The "Deficit" is the penultimate of political red herrings. Calling out excess, wasteful spending for what it is would be the better solution. That's what needs to be addressed, the spending.
Think that realistically spending and revenue would both need to give if someone was to actually balance the budget (which also would likely be a gradual process anyway)
I think, reasonably speaking, both spending and revenue would both need to move towards the middle over time. I have no policy prescriptions on how best to do so.
Really the article was focused on the specifics around the debt ceiling, but I liked to end it by zooming out to the bigger picture for perspective.
Who knows! stranger things have happened. Clearly it is not something that can happen overnight, rather it would be a gradual closing over time, which we have seen several times before in this nation's history.
The debt ceiling is such an artificial and dangerous construct, making a mockery of it through creative finance is the best path forward to getting rid of it IMO.
The meme economy alone would profit over 100 percent with a trillion dollar coin issued. Not to mention the music industry. I may even revive Saturday Night Live
The deficit will always go up and up and up. Spending will not be abated, no matter how many promises these political clowns make. Sure you can fumble around with bonds and coins and what not, but either inflation will get you or debasing the currency in some manner will. Otherwise, we could instantly erase all debt and allow all assets to increase in value.
See the fall of the Roman Empire for examples. It's not the numbers, it's the people who try to make them into something they are not...or the massagers and distorters of numbers trying to change facts into non-realies to make themselves look good or avoid admitting they know not what they are talking about. Those would be mostly the academic theory loving economists.
Looking at US history, we have fluctuated between significant deficits and moderate surpluses though it often takes a while to get from one end of the spectrum to the other. We certainly have been venturing deeper into deficits 2000, but I don't know that means it can't tilt back the other way.
You are right that the money printing trap is a very old phenomenon.
"The Treasury could issue a One-Dollar Bond for $100"
- Illuminati, God, Mother Mary: "Hold up!"
I get the concept, and it may even make some sense to combine a debt portfolio with a small fraction of bonds issued this way. Although, the time value of money is tilted towards investors, so maybe the issuer should minimize early payments and slowly grow interest as the years go on. Perhaps they can even issue at interest below current market rates (which could really make it appealing) as investors are getting continuous cash flows.
Anyway, I haven't had my coffee yet, so this could be a bad take on my part. But great article, loved reading it!
Absolutely - I picked 10yr as an example to work from, but I think it actually work best with longer duration (30yr).
But yes, once you get the "creative finance" juices flowing there is no end to the structures you can think up. You could craft any sort of repayment profile you want for a debt instrument theoretically (though maybe not with a "fixed coupon" bond).
You forgot to mention the most important part, of course, regarding the Trillion Dollar Coin: it would allow one of the super rich to intercept its delivery to finally become a real-life Mr. Burns (or Dr. Evil) because they own the only Trillion Dollar (Coin) Bill ;-)
Coming to think of it, reading this, it is as if the Simpsons creators, in their creative early-season juicy heydays, had Nostradamus-like visions, isn't it? Or they simply read about the Trillion Dollar Platinum coin to come up with that "idea".
For all who don't know what I am rambling on about - find an educational, government-approved, movie as to how this coining can actually go wrong here - you will need to destroy the movie (or poke out your eyes) after seeing the secret code phrase, of course:
How can the US Tsy issuing a coin denominated in its own unit of account be considered “radical?” The US Mint has been around since 1792, far pre-dating the Fed or any of the early renditions of a central bank. Thomas Jefferson spoke frequently about a national currency as a declaration of our sovereignty. We can create money without the approval of a monarch or a bond “market.” The federal government spends dollars into existence as a matter of standard operating procedure by crediting banks’ reserve accounts; the Tsy issues debt to drain the newly created reserves. The Constitution gives Congress the exclusive authority to coin money.
To use an analogy borrowed from corporate finance, minting a $1 trillion platinum coin and depositing it at the Fed in exchange for a Tsy security would be like doing a cash-less stock-for-debt exchange between a bond holder and the issuing company. The company is the monopoly supplier of its own stock, it can take in bonds while issuing stock if it so wishes (my firm has done this a number of times over the years with distressed issuers).
While these are all arguments for the Coin, I still think a good-faith interpretation would consider minting a trillion dollar coin a radical solution, in the sense that such a thing has never been done before in the way that it is being envisioned. Yes of course seigniorage is not new, nor is minting coins. But all other coins and paper currency have denomination limits (clearly for a reason), and it is only under a recent law (1996) that Platinum is excluded - the original authors, including those who now advocate for this solution admit that this was never the intention.
So even if determined legal - it is still radical. Issuing a coin that is *10 billion times* more valuable that the most valuable current coin is radical. I don't really think that's a controversial statement, even if you think its the right solution.
Further, the fact that the Treasury has shot down those who have presented this argument in the past suggests that it is not normal course.
I also do not agree with your statement that the government spends money into existence (though I recognize that others have made this argument) - I believe the Fed or commercial banks create the money by issuing credit to the Treasury, which it spends. If the Treasury had the ability to spend endlessly without incurring debt, why would they even care about the debt ceiling at all? Why would Yellen have to plead with lawmakers to adjust it higher?
Your view considers the "Federal Government" as one unit which ignores the purpose of the Federal Reserve as the arbiter of monetary policy vs. the Treasury which manages the finances of the government.
It is this exact distinction between the conflict of interest between monetary policy and the Treasury that led to the Treasury-Fed accord of 1951.
To follow up - the platinum coin is arguably the only lawful solution. NOT issuing it, and choosing to break the law instead, would be the radical choice, a dereliction of duty and grounds for impeachment. Worth noting the software that handles SS payments doesn’t even have a “turn off payments” option. And if TGA balance drops below zero, Fed officials have been instructed to book the negative balance.
I just read about it in Randy Wray’s latest book (https://www.amazon.com/dp/1509554254?ref=ppx_pop_mob_ap_share). Pg. 43, “In the Q&A section of the operational manual used by the Fed’s staff the question is posed: what do we do if we receive a Treasury check but the Treasury’s deposit has already dropped to zero? Answer: clear the check and enter a negative number. That is an overdraft.”
Re: your question, In theory yes but in practice no.
But the same rules that apply to you and I are not applicable to the US federal government. This is because the government is itself the sole issuer of US dollars. There is no numerical limit to how many dollars the government can create, just like there is no limit to how many points a scorekeeper at a football game can assign either team. When one team scores, the scorekeeper marks up the appropriate number on the scoreboard. Those points didn’t have to “come from” anywhere, and the scorekeeper cannot “run out” of points.
I’d encourage you to take a step back for a moment and forget the tropes we’ve all been told about “Fed Independence” and banks “lending money” to the US government. First, the Fed is a public institution that was created by Congress and ultimately answers to Congress. Congress was granted the power of the purse via the constitution - there’s a reason Hank Paulson had to get on his knees and beg Nancy Pelosi for a bailout. When Congress passes a spending bill, it effectively votes the dollars into existence. That is the money equivalent of scoring a touchdown. The Fed cannot question the authority of Congress; it cannot tell the Treasury “no,” just like the scorekeeper cannot question the authority of a referee when he/she raises their hands signaling a score.
The Fed serves as fiscal agent of the US government and operates the payments system for commercial banks. Commercial banks require special licenses (charters). The OCC, a branch of the Treasury that was voted into law by Congress, issues federal bank charters. The Fed clears payments between banks by debiting and crediting their reserve accounts. Reserves are liabilities of the Fed and assets of the banks. If I write you a check, I am sending instructions to the Fed to debit my banks’ reserves and credit your banks’ reserves, FOR FURTHER CREDIT to your deposit account at your bank.
Tax payments and bond purchases likewise are cleared by the Fed. Treasuries are only issued in book-entry form, and can only be purchased with reserves. When you or anyone else buys a treasury security, the Fed debits your banks’ reserves and credits their securities account, FOR FURTHER CREDIT to your account.
Step back and think about it like an accountant for a moment: buying treasuries is a USE of funds (reserves). The Fed issues reserves - they are a liability on its B/S. The Fed is therefore the SOURCE of funds. If there are insufficient reserves in the banking system for primary dealers to “competitively” bid at Treasury auctions (i.e. at a level acceptable within the Fed’s monetary policy goals) then the Fed advances the reserves to them. There is no numerical limit to how many reserves the Fed can keystroke into existence.
So no, commercial banks do not supply funds to the government in order for it to operate. It is the other way around: the OCC issues bank charters, granting them the legal privilege to issue deposits, and the Fed, an agent of the government and a legal creation of Congress, supplies the banks with the funds it demands to to pay taxes and buy treasuries. Commercial banks make up what some have dubbed the Finance Franchise - the government is the franchisor and the banks are the franchisees, expanding the government’s credit money in pursuit of the public purpose, and earning a fee (profits) for their efforts. For further reading, see this 2017 paper published by Cornell Law School (https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2660&context=facpub).
As the only entity in the world with the legal authority to issue US dollars, the US government is a currency monopolist - it is the sole supplier of the currency that it requires the non-government sector to pay taxes in. You can’t pay taxes or buy treasuries with a currency that doesn’t yet exist! It outsources money-issuing privileges in a franchise arrangement with the commercial banks, which requires a special government-issued charter. The banks themselves leverage the government’s “base money” - physical currency and reserves - to issue deposits to fund purchases of credit assets denominated in the government’s unit of account.
I understand why issuing a trillion dollar coin seems primitive and hack-y. It shouldn’t. It’s a sensible solution to an otherwise stupid problem. Yellen’s objections are purely political. Governments have been minting coins in denominations it chooses for thousands of years. It is no more of a “hack” or a “gimmick” than the Fed booking “deferred assets” to offset operating deficits. At least there is something tangible with a platinum coin! The system is unnecessarily complex to obfuscate the truth from the public. They’ve been fooling the media, most on Wall Street (including myself for a while and smart analysts like yourself), and academics for decades, if not longer (our industrialist capitalist forefathers like Thomas Edison used to understand and write about these matters).
Hope that all helps and feel free to reach out at rjb@moderncreditventures.com if you’d like to speak more offline.
I agree that the fiat can be printed by the government, and indeed this is what the Fed has done via QE.
I think where we disagree is in exactly who in the government should have authority. Presently, it is the Fed. The Coin would effectively give that power to the Treasury (and effectively the President).
I think that keeping monetary policy "independent" (as has been the case since the 50's) is the wiser choice.
QE and The Coin are similar but not the same. QE is technically a loan, and is indirect debt monetization. The Coin is simply direct debt monetization.
Thank you for another interesting article. Your review of possible 'escapes' and 'evasions' of the debt ceiling was well presented.
I think, fundamentally, that the debt ceiling is a reminder that the government works for the citizenry and that the citizenry does not work for the government. Nor is the government independent of the citizenry. The necessity to concoct extra-ordinary work arounds is because ordinary governance since Johnson and more pointedly since Trump/Pelosi/Schumer, has broken down into one side exhausting the credit capacity of the United States in order to distribute largess to its' adherents while the other has been increasingly been coopted or otherwise tendered ineffectual.
Come the debt ceiling fight, I look forward to what may be an interesting play in power politics.
I read a commentator on twitter talk about how the government needs roughly 22% of GDP to function. The presumption that government has a claim on almost a quarter of the gross national product seems to me to be absurd. The government has a claim on what the citizenry through its elected representative say the government has a claim on.
While I don't have the statistics, I wonder if the period after the Civil War to the WWI were the highest growth rates year over year for the United States? This would be before the income tax.
On the political side, the current deficit as a percent of GDP has increased since the most recently balanced budget (Clinton) in every subsequent administration (Bush to Obama to Trump to Biden), which is why I'm wary of making it a political argument. Clearly the debt ceiling showdowns are political divided though, which is why I see the whole thing as somewhat hypocritical and nonsensical.
The idea that the Government must run deficits to support growth also seems misguided, as you mention.
The deficit was consistently less than 5% of GDP from post-WWII until 2000, in which we saw much higher real growth than today. Even if we are in a "new era" of lower real growth, I don't think that ever expanding government deficits will be helpful, rather will be hurtful long term. Many people have noted that this is a recurring historical cycle (think Ray Dalio's arc of great empires). Printing money as a cure for real growth usually ends in tears (though the cycle will take decades or more to play out).
Thought provoking content as always! I was wondering what your thoughts were on Yellen saying the debt limit would be hit this upcoming week in regards to your article 35 “spotlight on the treasury”. Hasn’t this happened much sooner than expected?
Yes, this was expected - we were flirting with the limit throughout November and December. To quote from the piece "Today, the total outstanding public debt stands at $31.336 trillion - just a hair under the new statutory limit"
So it was always expected that we would hit the limit imminently, but this doesn't mean that we are in risk of imminent default. Just that we can't raise net new federal debt. The Government still has $372bn in the TGA which it can spend, plus the "extraordinary measures" referenced in the article.
Additionally, the net deficit/surplus vary significantly from month to month. April is almost always a net surplus month, because of the timing of income tax receipts. All these things make it very challenging to say when the true "Drop dead" date is - but it is still months away at a minimum
The "Deficit" is the penultimate of political red herrings. Calling out excess, wasteful spending for what it is would be the better solution. That's what needs to be addressed, the spending.
Think that realistically spending and revenue would both need to give if someone was to actually balance the budget (which also would likely be a gradual process anyway)
They're taking in record revenues, now. Why hike taxes when the rate of change on the spending outstrips any meaning of "balancing"?
Agree that recent explosion in deficit has been due to discretionary spending
And sorry, but this is my main pet peeve wrt Congress.
Yeah, but the problem is EITC gets cut, not the (world’s largest by an outrageous margin) military.
I think, reasonably speaking, both spending and revenue would both need to move towards the middle over time. I have no policy prescriptions on how best to do so.
Really the article was focused on the specifics around the debt ceiling, but I liked to end it by zooming out to the bigger picture for perspective.
Indeed. Simplest way is to balance the budget. Not sure we will see it on our lifetime though.
Brilliant analysis as ever Beae.
Thanks!
Who knows! stranger things have happened. Clearly it is not something that can happen overnight, rather it would be a gradual closing over time, which we have seen several times before in this nation's history.
The debt ceiling is such an artificial and dangerous construct, making a mockery of it through creative finance is the best path forward to getting rid of it IMO.
Hey maybe they will! I thought the idea above was clever, though think the chance of something like it happening is very low.
The meme economy alone would profit over 100 percent with a trillion dollar coin issued. Not to mention the music industry. I may even revive Saturday Night Live
It would certainly lend itself to jokes and satire!
The deficit will always go up and up and up. Spending will not be abated, no matter how many promises these political clowns make. Sure you can fumble around with bonds and coins and what not, but either inflation will get you or debasing the currency in some manner will. Otherwise, we could instantly erase all debt and allow all assets to increase in value.
See the fall of the Roman Empire for examples. It's not the numbers, it's the people who try to make them into something they are not...or the massagers and distorters of numbers trying to change facts into non-realies to make themselves look good or avoid admitting they know not what they are talking about. Those would be mostly the academic theory loving economists.
Looking at US history, we have fluctuated between significant deficits and moderate surpluses though it often takes a while to get from one end of the spectrum to the other. We certainly have been venturing deeper into deficits 2000, but I don't know that means it can't tilt back the other way.
You are right that the money printing trap is a very old phenomenon.
"The Treasury could issue a One-Dollar Bond for $100"
- Illuminati, God, Mother Mary: "Hold up!"
I get the concept, and it may even make some sense to combine a debt portfolio with a small fraction of bonds issued this way. Although, the time value of money is tilted towards investors, so maybe the issuer should minimize early payments and slowly grow interest as the years go on. Perhaps they can even issue at interest below current market rates (which could really make it appealing) as investors are getting continuous cash flows.
Anyway, I haven't had my coffee yet, so this could be a bad take on my part. But great article, loved reading it!
Absolutely - I picked 10yr as an example to work from, but I think it actually work best with longer duration (30yr).
But yes, once you get the "creative finance" juices flowing there is no end to the structures you can think up. You could craft any sort of repayment profile you want for a debt instrument theoretically (though maybe not with a "fixed coupon" bond).
Glad you enjoyed and thanks for the feedback!
Happy New Year, TLBS!
And to you as well. Thanks for reading!
As always, it's a pleasure to learn from you TLBS, keep it going!!
This one was a bit obscure, I'll admit. Thanks as always for reading!
You forgot to mention the most important part, of course, regarding the Trillion Dollar Coin: it would allow one of the super rich to intercept its delivery to finally become a real-life Mr. Burns (or Dr. Evil) because they own the only Trillion Dollar (Coin) Bill ;-)
Coming to think of it, reading this, it is as if the Simpsons creators, in their creative early-season juicy heydays, had Nostradamus-like visions, isn't it? Or they simply read about the Trillion Dollar Platinum coin to come up with that "idea".
For all who don't know what I am rambling on about - find an educational, government-approved, movie as to how this coining can actually go wrong here - you will need to destroy the movie (or poke out your eyes) after seeing the secret code phrase, of course:
https://www.youtube.com/watch?v=_KgHy3Pi5Yw
Ha, in the words of South Park, "SIMPSONS DID IT!"
But yes, The Simpsons has a pretty remarkable track record (Trump president, pandemic, etc). I wonder if they provided market predictions as well?
How can the US Tsy issuing a coin denominated in its own unit of account be considered “radical?” The US Mint has been around since 1792, far pre-dating the Fed or any of the early renditions of a central bank. Thomas Jefferson spoke frequently about a national currency as a declaration of our sovereignty. We can create money without the approval of a monarch or a bond “market.” The federal government spends dollars into existence as a matter of standard operating procedure by crediting banks’ reserve accounts; the Tsy issues debt to drain the newly created reserves. The Constitution gives Congress the exclusive authority to coin money.
To use an analogy borrowed from corporate finance, minting a $1 trillion platinum coin and depositing it at the Fed in exchange for a Tsy security would be like doing a cash-less stock-for-debt exchange between a bond holder and the issuing company. The company is the monopoly supplier of its own stock, it can take in bonds while issuing stock if it so wishes (my firm has done this a number of times over the years with distressed issuers).
While these are all arguments for the Coin, I still think a good-faith interpretation would consider minting a trillion dollar coin a radical solution, in the sense that such a thing has never been done before in the way that it is being envisioned. Yes of course seigniorage is not new, nor is minting coins. But all other coins and paper currency have denomination limits (clearly for a reason), and it is only under a recent law (1996) that Platinum is excluded - the original authors, including those who now advocate for this solution admit that this was never the intention.
So even if determined legal - it is still radical. Issuing a coin that is *10 billion times* more valuable that the most valuable current coin is radical. I don't really think that's a controversial statement, even if you think its the right solution.
Further, the fact that the Treasury has shot down those who have presented this argument in the past suggests that it is not normal course.
I also do not agree with your statement that the government spends money into existence (though I recognize that others have made this argument) - I believe the Fed or commercial banks create the money by issuing credit to the Treasury, which it spends. If the Treasury had the ability to spend endlessly without incurring debt, why would they even care about the debt ceiling at all? Why would Yellen have to plead with lawmakers to adjust it higher?
Your view considers the "Federal Government" as one unit which ignores the purpose of the Federal Reserve as the arbiter of monetary policy vs. the Treasury which manages the finances of the government.
It is this exact distinction between the conflict of interest between monetary policy and the Treasury that led to the Treasury-Fed accord of 1951.
To follow up - the platinum coin is arguably the only lawful solution. NOT issuing it, and choosing to break the law instead, would be the radical choice, a dereliction of duty and grounds for impeachment. Worth noting the software that handles SS payments doesn’t even have a “turn off payments” option. And if TGA balance drops below zero, Fed officials have been instructed to book the negative balance.
Who has directed the Fed officials to book a negative balance? The chairman of the Fed? (sincere question, as I haven't heard this)
I just read about it in Randy Wray’s latest book (https://www.amazon.com/dp/1509554254?ref=ppx_pop_mob_ap_share). Pg. 43, “In the Q&A section of the operational manual used by the Fed’s staff the question is posed: what do we do if we receive a Treasury check but the Treasury’s deposit has already dropped to zero? Answer: clear the check and enter a negative number. That is an overdraft.”
Interesting.
If I open a bank account that allows overdrafts, does that give me unlimited spending power?
BTW I appreciate the information, difference of opinion and healthy discussion!
Absolutely agreed! Appreciate the engagement.
Re: your question, In theory yes but in practice no.
But the same rules that apply to you and I are not applicable to the US federal government. This is because the government is itself the sole issuer of US dollars. There is no numerical limit to how many dollars the government can create, just like there is no limit to how many points a scorekeeper at a football game can assign either team. When one team scores, the scorekeeper marks up the appropriate number on the scoreboard. Those points didn’t have to “come from” anywhere, and the scorekeeper cannot “run out” of points.
I’d encourage you to take a step back for a moment and forget the tropes we’ve all been told about “Fed Independence” and banks “lending money” to the US government. First, the Fed is a public institution that was created by Congress and ultimately answers to Congress. Congress was granted the power of the purse via the constitution - there’s a reason Hank Paulson had to get on his knees and beg Nancy Pelosi for a bailout. When Congress passes a spending bill, it effectively votes the dollars into existence. That is the money equivalent of scoring a touchdown. The Fed cannot question the authority of Congress; it cannot tell the Treasury “no,” just like the scorekeeper cannot question the authority of a referee when he/she raises their hands signaling a score.
The Fed serves as fiscal agent of the US government and operates the payments system for commercial banks. Commercial banks require special licenses (charters). The OCC, a branch of the Treasury that was voted into law by Congress, issues federal bank charters. The Fed clears payments between banks by debiting and crediting their reserve accounts. Reserves are liabilities of the Fed and assets of the banks. If I write you a check, I am sending instructions to the Fed to debit my banks’ reserves and credit your banks’ reserves, FOR FURTHER CREDIT to your deposit account at your bank.
Tax payments and bond purchases likewise are cleared by the Fed. Treasuries are only issued in book-entry form, and can only be purchased with reserves. When you or anyone else buys a treasury security, the Fed debits your banks’ reserves and credits their securities account, FOR FURTHER CREDIT to your account.
Step back and think about it like an accountant for a moment: buying treasuries is a USE of funds (reserves). The Fed issues reserves - they are a liability on its B/S. The Fed is therefore the SOURCE of funds. If there are insufficient reserves in the banking system for primary dealers to “competitively” bid at Treasury auctions (i.e. at a level acceptable within the Fed’s monetary policy goals) then the Fed advances the reserves to them. There is no numerical limit to how many reserves the Fed can keystroke into existence.
So no, commercial banks do not supply funds to the government in order for it to operate. It is the other way around: the OCC issues bank charters, granting them the legal privilege to issue deposits, and the Fed, an agent of the government and a legal creation of Congress, supplies the banks with the funds it demands to to pay taxes and buy treasuries. Commercial banks make up what some have dubbed the Finance Franchise - the government is the franchisor and the banks are the franchisees, expanding the government’s credit money in pursuit of the public purpose, and earning a fee (profits) for their efforts. For further reading, see this 2017 paper published by Cornell Law School (https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2660&context=facpub).
As the only entity in the world with the legal authority to issue US dollars, the US government is a currency monopolist - it is the sole supplier of the currency that it requires the non-government sector to pay taxes in. You can’t pay taxes or buy treasuries with a currency that doesn’t yet exist! It outsources money-issuing privileges in a franchise arrangement with the commercial banks, which requires a special government-issued charter. The banks themselves leverage the government’s “base money” - physical currency and reserves - to issue deposits to fund purchases of credit assets denominated in the government’s unit of account.
I understand why issuing a trillion dollar coin seems primitive and hack-y. It shouldn’t. It’s a sensible solution to an otherwise stupid problem. Yellen’s objections are purely political. Governments have been minting coins in denominations it chooses for thousands of years. It is no more of a “hack” or a “gimmick” than the Fed booking “deferred assets” to offset operating deficits. At least there is something tangible with a platinum coin! The system is unnecessarily complex to obfuscate the truth from the public. They’ve been fooling the media, most on Wall Street (including myself for a while and smart analysts like yourself), and academics for decades, if not longer (our industrialist capitalist forefathers like Thomas Edison used to understand and write about these matters).
Hope that all helps and feel free to reach out at rjb@moderncreditventures.com if you’d like to speak more offline.
Cheers!
GH
I agree that the fiat can be printed by the government, and indeed this is what the Fed has done via QE.
I think where we disagree is in exactly who in the government should have authority. Presently, it is the Fed. The Coin would effectively give that power to the Treasury (and effectively the President).
I think that keeping monetary policy "independent" (as has been the case since the 50's) is the wiser choice.
QE and The Coin are similar but not the same. QE is technically a loan, and is indirect debt monetization. The Coin is simply direct debt monetization.
Thank you for another interesting article. Your review of possible 'escapes' and 'evasions' of the debt ceiling was well presented.
I think, fundamentally, that the debt ceiling is a reminder that the government works for the citizenry and that the citizenry does not work for the government. Nor is the government independent of the citizenry. The necessity to concoct extra-ordinary work arounds is because ordinary governance since Johnson and more pointedly since Trump/Pelosi/Schumer, has broken down into one side exhausting the credit capacity of the United States in order to distribute largess to its' adherents while the other has been increasingly been coopted or otherwise tendered ineffectual.
Come the debt ceiling fight, I look forward to what may be an interesting play in power politics.
I read a commentator on twitter talk about how the government needs roughly 22% of GDP to function. The presumption that government has a claim on almost a quarter of the gross national product seems to me to be absurd. The government has a claim on what the citizenry through its elected representative say the government has a claim on.
While I don't have the statistics, I wonder if the period after the Civil War to the WWI were the highest growth rates year over year for the United States? This would be before the income tax.
Thanks for the feedback Dave.
On the political side, the current deficit as a percent of GDP has increased since the most recently balanced budget (Clinton) in every subsequent administration (Bush to Obama to Trump to Biden), which is why I'm wary of making it a political argument. Clearly the debt ceiling showdowns are political divided though, which is why I see the whole thing as somewhat hypocritical and nonsensical.
The idea that the Government must run deficits to support growth also seems misguided, as you mention.
The deficit was consistently less than 5% of GDP from post-WWII until 2000, in which we saw much higher real growth than today. Even if we are in a "new era" of lower real growth, I don't think that ever expanding government deficits will be helpful, rather will be hurtful long term. Many people have noted that this is a recurring historical cycle (think Ray Dalio's arc of great empires). Printing money as a cure for real growth usually ends in tears (though the cycle will take decades or more to play out).
Thought provoking content as always! I was wondering what your thoughts were on Yellen saying the debt limit would be hit this upcoming week in regards to your article 35 “spotlight on the treasury”. Hasn’t this happened much sooner than expected?
Thanks Sidd.
Yes, this was expected - we were flirting with the limit throughout November and December. To quote from the piece "Today, the total outstanding public debt stands at $31.336 trillion - just a hair under the new statutory limit"
So it was always expected that we would hit the limit imminently, but this doesn't mean that we are in risk of imminent default. Just that we can't raise net new federal debt. The Government still has $372bn in the TGA which it can spend, plus the "extraordinary measures" referenced in the article.
Additionally, the net deficit/surplus vary significantly from month to month. April is almost always a net surplus month, because of the timing of income tax receipts. All these things make it very challenging to say when the true "Drop dead" date is - but it is still months away at a minimum