How the Fed Enables Trillion-Dollar Deficits

With the Federal Reserve’s annual Jackson Hole symposium there’s been much talk about when the central bank might allow interest rates to rise, presumably through the process of “tapering.” Tapering would mean easing monthly bond purchases, which would “effectively increase interest rates.“

Much of the discussion over the Fed’s policies on interest rates tends to focus on how interest rate policy fits within the Fed’s so-called dual mandate. That is, it is assumed that the Fed’s policy on interest rates is guided by concerns over either “stable prices” or “maximizing sustainable employment.”

This naïve view of Fed policy tends to ignore the political realities of interest rates as a key factor in the federal government’s rapidly growing deficit spending.

While it is no doubt very neat and tidy to think the Fed makes its policies based primarily on economic science, it’s more likely that what actually concerns the Fed in 2021 is facilitating deficit spending for Congress and the White House.

The politics of the situation—not to be confused with the economics of the situation—dictate that interest rates be kept low, and this suggests that the Fed will work to keep interest rates low even as price inflation rises and even if it looks like the economy is “overheating.” If we seek to understand the Fed’s interest rate policy, it thus may be most fruitful to look at spending policy on Capitol Hill rather than the arcane theories of Fed economists.

Why Politicians Need the Fed to Keep Deficit Spending Going—at Low Rates

Federal spending has reached multigenerational highs in the United States, both in raw numbers and proportional to GDP.

If all this spending were just a matter of redistributing funds collected through taxation, that would be one thing. But the reality is more complicated than that. In 2020, the federal government spent $3.3 trillion more than it collected in taxes. That’s nearly double the $1.7 trillion deficit incurred at the height of the Great Recession bailouts. In 2020, the deficit is expected to top $3 trillion again.

In other words, the federal government needs to borrow a whole lot of money at unprecedented levels to fill that gap between tax revenue and what the Treasury actually spends.

Sure, the Congress could just raise taxes and avoid deficits, but politicians don’t like to do that. Raising taxes is sure to meet political opposition, and when government spending is closely tied to taxation, the taxpayers can more clearly see the true cost of government spending programs.

Deficit spending, on the other hand, is often more politically feasible for policymakers, because the true costs are moved into the future, or they are—as we will see below—hidden behind a veil of inflation.

That’s where the Federal Reserve comes in. Washington politicians need the Fed’s help to facilitate ever-greater amounts of deficit spending through the Fed’s purchases of government debt.

Without the Fed, More Debt Pushes up Interest Rates 

When the Congress wants to engage in $3 trillion dollars of deficit spending, it must first issue $3 trillion dollars of government bonds.

That sounds easy enough, especially when interest rates are very low. After all, interest rates on government bonds are presently at incredibly low levels. Through most of 2020, for instance, the interest rate for the ten-year bond was under 1 percent, and the ten-year rate has been under 3 percent nearly all the time for the past decade.

But here’s the rub: larger and larger amounts put upward pressure on the interest rate—all else being equal. This is because if the US Treasury needs more and more people to buy up more and more debt, it’s going to have to raise the amount of money it pays out to investors.

Think of it this way: there are lots of places investors can put their money, but they’ll be willing to buy more government debt the more it pays out in yield (i.e., the interest rate). For example, if government debt were paying 10 percent interest, that would be a very good deal and people would flock to buy these bonds. The federal government would have no problem at all finding people to buy up US debt at such rates.

Politicians Must Choose between Interest Payments and Government Spending on “Free” Stuff

But politicians absolutely do not want to pay high interest rates on government debt, because that would require devoting an ever-larger share of federal revenues just to paying interest on the debt.

For example, even at the rock-bottom interest rates during the last year, the Treasury was still having to pay out $345 billion dollars in net interest. That’s more than the combined budgets of the Department of Transportation, the Department of the Interior, and the Department of Veterans Affairs combined. It’s a big chunk of the full federal budget.

Now, imagine if the interest rate doubled from today’s rates to around 2.5 percent—still a historically low rate. That would mean the federal government would have to pay out a lot more in interest. It might mean that instead of paying $345 billion per year, it would have to pay around $700 billion or maybe $800 billion. That would be equal to the entire defense budget or a very large portion of the Social Security budget.

So, if interest rates are rising, a growing chunk of the total federal budget must be shifted out of politically popular spending programs like defense, Social Security, Medicaid, education, and highways. That’s a big problem for elected officials, because that money instead must be poured into debt payments, which doesn’t sound nearly as wonderful on the campaign trail when one is a candidate who wants to talk about all the great things he or she is spending federal money on. Spending on old-age pensions and education right now is good for getting votes. Paying interest on loans Congress took out years ago to fund some failed boondoggle like the Afghanistan war? That’s not very politically rewarding.

So, policymakers tend to be very interested in keeping interest rates low. It means they can buy more votes. So, when it comes time for lots of deficit spending, what elected officials really want is to be able to issue lots of new debt but not have to pay higher interest rates. And this is why politicians need the Fed.

The Fed Is Converting Debt into Dollars

Here’s how the mechanism works.

Upward pressure on rates can be reduced if the central bank steps in to mop up the excess and ensure there are enough willing buyers for government debt at very low interest rates. Effectively, when the central bank is buying up trillions in government debt, the amount of debt out in the larger marketplace is reduced. This means interest rates don’t have to rise to attract enough buyers. The politicians remain happy. 

And what happens to this debt as the Fed buys it up? It ends up in the Fed’s portfolio, and the Fed mostly pays for it by using newly created dollars. Along with mortgage securities, government debt makes up most of the Fed’s assets, and since 2008, the central bank has increased its total assets from under $1 trillion dollars to over $8 trillion. That’s trillions of new dollars flooding either into the banking system or the larger economy.

For years, of course, the Fed has pretended that it will reverse the trend and begin selling off its assets—and in the process remove these dollars from the economy. But clearly the Fed has been too afraid of what this would do to asset prices and interest rates. 

Rather, it is increasingly clear that the Fed’s purchases of these assets are really a monetization of debt. Through this process, the Fed is turning this government debt into dollars, and the result is monetary inflation. That means asset price inflation—which we’ve clearly already seen in real estate and stock prices—and it often means consumer price inflation, which we’re now beginning to see in food prices, gas prices, and elsewhere.

This certainly isn’t a new trick. Just as we must look back to the Second World War to find similarly huge increases in government spending, the Second World War also provides an earlier example of this debt “monetization” scheme.

David Stockman describes the situation in his book The Great Deformation:

[During the war] the Federal Reserve became the financing arm of the warfare state. Making short shrift of any pretense of fed independence, Treasury Secretary Henry Morgenthau simply decreed that interest rates on the federal debt would be “pegged.” …

Obviously the only way to enforce this peg was for the nation’s central bank to purchase any and all treasury paper that did not find a private sector bid at or below the pegged yields. Accordingly, the Fed soon became a huge buyer of Treasury securities, thereby “monetizing” federal debt on a scale never before imagined.

This follows a textbook scheme that central banks have used during many wars and crises.

Joe Salerno describes this mechanism in his essay “War and the Money Machine”:

Under modern conditions, inflationary financing of war involves a government “monetizing” its debt by selling securities, directly or indirectly, to the central bank. The funds thus obtained are then spent on the items necessary to equip and sustain the armed forces of the nation.

But the money need not be spent on armed forces, of course. It can be spent on anything, such as bailouts and “stimulus.” The possibilities are endless, and the scheme can be used for any type of perceived emergency. But the mechanism is the same.

Now, most of the time in the past, this was considered a very radical thing to do, but it’s now standard operating procedure in this alliance between Congress and the Fed. You want huge deficits? Call in the central bank.

The Fed has apparently been more than happy to oblige. As noted by David Wessel at Brookings, the Fed is definitely doing its part.

Wessel writes:

Between mid-March and late June 2020, the Treasury’s total borrowing rose by about $2.9 trillion, and the Fed’s holdings of U.S. Treasury debt rose by about $1.6 trillion. In 2010, the Fed held about 10% of all Treasury debt outstanding; today it holds more than 20%.

And, as noted by the Committee for a Responsible Federal Budget in May 2020,

Since the crisis began, neither domestic nor foreign holdings of debt have increased significantly. Instead, the Federal Reserve has sharply increased its ownership of U.S. debt…. In fact, the Federal Reserve has indirectly purchased nearly all new debt issued since the recent crisis began.

Another estimate concluded the Fed “bought 57 percent of all Treasury issuance over the past year.”

Indeed, measuring indirectly, we find that from the fourth quarter of 2019 to the fourth quarter of 2020, total public debt grew $4.5 trillion. During that same period, federal debt held by the central bank increased $2.5 trillion. That’s 55 percent of the increase in total debt. Not surprisingly, the Federal Reserve holds 24 percent of all federal debt as of the first quarter of 2021.

Of course, the Fed doesn’t need to buy 100 percent of the new debt that’s issued. There are still many factors that buoy the demand for US debt in addition to the central bank’s purchases. European regimes and China, among others, are all at least as profligate as the United States when it comes to debt and spending, and so US debt by comparison continues to look relatively stable and like a relatively safe bet.

But these other factors clearly aren’t enough to keep the interest rate paid on US debt as low as the politicians need it to be. So the central bank steps in to “help out.” 

Hiding the True Cost of Spending

The political benefit to the US government goes beyond just keeping interest rates low. Converting government spending into monetary inflation obscures the true cost of trillions of dollars of new spending.

Rather than raise taxes to fund spending, deficit spending is more politically feasible for policymakers, because the true costs are moved into the future, or they’re hidden behind a veil of price inflation.

Ludwig von Mises long ago noted the political importance of inflation as a means of allowing the regime to “free itself” from having to ask the taxpayers for another tax increase.

Or, as Robert Higgs puts it in Crisis and Leviathan,

Obviously, citizens will not react to the costs they bear if they are unaware of them. The possibility of driving a wedge between the actual and the publicly perceived costs creates a strong temptation for governments pursuing high-cost policies during national emergencies.

The Myth of Fed Independence

As Stockman notes, when this sort of monetization takes place, it is all the more clear that alleged “Fed independence” is a fantasy. The Fed is today a critical partner is enabling the federal government’s spending plans, and in manufacturing a politically motivated low–interest rate environment.

Economists and Fed watchers may pore over Fed documents and Fed commentary to try to figure out how the Fed views the economics of low–interest rate policy. And that surely is a factor. But the political realities are something else, and remain very much at the center of it all.

This article is adapted from a talk at the Colorado Springs Mises Meetup on August 21, 2021. See the video.Author:

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More Government Debt as Far as the Fiscal Eye Can See

For the last two years, the federal government has been legally at liberty to borrow any amount of money necessary to cover its deficit spending under the Bipartisan Budget Act of August 2019. Unless Congress extends this Act or raises the official debt limit, starting on August 1, 2021 Uncle Sam will only be able to spend what he takes in, in taxes. The thought of living within a balanced budget sends a frightening shiver down almost every politician’s spine.

In its July 2021 report on the “Federal Debt and the Statutory Limit,” the Congressional Budget Office (CBO) explains that at the time the Bipartisan Budget Act was passed in the summer of 2019, the Congressionally approved debt limit stood at $22 trillion. The Act specified that that debt level would come back into effect as of July 31, 2021, plus any and all additional debt accumulated between those two dates. As of June 30, 2021, the federal government had added an extra $6.5 trillion of debt over the previous two years, bringing the outstanding national debt to over $28.5 trillion.

Through various budgetary gimmicks similar to those used by the U.S. Treasury in the past when the debt ceiling has been reached and before Congress has lifted that limit to a higher level, the CBO estimates that the Treasury has enough cash on hand and the potential for internal account juggling to keep spending more than will be taken in as taxes until October or November, or about halfway through the first quarter of the 2022 federal budget year that begins on October 1, 2021. After that, the president and the Congress would have to operate within the collected tax revenues.

Clearly, this is a fate worse than death to those in the halls of political power who win and hold government office by promising to various constituent groups that they will happily spend other people’s money on them if only they will contribute dollars for election campaigns and cast their ballot for them on Election Day.

Trillions of deficit dollars and even more to come

In the 2020 federal government fiscal year that ended last September 30, 2020, total government spending came to $6.55 trillion, with total tax revenues of $3.42 trillion. The budget deficit for the last fiscal year, therefore, came to $3.13 trillion, equaling almost 15 percent of U.S. Gross Domestic Product (GDP). Of course, it could be said that 2020 was an exceptional year due to the Coronavirus crisis and the devastating effect that the government shutdowns and lockdowns had on the economy, and the extra government spending that attempted to counteract the economic recession caused by the draconian restrictions that the federal and state governments had willfully imposed on the lives of everyone in the country. (See my article, “Government Policies Have Worsened the Coronavirus Crisis”.)

For the current 2021 fiscal year that ends on September 30th, the federal government outlays will come to even more, totaling $6.85 trillion, with projected total tax revenues of $3.84 trillion, and another budget deficit of over $3 trillion. For the upcoming 2022 fiscal year, the CBO projection is for $5.54 trillion of federal spending and estimated tax revenues of nearly $4.4 trillion, still leaving a budget deficit of $1.15 trillion.

Looking over the next ten-year period of 2022-2031, the Congressional Budget Office, in its July 2021 Updated Budget and Economic Outlook report, anticipates $1 trillion-a-year deficits for almost each fiscal period. Over the next decade, the government in Washington, D.C. will spend over a total of $63.4 trillion, and collect in taxes a sum totaling more than $51.3 trillion. Due to the deficits incurred each year to cover the gaps between annual expenditures and taxes collected, the total addition to the national debt will come to nearly $12.1 trillion. So, by the end of the government’s 2031 fiscal year, the national debt will stand well over $35 trillion.

Debt interest costs and the fiscal burden of entitlements

The CBO also highlights the fact that 45 percent of all that additional accumulated debt between fiscal year 2022 and 2031 will be monies that the federal government will have had to borrow to pay the interest on the national debt. That is, the federal government will be adding about $5.4 trillion to the government’s total debt just to finance the interest charges on all the existing national debt accumulated over the earlier years and decades.

Out of that total of $63.4 trillion of federal expenditures over the coming decade, the CBO calculates that more than $45 trillion of it will be outlays on “mandatory” or “entitlement” spending, or 71 percent of all spending. Around 35 percent of these “mandatory” outlays will be on Social Security and 45 percent on health care expenditures (Medicare, Medicaid, etc.), alone.

“Discretionary” defense spending for the coming ten years will make up 18 percent of government expenditures. Before fears are expressed about American national defense being “starved,” in 2019 U.S. defense expenditures came to $778 billion. The combined defense spending by the eleven closest defense-spending countries around the world came to $761 billion. That is the U.S. spent three percent more on defense spending than all of those other governments put together (China, India, Russia, the UK, Saudi Arabia, Germany, France, Japan, South Korea, Italy, and Australia).

Fiscal churning is really mostly about the redistributive state

Current projections suggest that U.S. GDP may total $21.5 trillion at the end of 2021. That means that between 2022 and 2031, based on the CBO estimates, the federal government will spend the equivalent of three of this year’s GDP. And over 70 percent of all that government spending will be on the redistributive “churn;” that is, taxing large numbers of “Peters” to transfer all that money to a sizable and growing number of “Pauls.” All those “Pauls,” therefore, who have that degree of direct dependency on government spending for significant portions of their standards and qualities of life.

But it should be kept in mind that the CBO, in its past forecasts, has frequently underestimated the actual growth in government spending and borrowing. Thus, given current and expected mandatory “entitlement” spending under existing legislation, plus, the present pushes for increases in that spending in the years ahead, these numbers are only likely to get even larger, given contemporary political and ideological trends among both Democrats and Republics, among “progressives” and “conservatives.”

Total spending as a measure of governmental burden

Nobel economist Milton Friedman (1912-2006) often emphasized that what mattered when looking at government fiscal policy is not whether that government covers its expenditures through taxes or by borrowing, but, instead, by the total amount of the country’s income and resources that are taken and used by that government. Suppose that there was a government that spent $2 trillion and maintained a balanced budget by taxing the citizenry an equivalent amount versus a government that, instead, spent $3 trillion, but only taxed its citizens $2.5 trillion by making up the rest through deficit spending by borrowing a half trillion dollars. Which government would be the more fiscally burdensome on the citizens of that country?

If the government taxes the citizenry, the dollars collected, and the real resources those dollars have buying power over in the marketplace, are transferred from private sector hands to the hands of Uncle Sam, who then decides what they will be used for.

But this is no less the case when the government borrows dollars in financial markets to cover part of its expenses in excess of collected taxes. Instead of a private borrower borrowing those dollars and using the real resources those dollars can buy in the marketplace for investment, capital formation or other purposes, the government borrows them and uses the real resources that can be bought with them for its own politically-oriented goals and ends.

Either way, the total amount of the income and resources of the society transferred out of private hands and into the hands of the government is represented by the total spending by that government, even if only part has been taxed and the rest has been borrowed.

America’s earlier unwritten fiscal constitution

However, while it may be true that whether the government taxes or borrows the taxpayer-citizens are poorer by that total amount, it is nonetheless the case that government following a balanced budget rule versus a budget deficit expedient has a huge political difference on the institutional ease or difficulty of government growing over time.

Nearly 45 years go, James M. Buchanan (1919-2013), and his colleague, Richard Wagner, wrote a book on Democracy in Deficit (1977). They pointed out that during the first 150 years of the United States, the federal government followed what they referred to as an “unwritten fiscal constitution.”

There is nothing in the U.S. Constitution that requires the government to annually balance its budget. Such a balanced budget “rule” for managing the government’s spending and taxing was considered a way to assure transparency and greater responsibility in the financial affairs of government.

It was argued that a balanced budget made it easier and clearer for the citizen and the taxpayer to compare the “costs” and “benefits” from government spending activities. Since each dollar spent by the government required a dollar collected in taxes to pay for whatever the government was doing, the citizen and taxpayer could make a more reasonable judgment whether they considered any government spending proposal to be “worth it” in terms of what had to be given up to gain the supposed “benefit” from it.

The trade-off was explicit and clear: any additional dollar of government spending on some program or activity required an additional dollar of taxes, and therefore, the “cost” of one dollar less in the taxpayer’s pocket to spend on some desired private-sector use, instead.

Yearly balanced budgets and budget surpluses after emergencies

Or if taxes were not to be increased to pay for a new or expanded government program, the supporter of this increased spending had to explain what other existing government program or activity would have to be reduced or eliminated to transfer the funds to pay for the new proposed spending.

There was an exception to this balanced budget rule, and that was a “national emergency” such as a war, when government might need large amounts of extra funds more quickly than they could be raised through higher taxes.

But it was also argued that once the national emergency had passed, the government was expected to manage its finances to run budget surpluses, taking in more than it spent each year. The surplus was to be used to pay off the accumulated debt as quickly as possible to relieve current and future taxpayers from an unnecessary and undesirable burden.

Amazingly, in retrospect, this actually was the fiscal rule and pattern followed by the United States government throughout the nineteenth century and into the twentieth century until the Great Depression in the 1930s.

The Keynesian call for budget deficits to “stimulate” the economy

However, starting with the 1930s, this unwritten fiscal constitution was permanently overturned as part of the Keynesian Revolution that originated with the publication of John Maynard Keynes’s, The General Theory of Employment, Interest, and Money (1936). It was argued that the government should not balance its budget on a yearly basis. Instead, the government should balance its budget “over the business cycle.” Government should run budget deficits in “bad” years (recession or depression) and run budget surpluses in “good” years (periods of “full employment” and rising Gross Domestic Product).

This new “rule” of a balanced budget over the business cycle became a generally accepted idea for fiscal policy among many economists and government policy makers. However, there has been one major problem with this alternative conception of the role and method of managing government spending and taxing: During the 76 years since the end of the Second World War in 1945, the U.S. government has run budget deficits in 64 of those years and had budget surpluses in only 12 years.

Hence, as Buchanan and Wagner referred to it, “democracy in deficit.” With the elimination of the balanced budget “rule” as the guide for fiscal policy, it has been possible for politicians to create the economic illusion that it is possible to give voters “something for nothing” – a “free lunch.”

The fiscal illusion of giving voters partly “something for nothing”

Politicians have been able to offer more and more government spending to special interest groups to obtain campaign contributions and votes in the attempt to be elected and reelected to political office.

They can offer benefits in the present in the form of new or additional government spending, but they no longer have to explain where all the money will come from to pay for it. The “costs” of that deficit spending is to be paid for by some unknown future taxpayers in some amount that can be put off discussing until that “some time” in the future.

Thus, politicians can supply benefits in the present – “now” – to targeted groups whose votes are wanted on Election Day, and avoid answering how the money will be paid back (with interest) because that can be delayed until the future – a period later in time, years ahead, when someone else may hold political office and will have to deal with the problem.

The moral dimension of government debt financing

There is an additional moral dimension to the issue of government deficit spending and its resulting accumulation of debt. This was a theme especially addressed by James Buchanan.

Normally, when a private individual or enterprise undertakes debt financing of some portion of his current expenditures, the legal obligation to pay back the contracted principle and interest falls upon the borrower. If he defaults or passes away before repayment of all that had been borrowed, creditors have a lien on the borrower’s positively valued assets.

The “benefits” of having the use of a greater sum of money in the present than his own income would enable him to spend, and imposes on the borrower a “cost” of an obligation to pay back the loan out of his future income and assets. The cost and the benefit are linked together within the same person.

It is not the same, Buchanan argued, in “The Deficit and Our Obligation to Future Generations” (1987), with government deficit spending and repayment of accumulated debt:

“If I borrow $1,000 personally, I create a future obligation against myself or my estate in the present value of $1,000. Regardless of my usage of the funds, I cannot, by the act of borrowing, impose an external cost on others. Unless I leave positively valued assets against which my debts can be satisfied, my creditors cannot oblige my heirs to pay off their claims.

“By contrast, suppose I ‘vote for’ an issue of public debt in the amount of $1,000 per person. I may recognize that this debt embodies a future tax liability on some persons, but I need not reckon on the full $1,000 liability being assigned to me. If I leave no positively valued assets, the government’s creditors can still enforce claims on my progeny as members of the future-period taxpaying group.

“Further, the membership in the taxpaying group itself shifts over time. New entrants, and not only those who descend directly from those of us who make a borrowing-spending decision, are obligated to meet debt, interest and amortization charges.

“In sum, the institution of public debt introduces a unique problem that is usually absent with private debt; persons who are decision makers in one period are allowed to impose possible financial losses on persons in future generations. It follows that the institution [of government] is liable to abuse this and overextend its borrowing practices. There are moral and ethical problems with government deficit financing that simply are not present with the private counterpart.”

Government debt is a way to impose part of the cost of what special interest group voters and politicians want “today” on those who “tomorrow” will have to be taxed to pay back the borrowed money.

Even if a current recipient of such governmental deficit spending largess is, himself, one of the future taxpayers, he is usually likely to have received a greater benefit than his personal portion of the future tax burden. Suppose that he is a farmer, for instance, who receives “today” $100,000 from the government for not growing a crop. When “tomorrow” comes and taxes have to be raised to pay back that $100,000 to the creditors who lent that sum to the government, that particular farmer’s additional tax burden will be a small fraction of that total amount.

To continue with the same example, many farmers who may have benefited from agricultural price-support programs decades ago have passed away. The burden of paying back whatever portion of that farm price-support spending originally financed by deficit spending now falls upon others who may not have even been born at the time the recipient received this special privilege from the government.

What is the ethics, James Buchanan asked, of a fiscal system under which incentives exist and come into play that enable the current generation of taxpayers and recipients of government programs to shift part of the burden to pay for them to future generations? Is that a culturally and economically healthy legacy to leave to our children and grandchildren?

The importance of balanced budgets and debt limits

This is why it would be desirable to incorporate a balanced budget amendment into the U.S. Constitution. It would not guarantee that government did not tax and spend more. But it would impose a greater clarity and transparency to the fiscal dimension of government decision-making that would make it far more difficult for those offering other people’s money in exchange for votes to do so without having to also explain who would be paying for the favors and privilege given to some, and how much they would have to pay.

Imagine if members of Congress and the President had to tell their constituents that this year’s $3 trillion of deficit spending was going to have to be covered, instead, by an increase in taxes by that amount. Or, another way of putting this, there was to be a per capita increase in taxes of almost $9,100, given the slightly more than 330 million people in the United States. Or, since only about half that number in terms of households pay taxes, each household’s per capita tax burden would be increasing by around $18,000 this year to balance the budget. And that, similarly, the $12.5 trillion of CBO projected additional debt over the next 10 years would be avoided by sufficient increases in taxes to make the national debt no worse than it stands right now in 2021 at about $28.5 trillion.

No talk about “taxing the rich” would be able to hide the fact that even if such a tax increase were to fall disproportionately more on the “one percent” income bracket, that a very wide band of the American middle class would still see their tax obligations rise significantly. It would be very clear, very soon, that the government-provided “free lunches” are, in fact, very costly.

In lieu of adding such an amendment to the Constitution, the next best thing would be for the Congress not to raise the federal debt limit. I have no illusions that the members of either major political party in Congress have the courage or the self-interest to do so. But the fact is that if Congress were to ever have sufficient pressure from voting constituents to just say, “NO,” that very act would impose a balanced budget on the federal government. Once Uncle Sam had reached the hard debt limit after all his internal accounting finagling, he would then only be able to spend what he had taken in, in taxes, given any “rollover” in refinancing existing debt that came due.

For this to be ever possible, there will have to be a strong educational and political campaign to reawaken an understanding among the public that deficit spending is merely a sleight-of-hand that siphons off wealth and resources from private uses in the present no less than if taxes had been increased in the here and now, and shifts the cost of doing so to the same or different voters in the future who will be obligated to make good on what was borrowed and spent in the past that is currently our present.

Such an effort should be considered an essential element in the intellectual battle for an eventual repeal and retrenchment drive that can begin to reverse the size and scope of Big Government, to start the process of restoring and improving upon a society of freedom grounded in individual rights and economic liberty.

Richard Ebeling

This article was originally published by The American Institute for Economic Research. Reprinted by 

No One Cares About the National Debt, Right?

Writing an article about the national debt is ridiculous. Nobody will read it, fewer will understand it. And those who do will have a knee-jerk reaction to it. It matters or it doesn’t matter.

For going on 40 years, doomsaying fiscal hawks have warned that piling up the national debt will lead to runaway inflation — Venezuela on steroids. But so far, the warnings have not become reality. And after running up a national debt that exceeds the gross domestic product for the first time since World War II, and routinely running trillion-dollar government deficits, all the doom and gloom predicted for overspending has failed to come to pass.

But John Cochrane, an economist at Stanford University’s Hoover Institution, makes the point that the debt doves must be right 100 percent of the time while the hawks fear being right only once.


As a fiscal hawk, Cochrane acknowledges that his doomsaying has been wrong for the past decade, but he says that doesn’t mean he’s wrong now.

“I live in California. We live on earthquake faults.” Cochrane says. “We haven’t had a major earthquake, a magnitude nine, for about a hundred years.” It would be foolish to consider someone a doomsayer for preparing for an earthquake in California, he says, despite the fact that major earthquakes aren’t a common occurrence.

“That’s the nature of the danger that faces us. It’s not a slow predictable thing,” says Cochrane. “It is the danger of a crisis breaking out. So I’m happy to be wrong for a while, but that doesn’t mean that the earthquake fault is not under us and growing bigger as we speak.”

The libertarian economist Murray Rothbard once wrote that when economists started telling politicians that it was the “government’s moral and scientific duty to spend, spend, and spend,” they went from being the “grouches at the picnic” to in-house yes-men.

[Jason Furman, who chaired the Council of Economic Advisers under President Obama] says that unlike advocates of Modern Monetary Theory, which posits that near-unlimited government money creation and spending are possible without dire consequences, he recognizes that there are limits. But he believes we are using the wrong metric to gauge the magnitude of the problem.

Indeed, Furman believes that rather than actual numbers — $22 trillion in debt climbing to 202 percent of GDP by 2050 — we should be looking at “stabilizing” the debt.

“The question is where do you want to stabilize the debt,” says Furman. “People used to think it should be 30 percent of GDP. Is that what we need to do in order to be safe? I think if you’re asking that question without looking at interest rates, then you’re in danger of a very incomplete answer.”

Most people acknowledge that there are limits but they envision slow, steady warnings. That you’ll see the problem coming and you’ll have plenty of time to fix things,” says Cochrane. “And I looked through history and I noticed that when things go wrong, they go wrong in a big crisis.”

What kind of “crisis”? We had a credit meltdown in 2007-2008 that nearly crashed the entire world economy. Now we’re dealing with the pandemic recession that is also worldwide and may be the tipping point for some countries. Just what would it take to set off a round of hyperinflation in the U.S.?

It should make us all uneasy that our current fiscal situation is totally dependent on much of the world staying relatively stable. History shows us that’s folly. With the entire planet connected, we’re even more vulnerable to disruptions than in the past.

For now, wishful thinking rules in Washington.

Rick Moran, PJMedia

It Is Time to Remove the Debt Barrier to Economic Growth

Out of habit, American economists worry about federal debt. But federal debt can be redeemed by the Federal Reserve printing the money with which to retire the bonds. The debt problem rests with individuals, companies, and state and local governments. They have no printing press.

We have explained that the indebtedness of the population means there is little discretionary income with which to drive the economy. The offshoring of middle class jobs lowered incomes, and after paying debt service—mortgage interest, car payments, credit card interest, student loan debt—Americans’ pockets are empty.

This situation has been worsened by Covid lockdowns. In the US the federal government has sent out a few Covid payments to help keep people’s heads above water as they face expenses without income. The financial press refers to these Covid checks as “fiscal stimulus,” but there is no stimulus. The Covid checks do not come close to replacing the missing wages, salaries and business profits from lockdowns.

Corporations have indebted themselves and impaired their capitalization by borrowing money with which to repurchase their stock. This has built up their debt in the face of stagnant or declining consumer discretionary income.

We propose to deal with the debt crisis by forgiving debts as was done in ancient times. Our basic premise is that debts that cannot be paid won’t be. Widespread foreclosures and evictions would further worsen the distribution of income and wealth and further contrain the ability of the economy to grow. Writing debt down to levels that can be serviced would clear the decks tor a real recovery. Income that would be siphoned off in debt service would instead be available to purchase new goods and services.

A few economists muttered that we were overlooking the “moral hazzard” of absolving people of their debts. But leaving the economy stagnated in debt is also a moral hazzard.

Policymakers did not endorse our proposal, but, in effect, policymakers adopted our policy. However, instead of forgiving the debt itself, they forgave payment of the debt service. Individuals and businesses who cannot pay their landlords or lenders cannot be evicted or foreclosed until June. This doesn’t hurt the lenders or banks, because the loans are not in default, and their balance sheet is not impaired. The banks add the unpaid payments to their assets, and their balance sheets remain sound.

When June arrives, the prohibition against eviction and foreclosure will have to be extended as the accrued debt service cannot be paid. Extending the moratorium on foreclosures and evictions will just build up arrears. Is the implication a perpetual moratorium?

The question is: If policymakers are willing to forgive debt service, why not just forgive the debt. The latter is neater and clears the decks for an economic renewal.

The US economy has been financialized. Debt has been built up without a corresponding gain in productive capital investment in order to carry the mounting debt.

In financialized capitalism, the main purpose of bank loans is to refinance existing investments, not to expand productive capacity with which to service the debt. It is not possible to grow out of debt in a financialized economy, because too much income is used for debt service. The way to deal with this problem is to write down debts.

Michael Hudson and Paul Craig Roberts, UNZ Review
NOTE: The views expressed in this article are those of the authors, and do not necessarily represent those of the Artful Dilettante. It is, however, good food for thought. A/D

So Money DOES Grow on Trees After All

“Money doesn’t grow on trees.” Parents used to teach this to their kids — because it’s true, and because they believed it.

There’s no longer a basis for believing it. At least, not if you believe politicians.

Starting last year, and now with more intensity since President Trump and Republicans lost control of the government, government spends trillions upon trillions of dollars. Even the most robust economy could never create the money they’re spending. It’s just debt — and inflation of the currency, via “printing” more money.

They do it as justification for the wreckage they caused via lockdowns and riots — and then take credit for cleaning up.

Even five years ago, it would have been unthinkable for the government to shut down most human activity. The first protest you’d hear is, “What about the economy?”

Today, that’s no longer a problem. The government shuts down most human activity and then pays everyone what they no longer get. Unemployment benefits now pay more than many jobs, particularly entry level jobs, or jobs in the not-so-high-paying food service industries. To the government, that’s just fine. They can provide a guaranteed national income (without calling it that) which makes jobs increasingly irrelevant.

I routinely hear people talking about it now. Particularly younger people, or people with low income. There’s little or no rational anxiety about holding or keeping a job. The question isn’t, “Where will I find work?” Or: “How do I keep my job? Or rise up the ladder?” The question has become: “When is the next stimulus check coming? And how much will it be?” Democrats are firmly, and likely permanently (thanks to election fraud), in charge of the government. They have openly reassured their needy subjects: More checks will be coming. Forever.

It appears that money DOES now grow on trees. Most of our parents were wrong. Since it’s so easy for the government simply to “print” or create (electronically) more and more money, then why not just pay everyone a billion dollars a month, instead of a mere $1400 or $2000 or whatever the next stimulus check will be? On the same premise, it shouldn’t be a problem. And if it IS a problem, morally and economically speaking, then why are we doing it at all?

It’s the greatest con job in all of human history. The government has created a crisis to ensure destruction of the economy. Then the same government that destroyed the economy comes in as the rescuer to provide “emergency” bailouts for an emergency that’s already into year two, with no signs of ending.

Of course, economists do have a few things to say about unlimited government spending. Deficits and a spiraling national debt do matter. And something called inflation — to say nothing of hyperinflation, which totally devalues the currency — might eventually come home to affect everyone except for the one percent elites who rule over our Communist paradise. Everything we know about economics, human nature, and the repeated failures of socialism tell us that disaster will arrive. Including — and especially — toward the ignorant fools who now celebrate their government “freebies”.

Not that we’ll be permitted to talk about it, when it happens.

Michael J. Hurd, Daily Dose of Reason