Written by Rodger Malcolm Mitchell, www.nofica.com
Editor’s Introduction
‘The Boy Who Cried Wolf‘ is one of Aesop’s Fables, numbered 210 in the Perry Index. It is a cautionary tale about the risks of repeatedly raising false alarms. A shepherd boy repeatedly tricks nearby villagers into thinking a wolf is attacking his town’s flock ln order to get attention. When a wolf actually does appear and the boy again calls for help, the villagers believe that it is another false alarm, ignore the shepherd boy, and the sheep are eaten by the wolf.
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From Wikipedia:
[The fable] echoes a statement attributed to Aristotle by Diogenes Laertius in his The Lives and Opinions of Eminent Philosophers, in which the sage was asked what those who tell lies gain by it and he answered “that when they speak truth they are not believed”.[7]
Francis Barlow‘s illustration of the fable, 1687 Wikipedia
While it is true that the amount of money (so-called “debt”) created by a monetarily sovereign government does have practical limits, history has proven that for at least 80 years those limits have not been approached by the United States. Stephanie Kelton has discussed these limits in her epochal book “The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy” (page 157):
MYTH #6: “Entitlerment” programs like Social Security and Medicare are financially unsustainable. We can’t afford them anymore.
REALITY: As long as the federal government commits to making the payments, it can always afford to support these programs. What matters is our economy’s ability to produce the real goods and services people will need.
So, the “boys” have been “crying wolf” for at least 80 years and many “villagers” are still rushing to the cries with panicked excitement. But again and again the panic has proven to be misplaced. If Aesop’s wisdom is ever to be realized in this case by a majority of the public, there is little indication that the time is soon to arrive. The “villagers” here seem very slow learners. But there is also little indication that the “real wolf” will soon put in an appearance either.
The challenge is for public awareness of how sovereign debt and money actually function to be achieved before we eventually approach the ever-extending-forward limits of the potential of the economy to produce “the real goods and services people will need”.
Rodger Malcolm Mitchell, on his Monetary Sovereignty blog, has been waging an educational battle on this topic for many years. His latest piece, which is reproduced below, evoked this editor’s metaphor of the boy who cried wolf.
To this editor, it seems that the prevailing philosophy over the last century has been that:
The amount of money has defined what can be done.
Why not consider the philosophy that:
What can be done should define the amount of money.
Of course, that would crush many fiefdoms.
There you go again. The same old, wrong story about federal “debt.”
And to quote President Ronald Reagan, “There you go, again.”
Except the first time he was talking about President Jimmy Carter’s charge that Reagan opposed Medicare. This time, we reference the Libertarian ongoing, interminable, economically ignorant claim that the so-called “federal debt” is too high by once again calling it a “ticking time bomb.”
I won’t go into details about why the federal “debt” is not a debt in the usual sense; rather, it is deposits that easily are paid off simply by returning them to the depositors. You can read about that, here.
Instead, we will dive directly into an article written by Todd G. Buchholz, “a former White House director of economic policy under President George H.W. Bush and managing director of the Tiger Management hedge fund, who was awarded the Allyn Young Teaching Prize by the Harvard Department of Economics. He is the author of New Ideas from Dead Economists and The Price of Prosperity.“
In 75 years, a 90-fold increase in debt (blue) vs. a 10-fold increase in inflation (red). Still no “time bomb” explosion.
America’s New Debt Bomb, Aug 20, 2020, by TODD G. BUCHHOLZ
Like in World War II, the United States is piling on debt to confront a whole-of-society crisis, raising the question of who will foot the bill in the long term.
Immediately, we come across a misstatement. There is no “bill” for the federal debt. No one ever will pay for the federal debt, not today’s taxpayers nor tomorrow’s. Federal taxes do not fund federal debt.
Federal finances are nothing like personal finances, which require income to fund outgo. The federal government requires no income. It never can run short of dollars, and it does not use taxes to fund spending.
But, unlike the post-war era, the underlying conditions for robust economic recovery today are less than favorable, placing an even greater onus on wise policymaking.
The United States today not only looks ill, but dead broke. To offset the pandemic-induced “Great Cessation,” the US Federal Reserve and Congress have marshaled staggering sums of stimulus spending out of fear that the economy would otherwise plunge to 1930s soup-kitchen levels.
When someone or something is “dead broke,” they are unable to pay their bills. But the federal government never is unable to pay its bills. Being Monetarily Sovereign, it has the infinite ability to pay bills, even without collecting taxes.
The 2020 federal budget deficit will be around 18% of GDP, and the US debt-to-GDP ratio will soon hurdle over the 100% mark. Such figures have not been seen since Harry Truman sent B-29s to Japan to end World War II.
The debt/GDP ratio is completely meaningless. “Debt” is the net total of deposits into Treasury Security accounts in the 240+ years since the U.S. became a nation. GDP is one year’s total American spending – the ultimate apples/oranges comparison. There is no relationship between the debt/GDP ratio and America’s economic viability.
Assuming that America eventually defeats COVID-19 and does not devolve into a Terminator-like dystopia, how will it avoid the approaching fiscal cliff and national bankruptcy?
To answer such questions, we should reflect on the lessons of WWII, which did not bankrupt the US, even though debt soared to 119% of GDP.
The federal government cannot go bankrupt. It is a mathematical impossibility for a nation with the infinite ability to create its sovereign currency.
By the time of the Vietnam War in the 1960s, that ratio had fallen to just above 40%. WWII was financed with a combination of roughly 40% taxes and 60% debt.
Mr. Buchhotz first advises reflecting on the lessons of WWII, then promptly forgets what he has written.
WWII was not finanaced with taxes or with debt. It was financed with federal money creation. Even if the federal government had collected zero taxes and zero deposits, it easily could have paid all war bills. That is the fundamental difference between personal finance and federal finance.
These US bonds were bought predominantly by American citizens out of a sense of patriotic duty.
Fed employees also got in on the act, holding competitions to see whose office could buy more bonds. In April 1943, New York Fed employees snapped up more than $87,000 worth of paper and were told that their purchases enabled the Army to buy a 105-millimeter howitzer and a Mustang fighter-bomber.
It was a con job by the government, to make Americans feel they were part of the war effort. Similar psychological efforts included school children saving and turning in newspapers and housewives turning in used cooking oil.
Neither the newspapers, nor the cooking oil, nor the “war bonds” had any utility for the government.
Patriotism aside, many Americans purchased Treasury bonds out of a sheer lack of other good choices.
Until the deregulation of the 1980s, federal laws prevented banks from offering high rates to savers. Moreover, the thought of swapping US dollars for higher-yielding foreign assets seemed ludicrous, and doing so might have brought J. Edgar Hoover’s FBI to your door.
While US equity markets were open to investors (the Dow Jones Industrial Average actually rallied after 1942), brokers’ commissions were hefty, and only about 2% of American families owned stocks.
Investing in the stock market seemed best-suited for Park Avenue swells, or for amnesiacs who forgot the 1929 crash.
Today, bonds have two primary purposes:
- To provide a safe “parking place” for unused dollars (which helps stabilize the dollar) and
- To assist the Fed in controlling interest rates (which helps control inflation.
In no case are bonds a method for the U.S. government to obtain dollars. The federal government (unlike state and local governments) creates dollars, ad hoc, by spending dollars.
How, then, was the monumental war debt resolved? Three factors stand out.
First, the US economy grew fast. From the late 1940s to the late 1950s, annual US growth averaged around 3.75%, funneling massive revenues to the Treasury. Moreover, US manufacturers faced few international competitors. British, German, and Japanese factories had been pounded to rubble in the war, and China’s primitive foundries were far from turning out automobiles and home appliances.
Second, inflation took off after the war as the government rolled back price controls. From March 1946 to March 1947, prices jumped 20% as they returned to reflecting the true costs of doing business.
Third, the US benefited from borrowing rates being locked in for a long time. The average duration of debt in 1947 was more than ten years, which is about twice today’s average duration. Owing to these three factors, US debt had fallen to about 50% of GDP by the end of Dwight Eisenhower’s administration in 1961.
The “monumental war debt” (i.e. the total to deposits into Treasury Security Accounts) was “resolved” (reduced) when existing bonds matured and fewer people wanted to make deposits into new bond accounts.
This “resolution” neither benefited, nor was a burden on, the U.S. government. The government has total control over the number and face amount of bonds outstanding.
If it want more deposits, it either can raise interest rates or the Fed itself can create dollars and make those deposits.
So, what’s the lesson for today?
For starters, the US Treasury should give tomorrow’s children a break by issuing 50- and 100-year bonds, locking in today’s puny rates for a lifetime.
The above makes the implicit and false assumption that “tomorrow’s children” will fund federal debt. Again, this belief is based on the false assumption that Federal debt is like state/local debt and personal debt.
Finally, what about the post-war experience with inflation?
Should we try to launch prices into the stratosphere in order to shrink the debt? I advise against that. Investors are no longer the captive audience that they were in the 1940s. “Bond vigilantes” would sniff out a devaluation scheme in advance, driving interest rates higher and undercutting the value of the dollar (and Americans’ buying power with it).
Any effort to inflate away the debt would result in a boom for holders and hoarders of gold and cryptocurrencies.
Utter nonsense. Inflation does not “shrink the debt” (total deposits), and though inflation can shrink real deposits (i.e. inflation-adjusted, total deposits), there is no purpose served in trying to shrink it.
Further, inflation neither is caused nor cured by federal debt. All inflation, down through history, has been caused by shortages, usually shortages of food and/or energy. Inflation is cured by curing the shortages, which sometimes requires increased deficit spending.
The federal debt (total deposits in T-security accounts) is not a burden on the government, not a burden on taxpayers, not a burden on future generations, and not a burden on the economy.
The “debt” has increased massively, with no adverse effect on anyone. But the debt-scare-mongers are immune to learning from experience, which is why we continually add to the following list:
September, 1940, the federal budget was a “ticking time-bomb which can eventually destroy the American system,” said Robert M. Hanes, president of the American Bankers Association.
September 26, 1940, New York Times, Column 8
By 1960: the debt was “threatening the country’s fiscal future,” said Secretary of Commerce, Frederick H. Mueller. (“The enormous cost of various Federal programs is a time-bomb threatening the country’s fiscal future, Secretary of Commerce Frederick H. Mueller warned here yesterday.”)
By 1983: “The debt probably will explode in the third quarter of 1984,” said Fred Napolitano, former president of the National Association of Home Builders.
In 1984: AFL-CIO President Lane Kirkland said. “It’s a time bomb ticking away.”
In 1985: “The federal deficit is ‘a ticking time bomb, and it’s about to blow up,” U.S. Sen. Mitch McConnell. (Remember him?)
Later in 1985: Los Angeles Times: “We labeled the deficit a ‘ticking time bomb’ that threatens to permanently undermine the strength and vitality of the American economy.”
In 1987: Richmond Times – Dispatch – Richmond, VA: “100TH CONGRESS FACING U.S. DEFICIT ‘TIME BOMB'”
Later in 1987: The Dallas Morning News: “A fiscal time bomb is slowly ticking that, if not defused, could explode into a financial crisis within the next few years for the federal government.”
In 1989: FORTUNE Magazine: “A TIME BOMB FOR U.S. TAXPAYERS“
In 1992: The Pantagraph – Bloomington, Illinois: “I have seen where politicians in Washington have expressed little or no concern about this ticking time bomb they have helped to create, that being the enormous federal budget deficit, approaching $4 trillion.“
Later in 1992: Ross Perot: “Our great nation is sitting right on top of a ticking time bomb. We have a national debt of $4 trillion.”
In 1995: Kansas City Star: “Concerned citizens. . . regard the national debt as a ticking time bomb poised to explode with devastating consequences at some future date.”
In 2003: Porter Stansberry, for the Daily Reckoning: “Generation debt is a ticking time bomb . . . with about ten years left on the clock.”
In 2004: Bradenton Herald: “A NATION AT RISK: TWIN DEFICIT A TICKING TIME BOMB“
In 2005: Providence Journal: “Some lawmakers see the Medicare drug benefit for what it is: a ticking time bomb.”
In 2006: NewsMax.com, “We have to worry about the deficit . . . when we combine it with the trade deficit we have a real ticking time bomb in our economy,” said Mrs. Clinton.
In 2007: USA Today: “Like a ticking time bomb, the national debt is an explosion waiting to happen.“
In 2010: Heritage Foundation: “Why the National Debt is a Ticking Time Bomb. Interest rates on government bonds are virtually guaranteed to jump over the next few years.
In 2010: Reason Alert: “. . . the time bomb that’s ticking under the federal budget like a Guy Fawkes’ powder keg.”
In 2011: Washington Post, Lori Montgomery: ” . . . defuse the biggest budgetary time bombs that are set to explode.”
June 19, 2013: Chamber of Commerce: Safety net spending is a ‘time bomb’, By Jim Tankersley: The U.S. Chamber of Commerce is worried that not enough Americans are worried about social safety net spending. The nation’s largest business lobbying group launched a renewed effort Wednesday to reduce projected federal spending on safety-net programs, labeling them a “ticking time bomb” that, left unchanged, “will bankrupt this nation.”
In 2014: CBN News: “The United States of Debt: A Ticking Time Bomb“
On Jun 18, 2015: The ticking economic time bomb that presidential candidates are ignoring: Fortune Magazine, Shawn Tully,
On February 10, 2016, The Daily Bell: “Obama’s $4.1 Trillion Budget Is Latest Sign of America’s Looming Collapse”
On January 23, 2017: Trump’s ‘Debt Bomb‘: Deficit May Grow, Defense Budget May Not, By Sydney J. Freedberg, Jr.
On January 27, 2017: America’s “debt bomb is going to explode.” That’s according to financial strategist Peter Schiff. Schiff said that while low interest rates had helped keep a lid on U.S. debt, it couldn’t be contained for much longer. Interest rates and inflation are rising, creditors will demand higher premiums, and the country is headed “off the edge of a cliff.”
On April 28, 2017: Debt in the U.S. Fuel for Growth or Ticking Time Bomb?, American Institute for Economic Research, by Max Gulker, PhD – Senior Research Fellow, Theodore Cangeros
Feb. 16, 2018 America’s Debt Bomb By Andrew Soergel, Senior Reporter: Conservatives and deficit hawks are hurling criticism at Washington for deepening America’s debt hole.
April 18, 2018 By Alan Greenspan and John R. Kasich: “Time is running short, and America’s debt time bomb continues to tick.”
January 10, 2019, Unfunded Govt. Liabilities – Our Ticking Time Bomb. By Myra Adams, Tick, tick, tick goes the time bomb of national doom.
January 18, 2019; 2019 Is Gold’s Year To Shine (And The Ticking US Debt Time-Bomb) By Gavin Wendt
[The following were added after the original publishing of this article]April 10, 2019, The National Debt: America’s Ticking Time Bomb. TIL Journal. Entire nations can go bankrupt. One prominent example was the *nation of Greece which was threatened with insolvency, a decade ago. Greece survived the economic crisis because the European Union and the IMF bailed the nation out.
July 11, 2019: National debt is a ‘ticking time bomb‘: Sen. Mike Lee
SEP 12, 2019, Our national ticking time bomb, By BILL YEARGIN
SPECIAL TO THE SUN SENTINEL | At some point, investors will become concerned about lending to a debt-riddled U.S., which will result in having to offer higher interest rates to attract the money. Even with rates low today, interest expense is the federal government’s third-highest expenditure following the elderly and military. The U.S. already borrows all the money it uses to pay its interest expense, sort of like a Ponzi scheme. Lack of investor confidence will only make this problem worse.
JANUARY 06, 2020, National debt is a time bomb, BY MARK MANSPERGER, Tri City Herald | The increase in the U.S. deficit last year was about $1.1 trillion, bringing our total national debt to more than $23 trillion! This fiscal year, the deficit is forecasted to be even higher, and when the economy eventually slows down, our annual deficits could be pushing $2 trillion a year! This is financial madness.there’s not going to be a drastic cut in federal expenditures – that is, until we go broke – nor are we going to “grow our way” out of this predicament. Therefore, to gain control of this looming debt, we’re going to have to raise taxes.
February 14, 2020, OMG! It’s February 14, 2020, and the national debt is still a ticking time bomb! The national debt: A ticking time bomb? America is “headed toward a crisis,” said Tiana Lowe in WashingonExaminer.com. The Treasury Department reported last week that the federal deficit swelled to more than $1 trillion in 2019 for the first time since 2012. Even more alarming was the report from the bipartisan Congressional Budget Office (CBO) predicting that $1 trillion deficits will continue for the next 10 years, eventually reaching $1.7 trillion in 2030
April 26, 2020, ‘Catastrophic’: Why government debt is a ticking time bomb, Stephen Koukoulas, Yahoo Finance [Re. Monetarily Sovereign Australia’s debt.]
August 29, 2020, LOS ANGELES, California: America’s mountain of debt is a ticking time bomb The United States not only looks ill, but also dead broke. To offset the pandemic-induced “Great Cessation,” the US Federal Reserve and Congress have marshalled staggering sums of stimulus spending out of fear that the economy would otherwise plunge to 1930s soup kitchen levels. Assuming that America eventually defeats COVID-19 and does not devolve into a Terminator-like dystopia, how will it avoid the approaching fiscal cliff and national bankruptcy?
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