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In “All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President will probably deliver in his State of the Union Address next month. I view the coming narrative as very likely to be composed of a number of fairy tales. Two previous posts have criticized two of the many fairy tales I expect to be in the narrative. This post examines the third fairy tale, namely the idea that we can’t keep adding debt to the national credit card. Paul Ryan, the Republicans’ most visible fiscal genius is particularly fond of this one, as are both Ron and Rand Paul, and the tea partiers.
Of course, the fairy tale appeals to the experience of you and me because if we can’t keep adding debt to our personal credit cards without paying down the amount of debt and without limit, then why should we believe that the Government can do this? Of course it can’t. Of course there have to be limits. Look at us, the limits of what we can borrow are determined by our income and our financial assets. Some us can have $25,000 in total credit card debt, someone else might have $100,000 as a limit. Someone else, might have more than a million, but everyone of us has a limit that the banks determine by looking at how much we have in financial assets, and what our income is as well as our repayment record. Also, when we begin to approach our credit limits, and have a repayment burden that stresses our financial assets and our current income, we begin to risk insolvency and the possibility that we might default on our credit card debt comes closer, until because of the high risk of insolvency and default, we can no longer get any more credit to help us to avoid that default.
So, the above is our personal or household credit card situation, and it is perfectly in order to believe that we can’t use it without limit. But the Government’s “credit card” situation is very different from our own. First, the limit on the Government’s ability to issue debt is not based on the Government’s ability to borrow, or on the Government’s ability to generate financial assets, which, aside from Congressional constraints, is constitutionally unlimited. Nor is the limit imposed by any creditor.
Rather the limit on what the Government can borrow is determined by the Government itself. Specifically, it is determined by Congress which imposes a debt ceiling which it raises from time-to-time. Without that ceiling, that self-imposed constraint, the limit on what the Government can borrow in US Dollars is indeterminate, if it exists at all.
Second, you and I can’t keep adding debt to our credit cards, not only because we have a limit, but long before we reach such limits, we may well want to stop adding debt, because our ability to maintain and pay off our debt burden, may be running out. That ability is limited because we can’t produce financial resources at will.
The Government is different however. It is not like a household or even the largest corporation. It is not the user of our national currency. It is the creator of it. All of our dollars proceed from the authority of the Government to spend, and, in the act of spending to create dollars.
If the Government has debt, it can always pay that debt simply by marking up the accounts of its creditors. Also, unlike your household or mine, it doesn’t matter how much is on the Government’s credit card, it can always repay its debts whenever they come due, unless Congress does something stupid to stop it from doing so.
In fact, its own constraints aside for a moment, the Government has precisely the same ability to repay its debts, however high those debts are, and however high its debt-to-GDP ratio is, so long as those debts are owed in the currency (USD) it has the authority to create. It doesn’t matter whether the Government owes $14 Trillion, or $30 Trillion, or only $50,000. It’s ability to pay, self-constraints aside, is exactly the same. It doesn’t matter if its debt-to-GDP ratio is 10% or 100% or 300%, it’s ability to meet its debt obligations is exactly the same, if it decides to shed its self-constraints.
So, when Paul Ryan, or Ron Paul, or even Barack Obama say that we can’t keep putting debt on our national credit card what are they really talking about? They’re not talking about the Government’s intrinsic ability to pay or not. What they’re talking about is that Congress has 1) placed a debt ceiling on the Executive Branch’s ability to borrow, and 2) passed a mandate requiring the Government to issue debt when it deficit spends. These are Congress’s constraints and they are causing our current so-called fiscal crisis.
The austerity mavens, including the President are telling us that we, the people, have spent too much and run up debts that are too large on our national credit card when Congress has a) required us to use our credit card and, as a result, maintain and increase our national debt, and then b) given us a ceiling of debt which they raise from time-to-time, which has nothing to do with our Government’s ability to pay. How unjust is it to create this Catch-22, claim there is an objective problem with a national debt that only exists due to their own restraints, and then say to us, after they’ve just finished extending the Bush Tax Cuts for the rich and providing an estate tax giveaway, that this phony fiscal crisis requires that everyone (except the rich, of course) accept their fair share of austerity?
It is not true that we can’t keep placing debt on our national credit card, so long as Congress removes its arbitrary and unnecessary debt ceiling. If it does that we can keep placing debt on that credit card if we want to without threatening our solvency as a nation.
It is also not true that we must keep issuing debt instruments and keep increasing the national debt, because of some intrinsic feature of the world.
The only reason why we must do so, the only reason we have any national debt in US currency right now, is because Congress forces the Executive Branch to issue debt when it is going to have a deficit, rather than just spend what has been appropriated.
In short, the debt/deficit crisis that Paul Ryan, the Pauls, Barack Obama, and the tea party are so hysterical about, is only a crisis because of Congressional constraints placed on the Executive Branch. Tell Congress that we don’t want to experience austerity because they want to keep issuing debt, and then to have debt ceilings forcing artificial fiscal crises on the Executive Branch. Remove those limits on the national credit card! The Government has unlimited ability to pay its debts so it should have no limits on the national credit card.
And if you’re so upset and frightened about the debt, then recognize that the debt is your (Congress’s) fault. If you remove the requirement to issue debt, then our national debt will be paid down soon enough, and you won’t have to whine about fantasy fiscal crises anymore!
(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).
6 Comments
There is no debt crisis, they know there is no debt crisis, they simply want to put us in a position that makes us totally helpless and unable to offer any resistance whatsoever against whatever injustices they feel like perpetrating upon us. I am not sure why they so thoroughly enjoy our suffering, but I can feel the hate streaming from them, whenever I see their faces and hear their voices. Usually they also like to add that God is talking to them and telling them to do this. Strange how I feel almost blasphemous and guilty saying that, even though I know the God talking through them is not the God of mercy and compassion.
Thank you. The whole deficit meme was reinforced when Bernanke went before Congress this week to describe, defend and explain his recent Fed purchases of securitized ? bonds. He warned that if the deficit was allowed to increase that it would drain money from the economy and possibly edge inflation up. The usual scarecrows were placed in front of us to scare us into deficit ‘reduction’. Of course I see these recent events as an indirect/direct attack on Social Security and Medicare. Bernanke was careful to stress that he saw uncontrolled medical spending as the major fiscal threat to the government and the economy. Meanwhile, he made no comments to place the recent tax cuts into perspective as those seemed to me to be irrational, out of control ‘spending’. But, as you well point out, this is all phony posturing to predicate more cuts.
Wow. If that were true, no one in the U.S. would ever have to work again. Just have the government authorize debt and send a check to every person in the country for, oh, $50K or $60K. Supposedly the country doesn’t have a “credit card” but what happens to the debt that Congress authorizes? It must be sold as Treasury bonds to willing buyers who expect a return. Today the Chinese hold most of the U.S. debt. If the Congress can authorize “unlimited” debt (spending), the Chinese credit card company will start to get the idea that we can’t pay it back. Interest rates will have to rise to attract reluctant buyers of debt(thus raising interest rates for U.S. homeowners and small businesses). Keep creating “unlimited” debut until finally the reluctant creditors get disgusted and shut down the U.S. debt credit card. Ohhh, I forgot… We don’t need to pay it back…we can just authorize the creation of more money and debt to pay back the debt. Why bother collecting taxes at all?
In fact, since government has “unlimited” funds, why not double the troops’ wages? Why not triple Medicare payments to doctors and hospitals? Why not pay military contractors $300 for a single hammer? (Oh, wait, our government already does that.) Well, good enough! Now all those worthy (privileged) people will have full pockets so when all U.S. consumers are shopping in competition for, say, food items (which, actually, ARE LIMITED), prices can find their oh-so “natural” level…Plenty of money, prices rise.
But don’t worry. There are no natural laws in economics–for governments. Only for us–actual people. Our government has the divine right to create money and credit out of thin air…and promise the work and property and lives of 309 million subjects (sorry, citizens) and their decendants as collateral.
I know. I get very angry too. I can’t believe the corruption of these people, or the mechanisms of projection at work.
Thanks. Bernanke is strange. Sometimes he seems to understand and sometimes not. Did he say why he thinks more deficit spending will “drain” money for the economy. It seems to me that it would do the opposite unless he’s delivering a threat saying that he’ll raise interest rates if that happens.
Here’s what Bernanke told Scott Pelley some time ago in an interview: (See http://www.cbsnews.com/stories/2009/03/12/60minutes/main4862191_page2.shtml)
So, 1) the Fed can mark up accounts, adding money to the system and that’s alright; but
2) the Government shouldn’t deficit spend to get people jobs because they’d be adding money to the economy which somehow will result in draining money from the economy.
Give me a break. Sounds like Bernanke needs to retire to me. It also sounds like it’s way past time for the Fed to be placed under Treasury so that it’s accountable to the people.
Well, first, our Government has the constitutional right to create money in ways specified by the Congress. Right now that includes coining money, printing up money and electronically marking up private sector accounts. Second, that’s not by divine right, it’s by a right incorporated into the Constitution by the Founders.
Third, I’m not advocating unlimited spending by the Government. If you can quote where I have said that I’d appreciate it. What I am saying is that the only limit on our credit card is an artificial one set by the Congress that has nothing to do with anything real. So the idea that we can’t keep adding debt to the credit card is a fairy tale. We certainly can. Now should we? That depends on economic conditions and our financing choices.
Under current conditions, the Government needs to spend more money to create full employment. If it does that there will be no demand-pull inflation by virtue of its spending. Now Congress, when it appropriates additional spending can do different things. The best thing to do is nothing. Just let the Government deficit spend, and don’t issue any debt in correspondence with the spending. If Congress does that the Government will actually pay down the national debt that everyone is so worried about.
Congress now requires that the Government issue debt when it deficit spends. This is the real cause of the existence of the national debt. If Congress had lifted that gold standard-related requirement in 1971 we would not have a national debt now. However, they didn’t. What I’m saying in this post is that if they continue to insist on debt issuance, then they ought to remove their self-imposed limit on our credit card, because there is no other limit on our national credit card.
Fourth, if the Chinese don’t want to buy our debt anymore, that’s fine, because the alternative is that their accumulated USD will sit in their Fed Reserve Account and they won’t earn any interest on those dollars. I don’t see why that’s a problem for us.
The world has lots of USD originally created by our Government. The choice of these holders of dollars is to spend them on our goods and services, buy bonds, keep them in their reserve accounts, or sell them on the open market. If they spend them on goods that’s good for us. But they won’t because they’re addicted to exports. If they buy bonds, that’s no problem because we can always pay them off. if they leave them in the reserve accounts, we don’t have to pay interest. And if they sell them to others, that will drive down the value of the dollar and we’ll be able to export again.
It’s all good for us, stop hiding under the bed. Let the Government do its work when the private sector is unwilling to. Don’t just let people sit there and suffer.