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Saturday, September 14, 2013
As the next congressional showdown over the debt ceiling approaches, the whirlwind of Beltway discussions will once again tilt toward U.S. debt and deficits. Countless organizations in Washington, D.C., analyze and comment on federal deficits and debt. Many emanate from octogenarian billionaire Pete Peterson, who funds several debt-hysteria groups such as the Concord Coalition, Fix the Debt and the more recent, youth-oriented The Can Kicks Back.
Nearly all of these groups and commentators are dead wrong. Simply put, the U.S. government is the monopoly issuer of the dollar. The U.S. government is no longer on a gold standard, and thus has the ability to issue currency in unlimited amounts and pay all its debts.
Article 1, Section 7 of our Constitution grants the U.S. Congress the unique prerogative to “coin Money [and] regulate the Value thereof.” Congress has assigned this incredibly important task to two of its agents: the United States Treasury and the United States Federal Reserve. These two government agencies work in tandem to ensure that funds are always available to meet congressional appropriations.
Contrary to statements from analysts and elected leaders, including President Obama, there is no scenario in which the U.S. Treasury could “run out of money” or involuntarily default on its debts. Social Security, Medicare and all other federal programs can never go bankrupt, regardless of the status of “trust funds” or other accounting mechanisms.
All such solvency concerns are remnants of the gold standard currency regime that no longer exists. Modern money is simply a means of facilitating commerce and moving real goods and services around the economy. As a fiat currency, the U.S. dollar is no longer arbitrarily backed by the value of a shiny rock; in our modern civilization, it is backed by the ever-increasing productivity of American workers.
So, then, what is debt, exactly? Our $17 trillion national debt exists mostly in the form of U.S. Treasury securities of varying maturity. The nature of U.S. government debt is entirely different from private debt, since no private actors are currency issuers.
These securities are simply default-risk-free, interest-bearing alternatives to dollar balances and are functionally nothing more than savings accounts at the Federal Reserve.
Further, concerns about China funding our debt are misguided; the Chinese have earned several trillion in dollar balances by trading with us. Instead of making the Chinese, or any other holders of U.S. dollars, just hold these dollar balances in non-interest-bearing accounts, the U.S. Treasury offers debt, or its securities, as an interest-bearing alternative to dollar balances.
With rare exception, there is also really no such thing as “paying down the debt.” The value of Treasury securities outstanding has increased consistently over our nation’s history, and the Treasury has been able to seamlessly roll over these securities since 1789, without any grandchildren involved. It can continue to do so in perpetuity, with interest rates determined not by markets, but by policymakers at the Federal Reserve.
U.S. government debts serve as default-risk-free assets to all private actors and play an irreplaceable role in the global financial system. The simple fact that you or I have a dollar in our pockets is proof that the government has at some point spent more than it has taxed back. In no way should this be considered a bad or unsustainable phenomenon.
So what does all this mean for policymakers? If the deficit is too small to overcome private net savings, unemployment will result. And right now, the massive hangover of private debt, including mortgages, credit cards and student loans, is preventing the private sector from expanding on its own.
Therefore, it is the sole responsibility of Congress to deficit spend until the economy reaches full employment. The overriding economic concern of this spending is its ability to cause inflation, but not its creation of any arbitrary debt number or ratio.
While some of this spending will certainly be considered wasteful by partisan observers, nothing could be more wasteful than allowing millions of our fellow citizens to go unemployed or underemployed.
The latest economic figures remained painfully inadequate. So given these conditions, what might be an easy way to increase employment?
How about we stop taxing it? An easing or full repeal of the regressive FICA (payroll) tax might just do the trick.
Our great nation has already suffered through five years of high unemployment, weak growth and deferred dreams, represented by the nearly $5 trillion in lost economic output since the 2008 financial crisis. Dumb policymakers aside, we the people need not allow this tragedy to continue for one more day.
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