, unless the central bank pays a premium on the assets it buys.”

    I’ve often wondered whether this happened with QE: to buy all those pension/insurance bonds wasn’t an inducement needed? So new assets were created, so more than an asset swap?

    So much of Economics is ‘bewitchment by language’ -the way in which words leave is in Alice in Wonderland without noticing it.

    Thanks for your felicitous phrase ” it imposes an imaginary chronology on a system of asynchronous operations” -helps a bit in the ‘chicken-and eggism’ of these issues.

    1. axdouglas Post author

      Cheers for that.

      QE involved paying a premium on the face value of the bonds, but the effect is to flatten the yield curve rather than to create financial net worth as such.

  4. Pingback: On the Alleged Expertise of Economists | Origin of Specious

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