With all due respect to columnists with national followings, their constant chants that national debt is a disaster waiting to befall us is nonsense. Except for three years when Andrew Jackson was President, the nation has had a national debt and the predicted disaster has never occurred.
There are two groups of people in the world, currency users and currency issuers. You and I, any company we know of, state governments, and any country in the European Union are currency users. To spend money we have to earn it, borrow it, or in the case of a state government or a member of the European Union, acquire it via taxation. But for currency issuers, like the United States, Canada, or Japan, they create all the money they need by simply purchasing goods and services, or transferring money through their nation’s entitlement programs.
The critics of a national debt point to three problems that the debt will create, it will cause the nation to go bankrupt, it will rob our children of their future when the debt is repaid, and it will cause business investment to fall due to debt induced increases in the interest rate, a phenomenon that economists call crowding out.
It’s possible for currency users to borrow money to such an extent that they are unable to service their debts, in which case they face the possibility of bankruptcy. But for currency issuers, sovereign governments who control the currency their debts are denominated in, bankruptcy is impossible. No matter the size of the national debt, the nation can always redeem bonds by having the central bank, in our case the Federal Reserve, purchases as much debt as the government deems necessary. In theory there’s no reason why the Fed could not buy all outstanding government bonds thereby eliminating the entire national debt.
Debt repayments, which will supposedly will rob our children of their future, will not occur for one simple reason. Paying down the debt by $1 trillion has the same effect, as a $1 trillion tax increase, or a $1trillion cut in federal expenditures or transfers. The demand for good or services will decline, inventories will accumulate, workers will be laid off, and the economy will sink into recession.
The historical record is replete with examples of just such events. In 1817, 1823, 1852, 1867, 1880, 1920, the federal government began to run budget surpluses lasting from four to 13 years, which in turn lead to debt reductions. In each case the nation suffered a depression at the end of, or within, one year of the surpluses ending. Most recently, the Clinton administration ran surpluses from 1998 to 2001, and, as expected, the nation entered a brief recession in 2001. The only time you would ever pay down national debt would be to reduce demand, and accept a recession, as the price to be paid to eliminate a damaging inflation problem.
As for deficits crowding out investment by driving interest rates up, there’s no evidence it ever happened, and more recent evidence shows just the opposite. When deficits, which drive national debt increased from 1980 to 1995, the Federal Funds rate, the interest rate one bank charges another for over night loans, fell from around 18 percent to less than 4 percent. Again from 2010 to 2020 when deficits and national debt rose to historic levels, the Federal Funds rate fell from 5 percent to close to zero. When the government is running large budget deficits, they’re flooding the market with money. These deficits are matched by Treasury bond sales, the purpose of which is to prevent the interest rate from falling to zero. Thus bond sales, in conjunction with Fed actions, are done to control interest rates, not finance the government. Thus it’s more accurate to say that deficits lead to crowding in, interest rate reductions actually cause private investment to rise, not fall.
In the end, the way to think of this is that the national debt belongs to the government, not us. When the government spends $1 trillion more than they tax, they’re giving society an extra $1 trillion in buying power. An increase in their debt equals the increase in society’s financial assets (risk-free government bonds).
By buying into the national debt scam, we accept policies fix a “problem,” that doesn’t exist. The negotiations between the administration and the Democrats on a new relief package have stalled with the administration citing the impact on the debt. But this is a ruse, the administration efforts are simply designed to cap government spending. If nothing changes, families will be crushed, bankruptcies will soar and evictions will skyrocket. All done in the name of a problem that doesn’t exist.