7 Myths That Drive the Debt Ceiling Debate

budget crisisThe metaphors that frame the current Federal budget and debt ceiling debates are completely inaccurate, and if the media coverage is any indication, the public has swallowed them hook, line and sinker, too. Watching this debate is like watching someone try to steer a car by turning the rear-view mirror.

For example, even “liberal” Democratic President Obama has compared the public sector’s quandary to a family that borrowed too much and must tighten its belt, reducing spending until the debt is repaid. The critical omission in this metaphor is that this public sector “family” can legally mint money. Remember: U.S. currency is “fiat money,” not backed by any commodity (gold, silver). There is literally no limit to how much money the government can create with a few keystrokes.

Q: How much can be safely lent to a borrower who can legally mint money?
A: This is like asking whether someone scoring a soccer match can run out of points. There is no limit to how much money can be lent to a borrower who can produce money out of nothing, provided the borrower does not willfully refuse payment based on some political agenda. The Treasury could literally mint a few trillion-dollar coins tomorrow and pay the entire national debt. In other words, the entire “crisis” is a response to an illusion.

Q: Could that be true? Could the entire debate about “spending too much” or “budget deficits” be not just misguided, but delusional?
A: This is the age of climate science denial and “voodoo” economics. Delusional is everywhere. Former Kucinich economics advisor Michael Hudson writes that the design of the current debate gives Obama political cover to undermine New Deal programs like Social Security, and Great Society programs like Medicare, despite the government’s obvious ability to fully fund these programs.

Q: But if the government just prints money, isn’t that the path to Weimar-Germany-like hyperinflation?
A: Money is just a symbol for goods and services, so too many dollars chasing too few goods and services would devalue money, and be inflationary. That said, the current economic problem is deflation. Furthermore, the Fed has already created (out of nothing) $13 – $16 trillion to bail out the financial sector. Is the request that they create a much smaller amount of money so the government can pay its bills really that much more difficult to swallow?

I’m indebted for this insight to the “Chartalists” or “Modern Money Theorists” among economists. For your further contemplation, here are Warren Mosler’s Seven Deadly Innocent Frauds of Economic Policy based on that theory. Part I of that online document explains these in detail. I leave it to you to explore the reasoning for yourself. Note that all of these are false, yet are accepted as truisms by the general public and most policy makers, even sophisticated economists who do not understand Federal Reserve accounting:

  1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
  2. With government deficits, we are leaving our debt burden to our children.
  3. Government budget deficits take away savings.
  4. adam eranSocial Security is broken.
  5.  The trade deficit is an unsustainable imbalance that takes away jobs and output.
  6. We need savings to provide the funds for investment.
  7. It’s a bad thing that higher deficits today mean higher taxes tomorrow.

The current debate is hostage to these “innocent frauds.” When we stop using the unexamined conventional metaphors of economics to solve our budgetary problems, we’ll at least have a shot at resolving them.

Adam Eran

Leave a Reply

Your email address will not be published. Required fields are marked *