Let's print money and buy back the national debt.

Many years ago, Milton Friedman wrote an article which set out a monetary system which involved no national debt, though he subsequently did not pursue the idea with vigour (1). And in 2010, a former Wall Street trader and banker, Warren Mosler, wrote an article which suggested much the same (2).
The conventional view is that if a government spends more than it gets from taxation, it needs to borrow to cover the difference. But neither Friedman nor Mosler said that governments necessarily need do this. That is, both authors said that, within limits, governments can simply print extra money where spending exceeds income.
Now that might sound irresponsible. But it's not necessarily, because the relationship between money supply increases and inflation is much more complicated than is commonly supposed.
So could we simply print money and buy back the national debt? I'll argue below that the answer is essentially "yes": that is, there are no strictly economic problems involved in doing this, though there certainly are political problems. So here goes.

Quantitative Easing.
Several countries have already printed a fair amount of money and bought back national debt under the guise of Quantitative Easing. And this has been a bit of a non-event: the effect on demand and inflation has not been spectacular. Thus printing significant amounts of money does not, contrary to popular belief, lead to instant hyperinflation. But of course, printing can go too far.
The consensus seems to be that QE has been mildly stimulatory. Thus QE done big time would doubtless be too stimulatory, and thus too inflationary. But that is no problem because the inflationary effect can always be nullified extra tax or reduced public spending.
Note that it is the deflationary effect of those tax/spending changes that matters. And if the deflationary effect exactly cancelled out the above inflationary effect, there would be no net effect (apart from debt reduction). That is, there need not be any change to total numbers employed, average take home pay, and so on. (Incidentally I am using the word deflation here in the "demand reducing" sense, rather than in the "price reducing" sense.)
As to the exact amount of additional tax needed to counter the inflationary effect of a buy-back, that is a difficult question, which I will not address here in detail. But there is a good reason for thinking that only around $1bn of extra tax would be needed for every $10bn of debt bought back.
This reason is that QE or buying-back is essentially to swap two assets which are not greatly different to each other: money and government debt. In contrast, taxation, dollar for dollar, is much more serious: each dollar of tax is a dollar confiscated from the private sector.
Just to expand on that, money is a paper asset which pays little or no interest, whereas government debt, for the private sector, is a paper asset which DOES pay interest. As for government debt which is near maturity, this is as good as cash.
Returning for a moment to the above point that the deflationary effect of the extra tax (or reduced public spending) must cancel out the stimulatory effect of a buy-back, this does not necessarily have to be the case. One could collect insufficient tax, which would mean the buy-back would be stimulatory. But for simplicity, let's stick with the "zero stimulus" assumption.
So why don't we go for it: print a few trillion of new money and just buy back the national debt?

Keynes and Roosevelt.
This buy-back proposal very much ties in with a point made by Keynes. Keynes said (e.g. in a letter to Roosevelt in the 1930s) that stimulus can come from extra government spending financed either by borrowing or money printing (3).
Now if Keynes was right, it follows that if a country has recently effected stimulus via the borrowing route, it should be possible to switch, after the event, to the "money printing" route. That is, it should be possible to turn portions of national debt into monetary base without too much of a problem. Incidentally, Ellen Brown advocates very much this sort of solution to the supposedly insoluble debt problem in Chapter 39 of her book "The Web of Debt". The chapter is aptly entitled "Liquidating the Federal Debt Without Causing Inflation".

Debt held by foreign entities.
A potential, but not serious problem relates to debt held by foreign entities (foreign governments, institutions, etc). Clearly where debt held by such entities is bought back, a portion of the newly acquired cash in the hands of those entities will leave the country, which would depress the value of the relevant country's currency on foreign exchange markets, which in turn would depress living standards in the country. However there are several answers to this problem.
First, the decline in living standards is unlikely to be dramatic. The pound sterling lost about 25% of its value in 2008. The result has not been Greek style riots in the UK. Moreover the loss in UK living standards has been small compared to the loss suffered by European periphery countries as a result of their economic mismanagement.
Second, where just one country buys-back, its currency certainly loses value. But if several of the larger countries with allegedly excessive national debts all bought back simultaneously, those countries' creditors would have fewer escape routes. Thus the foreign exchange effects would be smaller.
Indeed, problems like the above foreign exchange one are not unique to buying-back. That is, any country which does anything significantly different to the rest of the world is asking for trouble. For example if one country raises its interest rates when the rest of the world is cutting rates, that country may well have problems. Thus a fair appraisal of buy-back (or interest rate adjustments) should involve gauging the effects when a significant proportion of the world's economies act simultaneously.

The private sector's paper assets - long term.
Another apparent problem is as follows. National debts have risen substantially during the recession, which in turn means that if much of this debt is replaced with monetary base, then come the recovery, the private sector will find itself holding far more monetary base than before the recession. And that could easily prove inflationary.
The answer to this is that it is generally accepted that in a recession, it is desirable for governments to run deficits, which result in a faster than normal increase in the national debt. And come the recovery, it is generally accepted that the debt can be paid back, or at the very least, its expansion can be stopped.
Now if much of this debt is converted to monetary base, then not much changes. That is, instead of paying back debt or stopping it growing, all that happens is that the monetary base is reined in (via extra tax), or at least its expansion is stopped.
Any extra tax required here would not, repeat not, mean reduced living standards. Remember that excessive amounts of money held by the private sector is so to speak money which cannot in the aggregate be spent, otherwise it causes inflation. That is, removing some of this "monopoly money" from the private sector would have no effect on the amount that the private sector spent in real terms on goods and services.
Put another way, a buy back (like QE) means the typical employer sees additional demand from customers. That effect, if not countered, would result in extra profits and/or higher wages, and/or extra output and so on. So assuming constant GDP is the objective, the effect of the money supply increase has to be countered by extra tax on profits, wages, and so on.

Do buy-backs really make sense?
Astute readers will have noticed that no actual reason has been given so far for debt reduction. Half the world is in a panic about debt, but that is not a good reason. There are, however, three good reasons.
First, as mentioned above, Keynes claimed that stimulus can be funded either via borrowed or printed money. Now borrowing has a deflationary effect, that is, it is anti-stimulatory! So what is the point of borrowing? Frankly I don't know.
Second, where stimulus is required and government borrows, the lenders - that is the wealthy - profit from the exercise. Now why should they, when there is an alternative, i.e. money printing, which does not benefit any particular group? Thomas Edison said that any new money should be the property of the people. He was right (4).
Third, the mere existence of national debt tempts politicians into putting the country in debt to other countries. This is not to suggest there is anything inherently wrong with debt (owed to other countries or other entities). The problem is that politicians' main motive for running up debt is that it is a way of buying votes: not a good reason for debt.
As to why Keynes advocated borrowing, I'm not sure. I get the impression he thought he was surrounded by economic illiterates who thought that printing money invariably led to hyperinflation. So to keep this lot happy, he advocated borrowing instead: an alternative which he himself did not strongly favour.

Conclusion: the only problems are political.
To summarise, there are no strictly economic problems involved in buying back national debts. Obviously buying back a country's entire debt in just one year would involve too much dislocation. But doing it over a five or ten year period would be no problem.
The only real problems are political. That is a buy-back, while it need not involve any significant change in living standards, would probably involve increased taxation and/or reduced public spending. And whichever sections of the population were affected would object. In fact they can be relied on to jump up and down with contrived indignation that would put Hollywood actors to shame.
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References:

1. http://nb.vse.cz/~BARTONP/mae911/friedman.pdf (p.250)
2. http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html (See 2nd last paragraph).
3. http://www.scribd.com/doc/33886843/Keynes-NYT-Dec-31-1933 (See 5th paragraph).
4. http://prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/

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Ralph Musgrave studied economics at New College, Durham, UK and has had several peer reviewd papers and articles published in economics journals, books and other publications. [[ct]]: Convert Currency Warren

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