Since 2007, the net worth of the median U.S. household has shrunk by 40%, i.e., to $55,000. The forces of repression, specifically the disciples of Pete Peterson, are now gathering to launch, during the lame-duck session, an effort to further impoverish the middle class via long-term cuts to what they call “entitlements,” Social Security and Medicare benefits, to “put our fiscal house in order.” They claim such cuts are necessary “because we are caught between a mountain of debt and a fiscal cliff.” But, the CBO’s own data show that the fiscal cliff is nothing but a temporary pot hole (a six-month decline followed by a return to normal growth), while the proposed austerity measures are intended to be permanent. But, what about that so-called “mountain of debt”? My thesis is that it is yet another “pile of shit,” another boogeyman that Peterson’s disciples use to frighten small children and naive journalists.
The first thing to understand is that the United State NEVER pays its debt, not since 1836. In spite of that, we’ve never defaulted on our payments. How is that possible? We simply roll the debt over, like a balloon-payment mortgage, i.e. we sell new bonds to retire the old ones. And, each year, we add the current deficit to the debt and carry on. Note, for example, that we had a huge debt at the end of WWII: $3.5 trillion, which was then 120% of GDP. We have never paid it off. It was left by the Greatest Generation to the Boomers, who left it to Gen X, who will leave it to the Millennials, etc. We never hear about that, because we have grown to the point where the cost of WWII constitutes less than 25% of our current debt. These graphs tell the story, and it’s not a story of “intergeneration theft,” as Peterson’s disciples call it.
The graphs also tell another story. As a percent of GDP, our national debt a continually shrank from 1945 until the election of Ronald Reagan in 1980. And, the debt-to-GDP rate has increased every year since, except while Bill Clinton was president. So, what to do about that?
During the post-election lame-duck session, there will be hysterical calls for another “grand bargain,” involving token tax increases on the wealthy and austerity for the middle class, mostly long-term cuts to Social Security and Medicare (a.k.a. “entitlement reform”). The most obvious alternative is to tell the lame ducks to keep this hands off Social Security and Medicare and to let the previous grand bargain, which involves no cuts to SS and Medicare, to take effect as scheduled. There will be a lot of weeping and gnashing of teeth on the part of defense contractors and entitlement cutters, and there will be dire claims about the mountain of debt and the fiscal cliff. But per the Congressional Budget Office (CBO), if laws currently on the books take effect as scheduled, the deficit will drop well below GDP growth, thus slowly shrinking the debt-to-GDP ratio. But, what about the fiscal cliff? Per that same CBO report the GDP would contract .8% during the first six months of 2013 (half a year at 1.6% per year) and then resume normal growth. That dip, which naive journalists are calling “the fiscal cliff” is a short-term problem that Peterson’s disciples are using to railroad into law long-term cuts to our social safety net.
The GOP will likely again hold the debt limit hostage unless they get a grand bargain and one that is to their liking. But, the president does not have to give in to that. He can cite the 14 Amendment:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
and proceed to use his authority under existing law to pay the nation’s appropriated expenses with freshly issued money. There is no need to default.
Some readers will object that “issuing money out of thin air causes inflation.” Please note that every time a bank makes a loan, it issues money out of thin air — banks loan out way more money than they have on deposit. Also note that between November 2008 and June 2010 the Federal Reserve bought up (i.e., paid off) roughly $1.5 trillion (10%) of the national debt by depositing freshly issued credit into accounts of various banks. Doing so did not cause inflation.
Letsgetitdone has covered much of this material, especially the issuing of new money, in greater detail in an excellent posting here a month ago.