–The federal debt is unsustainable — still?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.

People who don’t know what they’re talking about, but who want to sound erudite, love to use dramatic terms that can’t be disproved. A classic example is “ticking time bomb,” when referring to the federal debt and deficit.

This blog contains three posts (Federal debt: ‘A ticking time bomb”; “Debt bomb redux”; “More debt bomb nonsense” ) sampling the thousands of times since 1940 (!), the debt has been called a “time bomb.”

The nice thing about “ticking time bomb”: The users never needed to prove or substantiate anything. They didn’t have to say when it would explode or what would make it explode or what would happen after it exploded. They don’t even feel the need to explain why their dire predictions have been wrong, wrong and wrong, every year. They could just use the expression, then stand back, look wise and bask in the adoration.

Well, another description of the federal debt and deficit can be included in the “I know nothing, but I want to look smart” club. This time the term is “unsustainable.” In a previous post I hoped never to see that trite, meaningless term again (See: Unsustainable), but it was not to be. Here are just a few of the uses in the past 28 years.

–February 7, 1982: Ronald Reagan: “[…]rapid, unsustainable expansion of Federal spending and money growth[…]
–December 11, 1983: The New York Times; Editorial Desk:“[…]large and growing deficits are unsustainable. They have to be reduced […]
–1998: Douglas Elmendorf and N. Gregory Mankiw: “Current patterns of taxes and spending are unsustainable.”
—February 28, 2001: George W. Bush:. “Social Security’s spending path is unsustainable in the long run, driven largely by demographic trends.”
–March 3, 2005: Edmund L. Andrews: “Alan Greenspan, chairman of the Federal Reserve, warned on Wednesday that the federal budget deficits were ‘unsustainable,’ and he urged Congress to scrutinize both spending and taxes to solve the problem.”
–February 13, 2006: Paul Krugman: “Last year America spent 57 percent more than it earned on world markets. That is, our imports were 57 percent larger than our exports. It all sounds unsustainable. And it is.”
–05/15/09: Lita Epstein, DailyFinance, “Anyone who understands the U.S. debt picture won’t be surprised by President Barack Obama‘s statement that U.S. deficit spending is ‘unsustainable.’
–4/27/10: Reuters: By Pedro Nicolaci da Costa: “’In the absence of further policy actions, the federal budget appears set to remain on an unsustainable path,’ Bernanke told the 18-member National Commission on Fiscal Responsibility and Reform.”
–5/20/10:Professor Alan Blinder, former member of President Clinton’s original Council of Economic Advisers, and Vice Chairman of the Board of Governors of the Federal Reserve System: “[…]even though everybody knows that the federal budget deficit is on an unsustainable path toward the stratosphere.”

And now, again: 6/10, 2010 The U.S. economy continues a slow, painful recovery, but Congress must prepare to address an “unsustainable” level of debt in the federal budget, Federal Reserve Chairman Ben S. Bernanke cautioned Wednesday.

And again: 6/28/10: House Democratic Majority Leader Steny Hoyer: “Debt is a national security threat. Unsustainable debt has a long history of toppling world powers.”

And again: 7/8/10: The Committee For a Responsible Federal Budget: “The debt of the United States is rising to unprecedented – and unsustainable – levels.

And again: 11/11/10: Representative Jan Schakowsky: “. . . we have to do something; the debt and deficit are not sustainable. . .”

–11/26/10: Sheila C. Bair, Chairman of the FDIC: “The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable . . . “

–12/3/2010:Dick Durbin, senior Senator from Illinois (D): “Borrowing 40 cents out of every dollar we spend for missiles or food stamps is unsustainable.”

–2/21/11: Doug Elmendorf, head of the Congressional Budget Office: “The nation’s fiscal path is unsustainable, and the problem cannot be solved through minor tinkering.” If his name sounds familiar in this context, he, along with noted economist, Greg Mankiw, said almost exactly the same thing way back in 1998 [See above]. When do these gentlemen acknowledge that they repeatedly have been wrong?

–5/13/11: Frank R. Wolf, Republican congressman from Virginia: “It may have surprised some people when Standard & Poor’s warned last month that the United States could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s unsustainable debt. I have been sounding a similar alarm for almost five years, trying to get the attention of Congress and past and present administrations that America cannot continue on its debt and deficit track . . . ”

–7/25/11: iMFdirect: By Rodrigo Valdés: “By the end of this year, federal debt held by the public will represent 70 percent of the U.S. economy, almost double the 36 percent it was in 2007. The federal fiscal deficit will be 9.3 percent of GDP this year. That, quite simply, is not sustainable.”

All these years, the debt has grown, while remaining not only a ticking time bomb, but also unsustainable. How is that possible? Easy. No one knows what “unsustainable” means. Does it mean the government can’t pay its bills? Does it mean America will go bankrupt? Is there any data that proves the debt can’t be sustained?

There is no such data. The federal government has the unlimited power to pay any bills of any size. No federal check ever has or ever will bounce, not because we’re big or lucky, but rather because the government creates money to pay its bills by reaching into vendors’ bank accounts and crediting them.

Does “unsustainable mean that large federal deficits cause inflation? No, ever since the end of the gold standard in 1971, there has been zero relationship between large deficits and inflation, which seems to be related mostly to oil prices.

The whole notion of federal debt unsustainability is not in accord with fact or possibility.

For 30 years the gurus have told us the debt is unsustainable, without them having the slightest notion what it means. The next time someone tells you the federal debt is unsustainable, you’ll know they have no idea what they are talking about.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

9 thoughts on “–The federal debt is unsustainable — still?

  1. Hi Rodger,

    I am having trouble conceptualizing the potential ultimate consequences of federal debt. Let’s say federal debt continues to rise. Yes, the government has no trouble in paying or servicing the debt. But what happens if the interest on the debt rises from the current 15% or so of GDP to say 100% of GDP or 200% or 1000% of GDP. Isn’t there a point when the quantity of money being created on an annual basis is so massive that inflation becomes inevitable? I have read your book and understand that your answer would simply be to raise interest rates to increase the demand for money, but that in turn creates more debt (money) and the process compounds.

    You may reply that our debt has been increasing and interest rates have remained low and you’d be right. However I have trouble imagining that this would continue to be the case with money (debt) being created at 500% of GDP on an annual basis to service that debt. Your comments are appreciated.


  2. Yes, there is a point at which money creation can cause inflation. Some economists believe that point lies beyond when we reach full employment.

    We are nowhere near that point, and meanwhile we punish ourselves, our children and grandchildren, by not buying economic improvements — roads, education, R&D, et al — that would benefit future generations.

    See ITEM 12 for more on this.

    Rodger Malcolm Mitchell


  3. In discussing sustainability, we need to remember that the debt is a subsidy, mainly for rich people. How much of a subsidy are we willing to grant them? There are limits, right?


    1. My limit is close to zero, actually. We do need to provide some bonds for pension funds and as a safe haven, though. There may be other good reasons, as well. But subsidizing bond market babies is not on my list.


  4. Min,

    If the debt were zero (meaning zero T-securities), no problem. In fact, I favor eliminating all T-securities, as they serve no useful function.

    However, if you mean the deficit should be zero, this historically has caused depressions and recessions.

    Rodger Malcolm Mitchell


  5. Rodger,
    Not quite sure about the Twitter question citing Cullen Roche. If there is anyone who understands this stuff, it’s Cullen. Maybe that was your point.


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