economics

America’s Coming Debt Bomb

Genesis
Response
Penultimate
Finale

Todd G. Buchholz

Economist

October 9th, 2020
I wish I could believe that the tooth fairy really flies from pillow to pillow, that Elvis still lives, and that government debt doesn’t matter. Some people manage to believe in all three, and I’m sure they sleep better at night. I’m also sure that whenever confronted with absurdities, they can concoct all sorts of theories that seem plausible after a few drinks or puffs of suspect vegetation.
But to the rest of us, the U.S. and many of its G7 cohort look not just ill but veering towards broke. To offset the COVID-induced Great Cessation, the Federal Reserve and Congress have pumped in staggering sums of stimulus, fearing that the economy would otherwise sink like a dense dumpling in a bucket of broth at a 1930s soup kitchen. The 2020 budget deficit will hit about 16 percent of GDP, and the ratio of debt to GDP is hurdling over the 100 percent mark, numbers not seen since Franklin Roosevelt was photographed with a cigarette holder jauntily protruding from his patrician lips.
Assuming we eventually defeat COVID and do not devolve into a dystopic Terminator scene, can we avoid the fiscal cliff? Some people think we should not care about such things and that governments can keep borrowing without limit, as long as the central bank prints money. Such debt apologists are not necessarily original thinkers. They have many forerunners, some of them buried in the rubble of ancient Greece, where 4th century BC municipalities defaulted on debts to the Temple of Delos.
Want a more recent example? Take a flight to broken Venezuela, where debt is twice the GDP level and inflation should be displayed using scientific notation. In the 1960s and 70s, UK officials listened to such advice and recklessly borrowed. The country suffered raging inflation and a sinking currency. It was called the “sick man of Europe” (a phrase first applied by Czar Nicholas I to the crumbling Ottomans). In 1976, in an extraordinary conversion, Labour Prime Minister James Callaghan begged the IMF for a bailout, performed a fiscal about-face and declared to debt apologists, “I tell you in all candour that that option no longer exists.”
The age-old refrain from debt apologists is, “we owe the money to ourselves.” Two replies come to mind. First, we don’t just owe money to ourselves. About one-third of U.S. debt is in the hands of foreigners, including a trillion dollars to the Chinese. Second, even if we look solely at debt held by Americans, we should ask, “Who is we?” The lenders who in good faith bought U.S. Treasuries are not the same individuals who would benefit from tearing up the bonds or stomping their value down to nothing through inflation. This is a fallacy of composition.
A debt is a claim on the future. If you think it is imaginary, ask Elvis to sing Jailhouse Rock when he stops by your place tonight.
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