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Once Again, the National Debt Is Congress's Fault

letsgetitdone's picture

(Author's note: I've offered this idea a couple of times over the past few months here, with surprisingly little reaction. I'm trying once again, because I'm persuaded that much of the leverage that conservatives and Republicans have over our fate is due to the belief that most people hold that federal deficits, the national debt, and the GDP ratio are important, and that we must bring them under control to avoid Government insolvency. In addition every one seems to believe that the existence of the debt is due the to the profligacy of the Government, its monumental waste, and the lack of courage of its politicians who spend too freely to please constituents, gain campaign contributions, and help themselves to stay in office. None of this is true. The current existence of the National Debt, and also of a non-zero public debt-to-GDP ratio is the inevitable result of a technical decision that Congress has made about how the Treasury should finance its spending. This post talks about that decision, points out that its consequence is the National Debt, and also points out that the very existence of the National Debt is the fault of Congress.)

It is Congress's fault that we have a national debt at this point in our history. And also Congress can largely get rid of this debt over a 10 year period any time it wants to.

The national debt exists today because when the nation went off the Gold Standard in 1971 and adopted its fiat currency system, Congress did not repeal its mandate, very appropriate when our currency was convertible to Gold on demand, in least in theory, requiring that the Government back all its deficit spending with already existing borrowed dollars whose convertibility was covered by our holdings of Gold. This Congressional mandate to borrow funds by issuing debt instruments when the Government deficit spends, is what has caused the national debt to persist.

Had Congress repealed it when President Nixon took the country off the Gold Standard, and had we ceased to issue debt at that time, then the Government would have re-paid all of our 1971 debts as they came due, and our national debt today would be zero and our debt-to-GDP would now be at 0%.

The Congressional mandate to issue debt when the Government deficit spends has no useful function today, and the interest income it provides for mostly wealthy investors and foreign Governments who buy Treasury Securities is simply a form of welfare for the rich. In fact, it is welfare that will cost the Treasury almost $12 Trillion over the next 15 years if we continue the policy of issuing debt instruments.

Any positive effects this policy produces are vastly outweighed by the bad effects of having to cope politically and economically with the concerns of people who believe that the increases in the debt, and the debt-to-GDP ratio give us a fiscal sustainability problem whose priority outweighs everything else. Even though the national debt has no effect on national solvency; it is a political problem. It magnifies the political strength of conservatives and weakens progressives because it makes people afraid to deficit spend since then the country will be “going into debt.”

Congress needs to repeal the mandate forcing the Government to issue debt instruments on a dollar for dollar basis with deficit spending, right now. If it does so it will:

-- cease to provide welfare payments in the many Trillions of Dollars over the next 15 years mainly for the rich and foreign nations,
-- gradually pay off the $14 plus Trillion Federal debt entirely,
-- have rapidly decreasing Federal interest costs over the next decade until they entirely disappear,
-- have no further need to take difficult votes about increasing the Federal debt limit,
-- have no further need to worry about borrowing money from the Chinese, or the oil rich states, or the Japanese, that our grandchildren will one day have to re-pay,
-- have no further need to worry about what the bond markets think or are going to do, or
-- to worry about our debt or deficit spending being “fiscally unsustainable” when we want the Government to spend money to sustain the unemployed, help us end unemployment altogether, provide a more generous Social Security system for aging Americans rather than cutting the inadequate benefits we have now, fulfill American needs for new infrastructure, develop a re-invented first class educational system, and provide Medicare for All, among our other needs.

If Congress refuses to remove its requirement to issue debt, when it can easily do so at any time, then it's habitual complaints about its size should cease at once and no longer pollute our political debates.

My earlier posts on this subject were met with anticipated responses claiming that ceasing debt issuance would inevitably lead to inflation because of the increase in the money supply caused by merely "printing money." People who believe this, do so because they think that dollar for dollar debt issuance associated with deficit spending removes as much currency from the non-Government sector as the Government spends, and because of this damps down any inflation that may result from the Government spending.

This reasoning is faulty on two counts. First, increases in the money supply caused by Government spending do not result in demand-pull inflation until the point of full employment is reached because the increased demand produced by the Government is met by the private sector with supply increases rather than price increases. We have known that since Keynes. A very good recent account of the consequences of just creating money through deficit spending unaccompanied by debt issuance is this post by Professor Bill Mitchell. Yet another is this very good one by Professor Scott Fullwiler.

In addition, Professor Stephanie Kelton, shows that while Government debt issuance may transfer money back to the Government, it still leaves a net financial asset in the private sector, specifically, the Government debt instrument. As Scott Fullwiler points out in a comment on Stephanie Kelton's post, it is highly debatable that the net addition of a debt instrument to the private sector is less inflationary than just leaving additional cash would have been, and very likely that the debt instrument is actually more inflationary because 1) one can get more financial leverage from it than one can get from money, and 2) it adds more interest to the private sector than a cash deposit would.

The United States has many very real problems which it can help to address with Government programs. The deficit spending required to solve our problems shouldn't be constrained by the non-existent problem of that national debt, or the fantasy of stabilizing a debt-to-GDP ratio that also represents a non-existent problem, or the misguided notion that the issuance of debt makes deficit spending less inflationary than it otherwise would be. To make sure that deficit spending is not so constrained, Congress needs to repeal its debt issuance mandate now before the American people learn the truth that Congress, itself, is responsible for all the angst we hear about the deficit, the debt, and the debt-to-GDP ratio.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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Submitted by lambert on

So why don't the rentiers want austerity instead of more "debt instruments"?

Eureka Springs's picture
Submitted by Eureka Springs on

And I get it.. it is important. Your articles are an important source for reference and referral. But I could not explain this to someone in a coffee shop who has never been introduced to a number of posts or articles or mass emails or repetitious talking points along this line.

Assume the position that your conclusion is gospel. Stop negotiating.... until you/we have captured attention and put the fear of something, anything! into the monied criminal powers that be... I fear this is all for naught.

We need slogans.
We need demands.
Solutions.
Lines in the sand with credible threats.

On this and nearly every other "left" issue we have none.

And these must include a benefit - even if only perceived as a benefit to a great many people.

It's a sound bite self-centered world we live in.

letsgetitdone's picture
Submitted by letsgetitdone on

Hi ES,

We need slogans.
We need demands.
Solutions.
Lines in the sand with credible threats.

On this and nearly every other "left" issue we have none.

And these must include a benefit - even if only perceived as a benefit to a great many people.

It's a sound bite self-centered world we live in.

"Pay Off the National Debt!" is a slogan; and a demand.

The lines in the sand are:

-- If you vote for continuing debt issuance you're gone.

-- -If you vote against any social safety net or Medicare for All legislation because you think they'll increase the deficit you're gone.

- If you vote against or for anything because it's deficit neutral or will collect more in taxes than it costs, you're gone.

The solution is: Stop issuing debt instruments; just spend the money the Government needs to spend to solve problems.

The benefit is: we'll be able to spend all the money we need to solve our problems, and we won't have to worry or talk about the national debt anymore.

Submitted by MontanaMaven on

But it is difficult. I have made stabs at it by talking about The Bank of North Dakota and actually had some success. Here is my LTE about 316 words.

A Bank of Our Own
Fed Chairman Bernanke told Congress that the Fed won't bail the states out of their budget deficits. But it’s not because the Fed doesn’t have the ability. The Fed gave $12.3 trillion in almost interest free credit to the too big to fail (TBTF) banks and other financial entities to get them out of their credit crisis. The total budget deficit of the states is projected at $140 billion. That's chickenfeed compared to $13 trillion. Bernanke says it is because the Fed can't loan to states, municipalities, or commercial interests just to its exclusive club of private banks.
But it wasn't always that way. In 1934, Congress revised the Federal Reserve Act to allow it to "make credit available for the purpose of supplying working capital to established industrial and commercial businesses." This was repealed in 1958.
The Bank of North Dakota (BND) is the only state bank left and it continues in the tradition of that 1934 revision. It takes in state revenues and then makes low interest loans to businesses and farms. With the interest it makes, it circulates the money back into the state creating a great educational system for one and serves as a mini-Fed clearing checks to over 100 local banks.
Congress is dead set on screwing the states probably because its bankster masters want to keep milking them, so no chance of going back to the 1934 revision. But Ellen Brown, author of “Web of Debt argues that "the states could take matters into their own hands and set up their own state-owned banks based on the BND's model...rather than spending or selling off valuable public assets or hoarding them in massive rainy day funds made necessary by the lack of ready credit, states could leverage their assets into a very strong and abundant local credit system."
Would any state rep take this up or should we work on a ballot initiative?

I plan on building on this simple idea by talking about the colonial banks that worked well in the mid 1700s. The idea is to get people at the coffee shop and at the local watering hole to see the beauty of getting rid of the Federal Reserve system, by starting at the state level. We should not be paying interest on our own money. We should not be paying fees to keep our money in banks. And we should use our common assets for the common good of cheap education and fixing our physical infrastructure. We must go back to this basic "Lost Science of Money" that comes from Aristotle, but buried by the fractional banksters.

BruceW07's picture
Submitted by BruceW07 on

Although I appreciate the effort to break free of the mind-numbing moral imperatives that appear to govern and obscure monetary and fiscal policy, I feel that I ought to demur a bit, just keep things reality-based for those, who might be new to this territory.

Having a marketable national debt is actually a very useful extension of having a currency. It is something of a public utility or public good, in that it enhances the ability of the financial system to coordinate economic activity. (I'm ignoring, for a moment, the obvious dysfunctions of our present, increasingly predatory financial system, which is, admittedly, nurtured by actual monetary policy; but, that's just another reason to rescue monetary policy from an obscurity that aids the bad guys, not a reason not to have a monetary policy, or the means to have a monetary policy.)

I seriously doubt that it would be possible to stabilize the value of the currency, without a very large, managed (by a central bank), marketable national debt. We need the large, constant flows, backed by the fiscal (aka taxing) power of the state, to stabilize expectations for the value of money thru time. A marketable national debt provides a point of comparison, a theoretically "safe" asset, to use in arbitrage operations that finance or value other investments and assets, and provide the ability to secure and insure various risky transactions.

A national debt is a good thing, that makes possible a great many other valuable transactions and deal-making. Classically, a money serves three functions: a means of exchange, a store of value (aka a means of insurance) and a unit of account. A large, marketable national debt extends all three functions into the future, in a way that makes possible calculating on, and betting on, future prospects and possibilities.

Appreciation of this functional role is what is deprecated by the relentless propaganda trying to make the national debt into an issue of moral purity. Again, I am amused by the jiu-jitsu of letsgetitdone, in pointing out a way to eliminate the debt altogether. Maybe, it will contribute to helping people break free of the strait-jacket of moral purity that current conservative propaganda seeks to impose (and imposes so successfully). But, actually eliminating the national debt would be an economic calamity (though I do think eliminating a healthy chunk of it might be a tonic, if done in the right way, as a shock to the system).

Submitted by MontanaMaven on

he points out that Japan borrows money. But they borrow money to improve their companies and improve the lives of their citizens. Well, he wrote this in 2008. So it makes sense to borrow or have a debt to improve people's lives. As long as the interest goes back into the economy and not into some overseas bankster's pockets.

Haven't we had debt since the country began except for about 4 years in the 1820s?

But hey, what do I know. My degree is in Theater Arts. But then again, this is Kabucki, isn't it?