Tom Power - February 11, 2013
Is the National Debt a Burden on Future Generations?
Is the National Debt a Burden on Future Generations?
Late last year, a bi-partisan consensus concluded that the legislation mandating drastic across-the-board cuts in all parts of the federal government was likely to push the nation back into recession. That is why it was labeled a “fiscal cliff.” Congress and the White House managed to postpone those cuts, but now they are back upon us again, obscurely and less threateningly relabeled “sequesters.”
Those urging us to bravely go over that economic cliff and welcome back even higher levels of unemployment see a far greater threat to our economic well-being than “just” falling back into recession: namely the federal deficit and cumulative federal debt. That national debt, they tell us, is a gigantic millstone that we are forcing our children and grandchildren to carry into an impoverished future.
Given the magnitude of the sacrifice of long-established public programs that the deficit hawks claim we now must make, no matter how painful the losses of jobs and benefits may be, it is important to look at whether the federal debt actually represents the threat that these shrill anti-government folks claim.
This does not require complicated financial analysis. Common sense will do. Just ask what the investors in U.S. Treasury securities have been promised. The answer is very simple. They are promised a relatively low interest rate on their initial investment, and, when the bonds mature, they will simply get their dollars back. That’s it. They will surrender one interest-earning “paper” asset for other U.S. government non-interest-bearing “paper assets”, namely U.S. dollars. Will the U.S. government have trouble meeting that obligation? Of course not, the U.S. government creates those dollars.
The federal debt represents federal spending that was not offset by the revenues from federal taxes. That federal spending went directly into the economy as dollar purchases that became income to workers or revenue to businesses that provided goods and services to the federal government. To the people receiving those dollars, they were no different than any other dollars circulating in our economy. They were just dollars in circulation, facilitating economic activity, putting people to work, and allowing people to “make a living” and accumulate savings to cover future contingencies.
The national debt just keeps track of those dollars that federal government expenditures put into circulation that were over and above the dollars the government took in with taxes. The federal government did not have to “borrow” those dollars from anyone. The federal government creates those dollars in its constitutional role as the sole source of our nation’s currency.
In particular, the cartoonish idea that the federal government has been borrowing money from the Chinese to finance the U.S. deficits has things completely reversed. The Chinese, over America’s bitter objections, has been purposely running a trade surplus with the United States. It sells us far more that it purchases from us. The net result of that imbalance is that the Chinese have been purposely accumulating American dollars. The Chinese voluntarily fill our stores with their inexpensive, and, usually, quite well made goods. We voluntarily give them our dollars in payment. Because the Chinese do not buy as much from us, they have been piling up dollars. Given that the U.S. dollar has become a currency used worldwide, holding dollars is a very liquid way for the Chinese to store part of their wealth. Rather than hold those dollars as plain currency, the Chinese convert the dollars into interest bearing U.S. Treasury bonds. That is, the Chinese demand U.S. Treasury bonds as a way of safely storing the wealth they are earning in their trade relations with the United States.
Where is the economic threat in this? Well it is clear that the Chinese are taking a risk, storing so much wealth in U.S. Treasury bonds. The value of the dollar could tumble in the future and the Chinese could lose a good deal of that wealth. But that would be true of almost any other way the Chinese chose to store their wealth: inEuros, gold, common stock in the world’s many corporations, etc. The Chinese, on the basis of their own informed judgment, see the dollar as one of the safest way to store some of their wealth.
Where is the risk to the United States? All we have promised the Chinese or any other U.S. Treasury bond holders is that when those bonds mature, we will give them back the dollars with which they initially purchased the bonds. Since that is something the U.S. government creates, we have not necessarily promised them all that much.
Of course, they can go shopping in the United States with those dollars and carry U.S.-made goods home with them. But that is what we have been trying to coerce them into doing for decades. We would welcome their spending their dollars here and putting Americans to work.
The value of the dollar is ultimately tied to the strength of the American economy and our capacity to produce valuable goods and services. Putting Americans back to work and fully utilizing all of the productive resources we have is the best way to strengthen the American economy and the American dollar. The federal deficit, after all, was primarily caused by the economic collapse we have come to call the Great Recession. That is why our primary focus should be on job creation and why those who would destroy millions of additional jobs in the name of “austerity” and “deficit reduction” have things horribly backwards.
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