No, America is not about to default on its debts. And, no, Grandma’s August Social Security check won’t bounce. Nor would a failure to raise the debt ceiling result in a financial breakdown and ensuing Mad Max-style societal collapse. (This latter fact will, no doubt, disappoint many AltRight readers.)
Democracy seems to function through mass delusion, but few recent issues are obscured by so many misconceptions and misdirections as the current “debate” over raising the debt ceiling. Below, I’ve listed a few, all of which revolve around the fallacy that the government is about to run out of money.
One might take solace in the fact that Washington’s latest political crisis is more smoke than fire. To the contrary, examining the errors of the current debate brings one closer to an understanding the truly catastrophic nature of the world monetary system.
First, the misconceptions.
1) “If we don’t raise the debt ceiling, America will default on its debts.”
No. In terms of income and outflow, Washington isn’t anywhere close to default.
As Karl Denniger points out, “default is only the failure to pay interest or principal on a loan. Nothing else is a default.”:
The United States takes in about $2 trillion in taxes a year. The total interest paid last year was about $180 billion, a ridiculously low blended rate, but that’s what ZIRP (zero interest rates by The Fed) get you.
Let’s assume for a moment that the blended rate was to more than double, to 4%. That would be about $560 billion in interest a year, including interest on the Social Security and Medicare “trust funds” (which aren’t trust funds, but I’ve been over that before.)
$560 billion is about one quarter of the tax revenues that the government takes in. So even were interest rates to more than double The United States would not default.
Whatever the case, I predict that when Boehner, Cantor, & Co. finally agree to raising the debt ceiling, they will take credit for “avoiding a default.”
2) “The markets are jittery that America might default.”
No, they’re not.
First off, a default is not the end of the world. There have been many episodes of defaults by individual states throughout American history; shortly after the crises passed, bankers showed up to lend them more money.
And the Federal government is in a far better position. Washington can reproduce—for all practical purposes, without limit—the currency in which its debts and entitlement obligations are denominated. This differentiates it from Greece, which can’t print Euros and thus must plead for bailouts from its paymasters in Brussels and Berlin. As further below discussed, Washington will never default on its explicit debt, nor will it renege on Social Security and Medicare payments, for the simple reason that it always has the capacity to create more money.
True, dollars are created through issuing debt, and since 1917, Congress has had the power to limit debt issuance. However, the “ceiling” has been raised more than 100 times since it was instituted and 10 times over the past decade. On all fronts, scant resistance has been levied against the finacialization of the U.S. government.
Moreover, gold’s recent rise over $1,600 indicates that markets are (quite rationally) not predicting a default; they instead expect Washington to continue to spin off debt-to-service-debt to finance its some $15 trillion outstanding and some $70-100 trillion in liabilities [PDF], many of which, like Social Security, are currently unfunded.
Paradoxically, if Washington were to default (which, again, it won’t), the immediate result would be a strengthening of the dollar. If Washington cancelled its debts and entitlement payments, there would be, quite literally, less money now and promised in future. People would scramble for the dollars left over, and prices of most everything would fall. If the Republicans were truly concerned about the value of the dollar (which they say they are), they would be demanding not only a hard debt ceiling but a massive reneging on the innumerable future obligations. Being that the latter would necessitate informing their constituents that they should prepare for a diminished lifestyle, they won’t do anything of the kind.
3) “The Republicans are risking financial armageddon due to their libertarian, anti-government ideology.”
It’s hard to take this one seriously.
Without question, this standoff wouldn’t be happening were it not for the Republican leadership’s desire to throw the Tea Party a bone. (Otherwise, the ceiling would have been raised with little fanfare, as it was in the past.) That said, most proposed spending cuts, which were said to “match” hikes in the debt ceiling, are entirely symbolic.
As Gary North notes, “ . . . over the next decade” is tacked on at the end of any promised reduction. Thus, John Boehner’s big number of $4 trillion in unspecified cuts (which has been floated, then retracted, then floated again) becomes a relatively small number of $400 billion each fiscal year—which would still result in Washington running deficits of a trillion per (!).
4) “If the debt ceiling isn’t raised, Grandma won’t get her Social Security check.”
Once again, no.
It is quite ironic that during the Obamacare “town halls” two summers ago, Democrats ridiculed the idea that Obama would take away Grandma’s Medicare payments (or even “pull the plug”). Now, Obama is quite explicitly threatening seniors with their lives: “There may not be the money in the coffers” to send out August-3 Social Security checks, Obama informed 60 Minutes’s geriatric audience.
And some might think that Obama’s hands are tied in this situation, since, according to government accounts, Social Security went bankrupt last year (that is, its “fund” issued more than it took in.)
But Obama’s threat rests on the widespread illusion that the federal government’s finances amount to “coffers” filled with money—that is, some kind of large, though limited, source of wealth: eg, a bank account or gold hoard or dark basement filled with stacks of hundreds.
But this is not how modern government finances work. The Social Security “trust fund,” for example, is not a fund at all but a mass of liabilities. When it was cash-flow positive for 75 years, its revenues were traded for Treasury Bond IOUs and used for other governmental expenses: war, contracts, salaries, etc. Social Security is now cash-flow negative and requires debt to operate. There is all but no chance that Boehner and Cantor, or any politician, would allow themselves to be the one to shut off the credit line necessary for Grandma’s Social Security check to go out. Obama certainly knows this, which is why he’ll make such threats, knowing his opponents will cave.
But let’s stop here with the minutia. It’s easy to get lost in the political maneuvering and posturing and lose sight of the big picture. Overall, there are two elemental components of Washington debt-financed everything that are of paramount importance; both of which are so simple, and so nefarious, they boggle the mind:
1) There is practically no limit to the amount of debt Washington can issue.
2) Washington never plans to actually pay off its debt (ie, clear its balance); it will instead service its debt with more debt ad infinitum.
The first of these is directly relevant to Washington’s innumerable and unfunded promises and liabilities, which again, it will have no problem fulfilling in nominal terms.
Forget about paying Grandma two grand a month. If it so desired, Washington could request that the Fed purchase 30 trillion in new bonds, have the treasury print this up in thousand-dollar bills, and mail each citizen 100 grand in cash. A “stimulus package” of this kind is entirely feasible in a fiat-money system.
Of course, something like this would likely result in a Weimar/Zimbabwe hyperinflation, and hilariously high prices for everyday goods. And Washington is well aware of this, which is why a scheme of this kind would only be tried as an act of desperation.
And it’s also unnecessary, for in avoiding brazen money printing—and instead maintaining the dollar as the premiere vehicle of worldwide indebtedness—Washington has gotten away with inflations that are equally, if not more, outrageous than what I just described. Currently, the total dollar-denominated debt (including sovereign debt, consumer and student loans, mortgages, etc.) amounts to some $50 trillion (350 percent of GDP). And as mentioned above, the entitlement promises actually dwarf this gargantuan number.
Actually clearing America’s balance sheet would require most all of the production and savings of the entire world for years to come. But again, Washington won’t ever truly pay it off. Its solution is more insidious.
Dick Cheney’s infamous 2002 statement that “deficits don’t matter” wasn’t a mere confession of irresponsibility. He was accurately describing an arrangement in which America’s overseas empire, its citizens lifestyles and entitlement programs could be expanded—practically endlessly—through debt—debt serviced by the issuance of more debt.
Normal governments have to bring their expenditures in line with tax revenues. The exceptional nation doesn’t have to bother. That Washington collects revenues at all seems only to be a means of assuring its creditors that it has enough cash flow to make interest payments.
Conservatives and Republicans might want to blame this all on “big government,” but the reality is that for decades, all components of the Establishment have benefited from the arrangement: it is the way—indeed, the only way—Washington can finance wars, entitlements, student loans, mutliculturalism, and mortgages all at once.
The arrangement’s fatal flaw is not so much that it’s unfair but that it’s based on a paradigm of infinite debt growth in an intrinsically limited world. (And it’s only a matter of time before a rival country has the guts enough to offer a replacement for the dollar or at least stop indefinitely footing Washington’s bill.)
America’s debt empire, too, shall pass. And when it does collapse, the consequences will be more spectacular and catastrophic than anything prophesied in the current debt-ceiling debate.