Debt Hysteria

Today's blog is a simple reminder that no matter what any one tells you, our country is not going to go broke, even if it runs a big ol' deficit.

Debt hysteria is one of those few traits shared by the Right and Left.  The Right sees us drowning in a sea of entitlements, leading to some kind of central-planning dystopia from which the wealthy might be able to flee, but under which most of us will suffer.  The Left sees unsustainable tax cuts, and while the Left's objection to these tax cuts is marginally less insane than the Right's fear of tax cuts, it still is, essentially, hysteria.

Let's all say it together: the United States prints a fiat currency which is the reserve currency of most of the world.  Until such time as the Dollar is no longer accepted as good or valuable by most of the world, the US Treasury Department and Federal Reserve can put as many dollars into circulation as they need to / feel like.  ERGO, the federal government cannot "go broke".

Yes, you can't turn these fiat dollars in to your local bank and get [x] amount of gold, or silver, or [insert mineral here] in return.  And guess what?  You would have no reason to do so in the first place.  If society utterly collapses, sure, the dollar would be worthless.  But as long as we have a standing military, some form of order in society, and people doing business agree to circulate dollars as opposed to something else (and the contenders are jokes: the Euro? Bitcoin? The Renminbi? This is a topic for another post, but for now let's suffice it to say: let's get real - the contenders are runners-up at best), the US Dollar will stand, the most reliable and flexible - and therefore powerful - currency in mankind's history (or at least for our generation, our parents' generation, in most likely our childrens' generation as well).

Let's put all that aside for the sake of argument and assume the government can go broke, simply by being too far in debt - let's assume the government can't print any more dollars to pay off that debt, and that the government can't fight inflation using conventional means (i.e., have the Fed crank up the interest rate) for some crazy reason.

Even under these conditions, our debt is not out of control.  The Congressional Budget Office (CBO) projects that debt, under current conditions, will grow to 89% of the USA's GDP in the next 10 years.  Sounds scary, right?  Well, in the WWII years, the debt-to-GDP ratio ran at around 120%.  Debt was higher than GDP!  Heavens to Betsy!  Surely America went broke at this time, rather than going on to enjoy a half-century of unparalleled wealth and global dominance.

Remember when the huge deficits of the Reagan era destroyed the credibility of the dollar, leading to society's collapse?  Oh wait - I forgot for a second... the Reagan era was followed by the Clinton era of major employment gains and the "internet boom".

The point is: as long as your debt is denominated in your own currency, and your currency is widely accepted, you're not going to really face a debt crisis.  I want to put the following in bold to really drive it home: if someone tells you that entitlements such as Social Security or Medicaid are going to make us "go broke", they either DO NOT KNOW WHAT THEY ARE TALKING ABOUT or they are LYING TO YOU.  It's really that simple.

Now! One caveat.  Can driving up debt lead to an increase in interest rates, and can that pose an economic burden on our country?  Absolutely.  That can happen.  And it did happen, during the Reagan years notably:

Well, what happened in the Reagan years was “twin deficits”: the budget deficit pushed up interest rates, which caused a strong dollar, which caused a bigger trade deficit, mainly in manufactured goods (which are still most of what’s tradable.) This led to an accelerated decline in the industrial orientation of the U.S. economy:

There's more Econ 101 than I have the mental capacity to get into right now as to why higher interest rates lead to a stronger dollar which leads to an increase in the trade deficit which leads to a decline in the industrial orientation of the economy.  Suffice it to say: it can happen.

So, if Donald Trump makes to Make America Great Again, i.e., bring back manufacturing in a big way, he should arguably stay away from deficits!!! Not because America will "go broke" - it most certainly will not - but because the process described above.

(Please note:  I am not saying we should stay away from deficits.  Deficit spending can be extremely stimulative to the economy.  I am saying that deficit hysteria is a bunch of ridiculous hoo-hah.)

I beg you to please read this short Dean Baker article describing the economic burden imposed by austerity, i.e., balancing the budget at any costs, as opposed to a moderate tax.  A sample (emphasis added mine):

In any case, the austerity pushed by these people has imposed an enormous burden on the economy both in the present and likely long into the future. In fact, we can think of this burden as being similar to a tax. It is standard in Washington political circles to jump up and down and yell and scream over even the most minor tax burden, but fans of arithmetic everywhere know that people care about their after-tax income, not just their tax burden. Except for the arithmetically impaired or the insanely ideological, it would be much better to pay an additional 1.0 percentage point of income in taxes and have a 10 percent higher before tax income, then the leave your tax burden and income unchanged.

Let me close by looping back around to the New Yorker article describe the faddish survivalism trend circulating among the super-rich which I linked to in the second paragraph above.  The rich are hedging that society might collapse - that our fiat currency to be no good, and that something resembling Joseph McCarthy's The Road might unfold.  Hedge-fund manager Robert A. Johnson, who works on Park Avenue South (right down the street from where I work! I wonder if there's room in his bunker for my family when society collapses?) argues that buying fancy bunkers to protect yourself from a collapse of society, a collapse caused perhaps by cutting social services in the name of balancing the budget until everyone is simply starving, homeless and mad, is perhaps rather short-sighted:

Johnson said, “If we had a more equal distribution of income, and much more money and energy going into public school systems, parks and recreation, the arts, and health care, it could take an awful lot of sting out of society. We’ve largely dismantled those things.”

I know I'll have to return again and again to this topic, especially when the GOP and Trump start talking about what a terrible burden Medicaid as practiced currently is, for instance.  For now I'm off to chew glass.  Toodles!