Debunking the Debt Ceiling Kabuki

Debt! It's scary!

(c) by Mark Dempsey

You are as likely to get a straight answer from a conventional economist as you are to get the truth from your opponents at the poker game.

"...sometimes I’ve believed as many as six impossible things before breakfast.” - the Red Queen

The headlines about the debt ceiling negotiation are increasingly strident, warning that the U.S. is going to "run out of money." But most of the population remains clueless about what government debt is, thinking it's like household debt. Nothing could be further from the truth.

First, unlike a household, the U.S. is a monetary sovereign. It makes its own money, unconstrained by how much gold we have--dollars are a fiat currency. Most of the dollars are not even printed, they are typed electronic entries in accounts at the Federal Reserve ("the Fed").

Consequently, the Fed can issue dollars without limit, just as there's no limit to how many inches the Bureau of Weights and Measures has. There are resource constraints, but for a fiat currency issuer, there are no financial constraints.

On the other hand, the U.S. can self-sabotage.

But don't taxpayers inevitably have to sacrifice their dollars to pay this debt? No, dollars do not grow on billionaires. The federal government doesn't need the population's money to pay its debt. It can make the dollars it needs any time..

Federal fiscal policy is not "tax & spend." Where would taxpayers get dollars to pay taxes if the government didn't spend dollars out into the economy first? Taxes are necessary to ensure there's a demand for dollars, but they do not fund federal spending.

More accurately: government first spends, then retrieves some dollars in taxes. What do we call the dollars not retrieved in taxes--the ones in your wallet or savings account? Answer #1: the dollar financial assets of the population. Answer#2 (describing the same thing): National 'debt.' This is similar to your bank account, which is both your asset and the bank's debt. Asking the bank to reduce its debt (i.e. your bank account's size) is not very sensible.

So dollars are Federal Reserve Notes, and notes are IOUs. The Fed carries currency on its books as a liability too. Reducing the debt would mean reducing dollars in circulation with either tax increases or spending cuts.

What are you owed for a dollar? A dollar's worth of relief from an inevitable liability: taxes. The obligation is from the government to the noteholders, not from taxpayers to anonymous bondholders.

The U.S. has fallen for the "Fiscal Responsibility™" con seven or eight times in American history, and every time it's followed by a wave of asset forfeitures like the Great Depression. Perhaps the most dramatic of these occurred when Andrew Jackson paid off the entire debt in 1835, removing all public currency. People did their business with specie (gold) and roughly 7,000 varieties of private bank notes of varying reliability--a commercial nightmare. The Panic of 1837 resulted from this exercise in self-sabotage, and the ensuing poverty contributed to the outbreak of Civil War a few decades later.

Actually, rather than advocating a "fiscally responsible" government, the debt ceiling controversy aims at cutting spending for Social Security and Medicare. Sure, our military budget is ten times Russia's and three times China's, but it's grandma who must tighten her belt. The agenda is "labor discipline"--the message that poverty and suffering will follow if you don't take whatever crappy job is on offer. Labor discipline is the whip in the hand of our feudal masters.

So...will knowing this help resolve the debt ceiling crisis? It's possible. It's also possible that our public policymakers will sabotage the economy. There are plenty of politicians who want to undermine the government. The suffering caused by default would certainly be real, but the anxiety over "unpayable" debt is pretense.