Guest Commentary: Debunking the Debt Ceiling Kabuki

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 at 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 misery contributed to the outbreak of the 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 a pretense.

About The Author

Disclaimer: the views expressed by guest writers are strictly those of the author and may not reflect the views of the Vanguard, its editor, or its editorial board.

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7 Comments

  1. Richard_McCann

    I agree that the so-called debt crisis and attempts to enforce the debt limit are a false concern meant as a backdoor means of trying to cut government services. Many of us technically “spend” well beyond our current income when we buy a house or car by taking on debt, but the federal government accounting system does not allow for properly accounting for these large expenditures that deliver benefits for multiple years. The federal government assumes that one would have to pay for a house entirely out of a single year’s income. Ironically corporate accounting relies on moving capital spending into a separate category and shows only the debt repayment as an expenditure.

    Paul Krugman, Nobel Prize winning economist, has argued for years that rising debts is not a problem so long as it doesn’t outstrip general economic growth: https://markets.businessinsider.com/news/bonds/paul-krugman-economy-us-debt-31-trillion-ceiling-crisis-2023-5

    However, money is not just created out of thin air. And the alternative is not relying on a single precious metal. Money is a portable means of trading resources and time for someone else’s resources and time. It is backed by the economic output of our collective society, which is why returning a gold standard is a truly stupid idea. And for that reason, that issuing unlimited amounts of money also is foolish. It can unleash uncontrollable inflation, as happened in Weimar Germany which led to the rise of the Nazis.

    As a side note, just about the only good thing that Andrew Jackson did was wrest control of the U.S. government away from the landed elite who had originally established the country. But his populist demagoguery created undue hardship and led to the destruction of Native American societies. Unfortunately it’s being revived by Trump. Get Jackson off the $20 bill ASAP.

    1. Dave Hart

      Actually it is exactly like creating money out of thin air. Like there’s no limits on the number of points in a football game the only real constraint is the real economy, the natural resources, human resources, and technology that are needed to do anything. If you have all of that, you can afford it.

      1. Ron Oertel

        It is definitely creating money out of thin air. Or in this case, by adding digits in a computer.

        And as more money is “created”, the value of it is reduced.  In other words, inflation.

        1. Keith Olsen

          Exactly Ron, inflation, that’s why better oversight of the debt ceiling is so important.

          If you don’t think it matters then don’t complain when a loaf of Wonder Bread costs $20.

        2. Dave Hart

          Incorrect, Ron.  As you will note, the trillions created and spent into the economy in 2020 created very little inflation based on your description of what causes inflation.  A big part of recent inflation has been caused by supply chain chokepoints and other massive disruptions in many areas of production and transportation.  Add to that opportunistic price increases in industries dominated by only a few major corporations who can set prices and get away with it.  Inflation, as you describe it here, would only be evident if our economy was running at full capacity and “too many dollars chasing too few goods”.  Most economists who use data recognize that our economy has a lot of unused capacity, so it is not for lack of goods or the ability to produce them.

          Foggy thinking based on the tales of how money works are woven so deeply into the public consciousness that when the truth of the matter is made evident many have a hard time accepting the reality.  Once you’ve read “The Deficit Myth” by Stephanie Kelton (a book on how money is created and destroyed and is accessible to regular people), and can offer a cogent critique, I will be able to take your comments on deficit spending and the nature of the national “debt” seriously.  Until then, your view is just coffee shop chatter.

        3. Keith Olsen

          Ron, only until you’ve read Dave Hart’s handpicked book by a leftist economist who worked for Bernie Sander’s presidential campaigns in 2016 and 2020 and is a follower of MMT (Modern Monetary Theory) which AOC also espouses Dave Hart won’t be able to take your comments because your views are just coffee shop chatter.

          From Wikipedia:

          Stanford University economist John H. Cochrane gave the book a negative review,[26] saying that Kelton’s “implications don’t lead to her desired conclusions … her logic, facts and language turn into pretzels”. Cochrane called Kelton’s analysis of inflation biased,[26] and said the book cited “no articles in major peer-reviewed journals, monographs with explicit models and evidence, or any of the other trappings of economic discourse”.[26]
          New York University economist Alberto Bisin also panned the book, writing, “it’s not that the public-spending agenda proposed in the book wouldn’t be worthwhile, or that monetization is never a useful tool of monetary policy. … These are all issues currently studied and debated in (mainstream) academic and policy circles. But MMT, as exposed in the book, appears to be a very poor attempt at supporting this political agenda, with no coherent theoretical support.”[27]
          Former European Central Bank chief economist Otmar Issing gave the book a negative review in an article criticizing the Modern Monetary Theory.[28]

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