The U.S. is again on the brink of economic default. The right-wing Republicans in the House of Representatives are refusing to raise the ceiling on the “national debt” to allow the government to fulfill its financial obligations. The U.S. Constitution gives Congress the power “To coin Money [and] regulate the Value thereof” [Article I, Section 8, Clause 5]. Congress has delegated this authority to the U.S. Department of the Treasury and the Federal Reserve System or FED. The FED is the Treasury’s banker and the nation’s central bank. The current stalemate in Congress threatens to restrict the government’s ability to create and regulate the value of U.S. currency.
The government has already been forced to rely on “extraordinary measures,” meaning accounting tricks, to avoid defaulting on its financial obligations. If the national debt ceiling is not increased by early summer, the U.S. government will begin defaulting on its financial obligations. The resulting downgrading of the U.S. credit rating would lead to increased interest rates and higher costs of maintaining the existing debt level, creating a further need to increase the debt ceiling.
However, the real threat is to the integrity of the entire U.S. economy. The U.S. dollar is not backed by gold, silver, or anything of real or tangible value. The only thing that gives the U.S. dollar value is the “full faith and credit” of the U.S. government, regardless of whether dollars are represented by coins, bills, or bank deposits. A failure of the U.S. government to meet its financial obligations would threaten public confidence and trust in the financial integrity of the U.S. government, thus threatening the value of the U.S. dollar.
A loss of confidence in the value of U.S. currency could trigger hyperinflation in prices, crashes in the stock and real estate markets, and the evaporation of trillions of dollars of financial wealth. If Congress refuses to allow the government to do what it needs to do to maintain public trust in the U.S. Dollar, the entire economy of the U.S. could collapse, taking the global economy down with it.
Placing some arbitrary ceiling on the national debt is not a conservative act of fiscal responsibility, it is a reckless act of fiscal illiteracy. This is a cultural war between those who believe that people are worth what they contribute to and earn from the economy and those who believe that people have a right to the basic necessities of life—food, clothing, shelter, education, health care—regardless of what they contribute to the economy.
Republicans in the House of Representatives defend this action as being necessary to restrain “out of control” government spending on social programs, specifically Social Security and Medicare. They claim the government is creating an irresponsibly large national debt that will have to be paid off by our children and grandchildren. This is simply not true! Contrary to the propaganda otherwise, the national debt is not like a household or business debt. The national debt is analogous to deposits in a commercial bank, as I explained in a blog piece in September of 2021 https://www.johnikerd.com/post/the-national-debt-deception. Both are debts in the sense that investors or depositors can withdraw their funds if they choose to do so. There is no more reason to pay off the national debt than to take deposits out of commercial banks.
The primary difference between the FED, the nation’s bank, and commercial banks is that the U.S. government has the power to “create new money” to fulfill its obligations. The U.S. Treasury can simply “create deposits” in its account at the FED to pay off the national debt at any time, but it has no reason to do so. This is precisely what it did to bail out the banking system in 2009-2009. The only thing the government has to be concerned about is the risk of putting so much money in circulation that it causes inflation. If those who own government securities, which represents money loaned to the government, choose to invest it elsewhere in the economy, there would be no net increase in the amount of money in circulation. This was the case in 2008-2009 and there is no reason to expect anything different—as long as investors have confidence in the value of the U.S. dollar.
If Congress refuses to increase the ceiling on the U.S. debt, it will not be because of any legitimate concerns about the size of the national debt but instead, because the current Congress refuses to allow the government to fulfill its financial obligations, not only to its current creditors, but to future recipients of Social Security, Medicare, Medicaid, and other promised government benefits. This is a cultural war between those who believe that people are worth what they contribute to the economy and those who believe that all people are of equal inherent worth, regardless of their ability to earn money.
John Ikerd