THE ART OF THE DEAL
What is the purpose of the often-referenced Debt/GDP ratio?
In a previous paper we discussed the fact that the debt/GDP ratio does not measure our government’s ability to pay. So, what is its purpose?”
Some economists still believe that a nation with a high ratio is somehow approaching insolvency in the same way a household or corporation might. But this analogy collapses when applied to a Monetarily Sovereign government such as the United States.
You can see the absurdity of the ratio here, where various nations are compared. As you will see, the ratio has absolutely nothing to do with paying debts or any other conceivable measure of financial strength.
The federal “debt” is the total of Treasury securities, which are dollar obligations payable in dollars the government itself creates. Operationally, the United States never can involuntarily run short of dollars.
T-bills, T-notes, and T-bonds are financial obligations identical to that of dollar bills, which are Federal Reserve Notes (look at the dollars in your wallet.)
Thus, the “debt”/GDP ratio is neither more nor less meaningful that a dollars/GDP ratio, i.e. not at all.
Japan, with one of the highest debt/GDP ratios in the world, continues operating with extremely low interest rates and persistent low inflation.
Thus, the debt/GDP ratio does not measure federal solvency or the likelihood of inflation. Nations with high debt/GDP ratios have experienced inflation and deflation, prosperity and stagnation, high interest rates and low interest rates — the full spectrum.
So we searched for the possibility, faint as it may be, that this much quoted might contain some useful information.
The ratio may partly represent accumulated government-created financial wealth relative to annual spending and production. But you rightly may ask, “Who cares?“
Well, a high debt/GDP ratio may indicate a strong private-sector desire to save, perhaps by an aging demographics, weak private demand, or increasing financialization relative to productive growth.
In that sense, Japan becomes especially interesting. Japan may represent that kind of society, with high savings, low consumption growth, stable institutions, and/or a persistent need for government deficits to support overall demand.
This leads to a striking realization: A high debt/GDP ratio today may beget an even higher ratio tomorrow.
Why? Because if the private sector desires to save more than it spends, the economy may require continuing government deficits simply to maintain income flow and economic stability.
Historically, economics has been built around the assumption of scarcity: scarce food, labor, energy, and production.
But automation and artificial intelligence increasingly challenge those assumptions. AI potentially weakens the ancient connection between human labor and economic production.
For most of human history survival required labor. But what happens when machines increasingly perform the work, physical, analytical, creative, logistical, and informational work? The problem shifts from production to distribution –less on “who does” and more on “who receives?”
Some claim that if the government gives people money they won’t work. This mostly comes from the people who have a great deal of money but apparently still work. The richest man in history reportedly still works long hours. Why, do you suppose?
Modern civilization still largely assumes that the purpose of economies is to maximize production. But that assumption belongs to an earlier stage of development when survival itself was precarious. Once basic needs are satisfied, human striving does not disappear. It changes form.
People seek meaning, admiration, creativity, exploration, mastery, contribution, beauty, discovery, and challenge. The enemy is not the survival struggle. The enemy is boredom. The human species has advanced and our brain has grown, because we are endlessly curious and working. So in the future, jobs still will exist, but they will be more interesting and less physically unpleasant.
A Rolls Royce does not transport a person more meaningfully than a Volkswagen. Beyond a certain threshold, wealth becomes symbolic rather than functional. And admiration itself is rarely granted solely for wealth. Mother Teresa possessed little material wealth, yet became one of the most admired humans in history.
People admire such attributes as courage, creativity, wisdom, perseverance, achievement. Human beings climb mountains, explore caves, write poetry, paint pictures, walk on the moon, and swim with sharks not for survival or money. They do these things because curiosity and accomplishment appear deeply embedded within human nature itself.
Perhaps the fear that people would become lazy in a post-scarcity civilization misunderstands humanity. Children naturally explore, ask questions, build, dismantle, imagine, climb, and discover. Even now, many people’s most meaningful activities occur outside economic necessity.
Consider how many people engage in unpaid or low-paid activities, just for the enjoyment: art, music, science, friendship, sports, philosophy, exploration. Think of all the classes people take, not to make money but for pleasure and enlightenment.
I am ninety-one years old, I still write and paint—not to survive economically, but because the act of creation itself interests me.
The ultimate goal of productivity is not endless production. Perhaps it is freedom.
In that scenario, the true measure of economic success would not be total financial value of output, but the extent to which human beings are liberated from unnecessary survival labor and enabled to pursue meaningful existence.
Artificial intelligence intensifies this question dramatically. AI may become the technological mechanism through which mere survival labor steadily declines in importance. If so, humanity faces a civilizational choice:
We can use automation to concentrate wealth and control while preserving systems built around coercive labor and scarcity. Or we can use automation to increase human freedom.
This may represent the next great evolutionary threshold. Humanity itself may be only an intermediate stage in the universe’s development. Are we just a link in the chain beginning with inanimate atoms and ending far beyond DNA life?
Well, that was quite a trip from the totally useless, but widely quoted, Debt/GDP ratio, to the future of economics and even of existence. I hope you enjoyed it.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell
Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell;
MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;
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A Government’s Sole Purpose is to Improve and Protect The People’s Lives.
MONETARY SOVEREIGNTY
How The Roberts Court Makes Its Decisions
Is the dollar “unsustainable”?
Semantics creates belief.
Economics may be the only major “science” in which semantics predetermines conclusions. The words used are not neutral descriptions. They are analogies, metaphors, and moral judgments disguised as technical language.
A discussion may begin innocently enough with terms like “debt,” “deficit,” “borrowing,” “inflation,” and “crowding out.” But each of those words carries emotional and causal implications long before any analysis begins.
Take the word “debt.” In ordinary life, debt implies danger. It implies insolvency, burden, dependence, and eventual failure to repay from scarce resources.
Household debt can bankrupt a family. Corporate debt can destroy a company. So, when people hear “federal debt,” they automatically apply the same intuition to the federal government.
But for a Monetarily Sovereign nation such as the United States, federal “debt” is unlike household debt. Treasury securities, which are referred to as “debt,” are nothing more than deposits into Treasury security accounts at the Federal Reserve system. “Deposits” is much more benign than “debt.”
They are dollar-denominated obligations payable in dollars the federal government itself creates. A Treasury bill is a dollar bill that pays interest and has a maturity date. Both “bills” are the same financial obligations of the U.S. government. In its essence, a dollar bill is a T-bill.
Have you ever been told that the economy has “too many dollars” or that the number of dollars in circulation is “unsustainable”? No, that isn’t what you hear or read. You’re told the “debt” is too high.
GDP, which measures the economy equals the total dollars being spent—and shrinking GDP means a recession.
You’re often told the “debt” too high and can’t be maintained. By definition, the only way to cut the so-called “debt” is to reduce number of the dollars in the system, which also means to have a recession.
In short, the phrase “reduce the federal debt” literally means “cause a recession.” And in fact, that is exactly what has happened when the so-called “debt” (number of dollars) has been reduced.
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%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
The way this is framed shapes public debate before the facts are even considered.
Similarly, the term “deficit” carries negative emotional weight. Deficit implies shortage, failure, or irresponsibility.
Yet, a federal deficit means the government has pumped more money into the private sector through spending than it has taken out through taxes. Simply put, a deficit is net money creation, which the federal government can do without limit, merely by pressing computer keys.
When language changes, perception changes. “Federal borrowing” sounds like dependency. But, in fact, the federal government never borrows dollars.
It “accepts deposits into Treasury accounts,” which sounds entirely different, even though the underlying accounting operation is identical.
Those deposits do not provide the federal government with spending money. The government produces its spending dollars at will. The purpose of T-securities is to provide a safe place to store unused dollars and to help the Fed control interest rates.
The same linguistic distortion appears in discussions of inflation.
Economists sometimes describe inflation as “too much money chasing too few goods.” Grammatically and psychologically, this phrase emphasizes “too much money” while minimizing “too few goods.” The causal spotlight falls on spending rather than on shortages.
Yet historically, major inflations repeatedly have been associated with shortages and productive disruptions: Oil shortages in the 1970s, wartime destruction in Germany and Hungary. agricultural collapse in Zimbabwe, and during COVID, energy disruptions, shipping bottlenecks, housing shortages, and semiconductor shortages.
In each case, the economy’s ability to produce or distribute essential goods was hindered, but this ability isn’t worsened by government spending. In fact, inflation can be addressed through government spending to obtain the scarce goods.
The false picture is enhanced when a government produces more currency without taking steps to cure the underlying scarcities. That is like treating a viral illness with big doses of antibiotics, then blaming the antibiotics for the disease when the patient fails to improve.
The real problem was not the treatment itself, but the failure to address the actual cause.
Nevertheless, mainstream economic language often frames inflation as: “overheating,” “excess demand,” or “too much spending.” Those phrases direct attention toward reducing purchasing power by raising interest rates, cutting deficits,
weakening labor markets, and suppressing wages.
But inflation fundamentally always results from shortages, so the solutions are entirely different: Increase energy production, aid agriculture, build housing, improve transportation, expand healthcare capacity, strengthen supply chains, and invest in productivity, all of which require more government spending, not less.
One of the most revealing examples of economic semantics is the term “core inflation,” which excludes food and energy prices. The justification is that food and energy prices are unusually volatile and may obscure longer-term pricing trends.
The word “core” suggests something central, fundamental, primary, or causative. Yet historically, the vast majority of inflationary episodes have been driven by energy and food shortages or disruptions.
Oil shocks in the 1970s affected transportation, manufacturing, fertilizer, plastics, shipping, heating, and food production. Food shortages, like those in Zimbabwe, historically have destabilized entire economies and governments.
Thus, energy and food are not peripheral to economic life; they are “core” — foundational inputs into nearly every productive process. Removing them from a preferred inflation measure can create the impression that the very forces most responsible for inflation are somehow secondary or less important.
The semantic framing matters because it influences public understanding and equally important, policy response.
When economists’ solutions focus on “core” inflation, attention naturally shifts away from shortages in energy and food, and toward generalized theories of excess demand or excessive spending.
The terminology quietly encourages the belief that inflation primarily is a monetary or demand phenomenon rather than a resource and supply phenomenon. But add a trillion, trillion dollars to an economy that has a trillion, trillion more things people want to buy, and there will be no inflation.
Inflation is always and everywhere a supply problem, never a money problem.
Even terms like “crowding out” reveal the hidden metaphors embedded in economic thinking. The phrase implies that government spending physically occupies economic space that otherwise would belong to the private sector.
It assumes a limited pool of available money. But a monetarily sovereign government creates dollars whenever it spends. The real constraints are not dollars but actual resources, like oil and food.
“Cooling the economy” sounds gentle and scientific. In practice, it often means lower wages, business failures, and reduced consumer purchasing power, in short, recession.
“Fiscal discipline” sounds prudent. Operationally, it means reducing the flow of dollars into the private sector. The abstractions become especially dangerous because they conceal human consequences behind sterile terminology.
Words create belief. The debate often is won or lost before the first statistic appears—simply by the choice of words used to frame the discussion. People react to the stories implied by the language used.
SUMMARY
Terms like “debt,” “deficit,” “core inflation,” “crowd out,” “borrow,” “print money,” “overheated,” and “cool the economy” are often misused by economists. These expressions tend to carry misleading negative connotations and suggest flawed solutions.
Some suggestions for accuracy and clarity:
- Instead of “debt” —> “deposits.”
- “Core” inflation —>less volatile inflation measure
- Federal “deficit”—>growth dollars added
- “Crowd out” (eliminate this term as it is functionally incorrect)
- “Borrow” (accepts deposits)
- “Print money” —> add growth dollars
- “Overheated” —>trending toward inflation
- “Cool the economy” —> Reduce economic growth
Semantics creates belief, especially in economics.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell
Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell;
MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;
……………………………………………………………………..
A Government’s Sole Purpose is to Improve and Protect The People’s Lives.
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 