Fairy Tales of the Coming State of the Union: We Can't Keep Adding Debt To the National Credit Card
In "All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President will probably deliver in his State of the Union Address next month. I view the coming narrative as very likely to be composed of a number of fairy tales. Two previous posts have criticized two of the many fairy tales I expect to be in the narrative. This post examines the third fairy tale, namely the idea that we can't keep adding debt to the national credit card. Paul Ryan, the Republicans' most visible fiscal genius is particularly fond of this one, as are both Ron and Rand Paul, and the tea partiers.
Of course, the fairy tale appeals to the experience of you and me because if we can't keep adding debt to our personal credit cards without paying down the amount of debt and without limit, then why should we believe that the Government can do this? Of course it can't. Of course there have to be limits. Look at us, the limits of what we can borrow are determined by our income and our financial assets. Some us can have $25,000 in total credit card debt, someone else might have $100,000 as a limit. Someone else, might have more than a million, but everyone of us has a limit that the banks determine by looking at how much we have in financial assets, and what our income is as well as our repayment record. Also, when we begin to approach our credit limits, and have a repayment burden that stresses our financial assets and our current income, we begin to risk insolvency and the possibility that we might default on our credit card debt comes closer, until because of the high risk of insolvency and default, we can no longer get any more credit to help us to avoid that default.
So, the above is our personal or household credit card situation, and it is perfectly in order to believe that we can't use it without limit. But the Government's “credit card” situation is very different from our own. First, the limit on the Government's ability to issue debt is not based on the Government's ability to borrow, or on the Government's ability to generate financial assets, which, aside from Congressional constraints, is constitutionally unlimited. Nor is the limit imposed by any creditor.
Rather the limit on what the Government can borrow is determined by the Government itself. Specifically, it is determined by Congress which imposes a debt ceiling which it raises from time-to-time. Without that ceiling, that self-imposed constraint, the limit on what the Government can borrow in US Dollars is indeterminate, if it exists at all.
Second, you and I can't keep adding debt to our credit cards, not only because we have a limit, but long before we reach such limits, we may well want to stop adding debt, because our ability to maintain and pay off our debt burden, may be running out. That ability is limited because we can't produce financial resources at will.
The Government is different however. It is not like a household or even the largest corporation. It is not the user of our national currency. It is the creator of it. All of our dollars proceed from the authority of the Government to spend, and, in the act of spending to create dollars.
If the Government has debt, it can always pay that debt simply by marking up the accounts of its creditors. Also, unlike your household or mine, it doesn't matter how much is on the Government's credit card, it can always repay its debts whenever they come due, unless Congress does something stupid to stop it from doing so.
In fact, its own constraints aside for a moment, the Government has precisely the same ability to repay its debts, however high those debts are, and however high its debt-to-GDP ratio is, so long as those debts are owed in the currency (USD) it has the authority to create. It doesn't matter whether the Government owes $14 Trillion, or $30 Trillion, or only $50,000. It's ability to pay, self-constraints aside, is exactly the same. It doesn't matter if its debt-to-GDP ratio is 10% or 100% or 300%, it's ability to meet its debt obligations is exactly the same, if it decides to shed its self-constraints.
So, when Paul Ryan, or Ron Paul, or even Barack Obama say that we can't keep putting debt on our national credit card what are they really talking about? They're not talking about the Government's intrinsic ability to pay or not. What they're talking about is that Congress has 1) placed a debt ceiling on the Executive Branch's ability to borrow, and 2) passed a mandate requiring the Government to issue debt when it deficit spends. These are Congress's constraints and they are causing our current so-called fiscal crisis.
The austerity mavens, including the President are telling us that we, the people, have spent too much and run up debts that are too large on our national credit card when Congress has a) required us to use our credit card and, as a result, maintain and increase our national debt, and then b) given us a ceiling of debt which they raise from time-to-time, which has nothing to do with our Government's ability to pay. How unjust is it to create this Catch-22, claim there is an objective problem with a national debt that only exists due to their own restraints, and then say to us, after they've just finished extending the Bush Tax Cuts for the rich and providing an estate tax giveaway, that this phony fiscal crisis requires that everyone (except the rich, of course) accept their fair share of austerity?
It is not true that we can't keep placing debt on our national credit card, so long as Congress removes its arbitrary and unnecessary debt ceiling. If it does that we can keep placing debt on that credit card if we want to without threatening our solvency as a nation.
It is also not true that we must keep issuing debt instruments and keep increasing the national debt, because of some intrinsic feature of the world.
The only reason why we must do so, the only reason we have any national debt in US currency right now, is because Congress forces the Executive Branch to issue debt when it is going to have a deficit, rather than just spend what has been appropriated.
In short, the debt/deficit crisis that Paul Ryan, the Pauls, Barack Obama, and the tea party are so hysterical about, is only a crisis because of Congressional constraints placed on the Executive Branch. Tell Congress that we don't want to experience austerity because they want to keep issuing debt, and then to have debt ceilings forcing artificial fiscal crises on the Executive Branch. Remove those limits on the national credit card! The Government has unlimited ability to pay its debts so it should have no limits on the national credit card.
And if you're so upset and frightened about the debt, then recognize that the debt is your (Congress's) fault. If you remove the requirement to issue debt, then our national debt will be paid down soon enough, and you won't have to whine about fantasy fiscal crises anymore!