From “ticking time bomb” to “Deficit of Doomsday”

Regular readers of this post are familiar with the “ticking time bomb,” the name the Debt Henny Pennys have given to the federal debt.

You see, the Debt Henny Pennys (DHPs) do not understand the difference between the finances of a Monetarily Sovereign government (i.e. the U.S., Canada, Australia, Japan et al) and the monetarily non-sovereign finances of cities, counties, states, euro nations, you, and me.

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Alan Greenspan: “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. A government cannot become insolvent with respect to obligations in its own currency.”

St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets (borrowing) to remain operational.

The DHPs do not understand that while Monetarily Sovereign entities cannot run short of their own sovereign currency, and do not even need or use any sort of income (including tax income), we monetarily non-sovereign folks can and often do run short of money, simply because we, as individual people, do not have a sovereign currency.

If I asked you how much money you own, you probably could give me a pretty good estimate. But if I asked you how much money the United States government owns, you could Google forever and never find the answer.

The reason: Being Monetarily Sovereign, the U.S. government has infinite dollars. It can create dollars instantly and endlessly.

Denying economic reality, the DHPs, do not want you to know that they called the federal deficit and debt (they mix the two), a “ticking time bomb” way back in 1940, when the federal debt was $40 Billion.

And they have used the same warning every year since.

(It reminds me of the cult leader who annually tells his flock the world is ending, so they give him all their worldly possessions and climb a mountain to sit and wait for the apocalypse. Then, when the world doesn’t end, they climb back down, financially poorer and having learned nothing, and a year later, the same thing happens.)

Today, the debt has climbed to over $20 Trillion, a 50,000% increase from 1940, and here we are, with the strongest economy in our history.

Well, here’s a new one from the DHPs: Out with the misleading, “Ticking Time Bomb” and in with even more misleading, “Decade of Deficit Doomsday.” Different words; even more ignorant.

The 2020s Will Be the Decade of Deficit Doomsday
America will have to pay for its spending spree and its wars.
ERIC BOEHM, a reporter at Reason.com, 1/10/2020

The decade that just ended saw a period of uninterrupted economic growth. In the decade to come, we’ll pay for squandering it.

Since the so-called Great Recession officially ended in the third quarter of 2009, the United States has enjoyed 42 consecutive quarters of solid if unspectacular economic growth.

That’s the longest run of uninterrupted growth since government economists began tracking the business cycle in the 1850s, far outpacing the average economic expansion of 18 months.

Employment has increased by 12 percent, the jobless rate reached record lows, and America’s gross domestic product (GDP) has increased by more than 25 percent.

It has been, by almost any measure, one of the best times in American history. Almost.

Ah, poor Eric Boehm, the author of the above. He describes the last decade’s economy in glowing terms, but forgets to mention one important fact: The economy grew because the federal government pumped money into it. How?

With deficit spending.

Reduced deficit growth leads to recessions which are cured by increased deficit growth:

Hanging over this decade of good news is the gloom of a missed opportunity.

After piling up trillions of dollars in deficit spending during the last recession, the federal government took some modest steps towards reducing that red ink during the middle years of the 2010s.

But after Republicans took full control in 2017, spending skyrocketed and the deficit inflated again.

Why is Boehm concerned about the federal deficit? Does he believe the government will run short of money? (It can’t.)

Is he concerned about inflation? (The Monetarily Sovereign government has absolute control over the value of its own sovereign currency, which is why we don’t have high inflation despite high deficits.)

Is Boehm ignorant about economics or is he a liar? (The only two alternatives.)

Since Trump was inaugurated, Washington has added $4.7 trillion to the national debt—almost entirely the result of a gigantic spending binge, but with a small assist from the 2017 tax cuts, which reduced revenues without offsetting spending cuts.

And that $4.7 trillion constituted growth dollars entering the economy.

Now, more than a decade after the last recession ended, the United States is carrying a record amount of debt: more than $23 trillion. The country is on track to add more than $1 trillion to that total in every year of the coming decade, with old age entitlements ramping up as Baby Boomers retire and the country as a whole ages.

It isn’t even “debt” in the usual sense. It’s the total of deposits into Treasury Security accounts (T-bills, T-notes, T-bonds) which are paid off simply by returning the dollars in those accounts to the account holders. No problem at all.

Banks boast about the amounts of deposits they hold, and they are monetarily non-sovereign. But Boehm fears the deposits our Monetarily Sovereign government holds.

Ridiculous.

“Debt matters because it’s the one issue that impacts all others,” says Michael A. Peterson, CEO of the Peter G. Peterson Foundation, a nonpartisan policy center dedicated to fiscal issues.

“Debt threatens our economic health and hinders our ability to make important investments in our future. If we want to tackle big issues like climate change, student debt or national security, then we shouldn’t saddle ourselves with growing interest costs.”

The Peterson Foundation is as “nonpartisan” as Mitch McConnell.

The second paragraph (above) implies that the federal government can run short of its own sovereign currency with which to pay its bills.

It can’t.

According to the Congressional Budget Office, the national debt will approach the size of the entire U.S. economy by the end of the current decade—and will keep on growing until it hits 144 percent of U.S. GDP in 2049.

The current situation, warns the Government Accountability Office (GAO), is “unsustainable.”

Rather than “unsustainable,” they should have called it a “ticking time bomb,” like the other DHPs do. Both characterizations would be equally inaccurate.

By the way, Japan (a Monetarily Sovereign government) has a “debt” (holds deposits) that total more than 250% of its economy. They never have had any difficulty servicing their debt, and never will.

Compare all this with early 2001, at the end of the second-longest economic expansion in history. The federal government was running a surplus.

The national debt was falling and amounted to only 31 percent of GDP. That’s what you’d expect to see now, since deficits typically fall when the economy is growing and grow when the economy is rotten.

Oops. Boehm “forgot” to mention that the surplus led to the recession of 2001. Why?

Federal surpluses bleed money out of the economy, and give them to the federal government, which destroys them.

Indeed, since the end of World War II, the U.S. has seen deficits greater than 4 percent of GDP only in years when the country was either deep in the throes of a serious recession or emerging from one.

Boehm’s key words are, “emerging from one.” It’s the deficit growth that emerges us from recessions, by adding growth dollars to the economy.

Only by running deficits can America ever cure a recession or depression.

The Committee for a Responsible Federal Budget (CRFB), citing federal government data says that in the short term, deficit spending—or tax cuts that aren’t offset with spending cuts—can juice the economy and boost growth.

But in the long term, high levels of debt drag down economic growth.

The CBO projects that the average American household will lose between $2,000 and $6,000 in annual wealth by 2040 if the current trajectory continues. It also says America’s GDP will shrink by 2 percent over the next two decades if current policies continue and the debt keeps growing.

The “long term” comment is absolute nonsense, as demonstrated by history and by logic.

History shows that the federal debt has increased more than 50,000% since 1940, and the economy today is growing exuberantly.

History also shows that reducing federal debt (i.e taking dollars from the economy) causes depressions and recessions.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Great Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

Logic shows that adding dollars to the economy (which is what federal deficits do) is necessary to grow the economy, and that is exactly what the government does to cure recessions and depressions.

And the CBO projections are probably too rosy. They predate the approval of a new bipartisan budget deal in late 2019 that is expected to add another $1.7 trillion to the national debt over 10 years.

That would be 1.7 million growth dollars added to the economy. Growth dollars help prevent recessions.

Furthermore, the CBO is required to build projections based on current policies. Those assume, among other things, that some of the 2017 tax cuts will expire in the middle of this decade. Politically, that’s unlikely to happen.

Tax cuts grow the economy. Tax increases stifle economic growth.

Worse yet, the CBO’s projections don’t account for the inevitable eventual end to this run of economic growth. If we’re running a trillion-dollar deficit in the good years, what happens when the next downturn occurs?

When the next downturn occurs, the government will increase deficit spending to stimulate the economy.

“A recession could quickly push the deficit up towards $2 trillion,” says Brian Riedl, a former Republican congressional staffer now based at the Manhattan Institute. A recession would likely trigger politically-motivated calls for even more deficit spending, causing the debt to skyrocket even more than it already has.

Why would there be “calls for more deficit spending”? Because deficit spending is the only way to prevent or cure a recession.

And these calls would not be “politically-motivated.” They would be economically necessary.

It might also cause interest rates to spike, compounding America’s debt problem. Every percentage point that interest rates rise will add $1.8 trillion in added costs over the decade.

Isn’t it fascinating that intelligent people can make truly ignorant predictions that are completely at odds with obvious historical fact?

First, despite massive increases in the federal “debt” (deposits) interest rates have not “spiked.” Quite the opposite. They are low. The federal government has absolute control over the interest rates on its own sovereign currency.

Second, the federal government, being Monetarily Sovereign, can pay any amount of interest simply by pressing a few computer keys. It never can run short of dollars with which to pay its bills.

And third, if interest rates did “spike,” that would add growth dollars to the economy, thereby benefiting the economy.

“A nervous bond market could demand higher interest rates, further weakening both the economy and the deficit,” says Riedl. “So while the economy looks strong and the deficit seems irrelevant, the fiscal situation is quite fragile.”

The above paragraph is 100% bullsh*t, for the reasons explained previously. And the deficit is not “irrelevant.”  The deficit is necessary for economic growth.

America’s fiscal situation is not fragile at all. It is a rock-solid as any fiscal situation can be. It has the unlimited ability to pay bills, instantly and in any amount. Does that sound “fragile”?

Assigning blame isn’t the most important thing, but there is plenty to go around. The Trump administration and current crop of Republicans in Congress have made the problem worse than it already was.

Some of them—like former deficit hawk Mick Mulvaney and former House Speaker Paul Ryan, who made his name in Congress as the GOP’s budget-maker—deserve special ignominy for abandoning their fiscal conservatism when it was most needed.

Trump came into office promising to eliminate the national debt in eight years, and that’s even more of a joke now than it was then.

The “Trump administration and current crop of Republicans in Congress” are composed of the most incompetent, ignorant butt-kissers who ever have soiled the floors of the White House and the Congress building.

The fact that Trump promised what he didn’t do should come as no surprise to anyone who has been reading something more scrupulous than Brietbart.

(Still waiting to read Trump’s oft-promised replacement for Obamacare.)

Meanwhile, Democrats’ aversion to spending reductions and their refusal even to consider changes to entitlement programs—the biggest driver of the national debt—are equally large obstacles to any meaningful attempt at fixing this mess.

The party’s progressive wing is pushing for Medicare for All and expanding Social Security benefits, while elevating economic theories that say we should ignore the deficit.

The above is typical of the Party of the Rich — desperate to cut benefits to the middle- and lower- classes, but never eliminating those huge tax breaks for the rich.

In contrast to their elected officials, most Americans believe the debt and deficit are important.

A Pew Research Center poll conducted earlier this month found that 53 percent of Americans view the federal budget deficit as a “very big” problem facing the country.

That’s a larger share of the public than the portion that views terrorism (39 percent), racism (43 percent), or climate change (48 percent) as a major problem.

Sadly, the economic ignorance of the American public is equaled only by the economic mendacity of America’s politicians, media, and university economists, the majority of whom have been influenced (read: “bribed”) by the rich to lie about federal spending.

We had time. We may yet have more. But Washington is more likely to squander the 2020s, just like it did the latter half of the 2010s.

If by “squander, Mr. Boehm means “pump growth dollars into the economy,” then clearly the government has “squandered” the latter half of the 1900s, and we hope will continue to “squander” all of the 2000s and beyond.

Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400 fold during the last of my 77-year periods. That’s 40,000%!

Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1/4 ounces of gold with your $114.75.

And what would that supposed protection have delivered?  You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple, unmanaged investment in American business. 

Warren Buffett

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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The most important problems in economics involve:

1. Monetary Sovereignty describes money creation and destruction.
2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY