A Crisis Ignored Is A Crisis Fulfilled: A U.S. National Debt Odyssey

The question of debt and deficits has been vexing the US political system since chronic deficits began to be realized after the Great Society legislation of the 1960s.  But while troublesome, the issue has moved apparently to irrelevancy.

The term “existential threat” gets tossed around easily today while the real existential threat is right in front of us.

By 1971, the last vestige of external control on political spending was repealed by President Nixon with the unilateral violation of the Bretton Woods Treaty.  This last requirement to redeem money in gold (if held by foreigners) was abrogated and politicians had freed themselves of the straight jacket of a gold standard.  FDR suspended gold convertibility for citizens in 1933.

For the first time, the nation entered the realm of pure fiat currency. Money is what the government says it is and can be produced in whatever amounts the government and its agencies (the Federal Reserve) deem necessary. Whether paper or digital money, money is simply a promise by the government to pay in a currency constantly losing value.

Our political system has proven itself to be wholly inadequate to deal with runaway spending, absent Constitutional restraint and the shackles of a gold standard.

To be sure, there have been attempts to deal with it.  We have had spending caps, periodic fights over the debt ceiling, proposals for a Constitutional Amendment to “balance the budget”, ideas suggesting a flat tax or national sales tax, term limits, and other such worthy ideas. All centered around the idea of either constraining spending or sending a punitive signal to taxpayers. They largely have gone nowhere or had only temporary influence on the trend of things.  The chart below shows the results of these failed ministrations.

One of the most insidious features of deficit spending is both politicians and constituents feel the benefit today, while the cost is pushed out into the future on taxpayers yet unborn.  Under the rule people will always spend their own money differently than somebody else’s, spending your grandchild’s money seems like free money.  If we don’t feel any pain today, but only feel the gain, human nature will run amuck, and it certainly has.

Sort of like the boy who cried wolf, deficit critics would point out these trends, but the general prosperity of the nation has continued.  No “crisis” has happened. Further, prosperity that should have occurred, cannot be measured. Sure, inflation has been chronic, but as long as the elites that rule us do well on their assets, they seem content to see the middle class squeezed.

It seems unless we experience a specific and immediate disaster, the political system can’t muster up the discipline for action.  On the contrary,  transferring money from one group to another has made for great politics. Thus, absent any obvious and widespread pain, talking about deficits seems to have lost its political punch.

You have probably read that our National Debt just broke $34 trillion, up about 10% in just one year!  Perhaps more important is the relationship of debt to GDP (debt can grow safely if the ability to service the debt is growing). In a time of relative peace, it now exceeds the height of WWII.  Debt is growing much faster than the economy.

This is particularly the case when the future generations we plan to dump on are getting smaller and smaller.  Could it be that is why the big spenders and designers of the welfare state also tend to be “open border” advocates?

You can see that debt is much higher than in any other period. It took about 30 years after WWII for the relationship to get worked down, and then since the suspension of Bretton Woods and the rise of the welfare state, debt has soared in the modern period, often unrelated to war, which is another new development.  Debt is soaring primarily because of social spending on many programs never envisioned under the Constitution and a state of constant high military spending.

But the rate of debt accumulation is now really accelerating.  As our friend Wolf Richter of WolfStreet.com recently wrote:

The total US national debt spiked by $1.0 trillion in 15 weeks since September 15, to $34.0 trillion, according to the Treasury Department’s figures this afternoon. In the seven months since the debt ceiling was lifted, the national debt spiked by $2.5 trillion.

These are huge gigantic numbers that are piling up as a result of the incredible hard-to-fathom daredevil reckless shake-your-head deficit spending by Congress. Congratulations, America! We made it, $34 trillion!

Since the beginning of 2016, the total debt has spiked by $15 trillion, or by 80%! This stuff is just breathtaking.

Unfortunately, we are not optimistic about stopping this head-long dash off the financial cliff. Republicans who are supposed to be sensible about finances, have largely ignored the problem. Democrats have been criminally negligent, continually adding new spending to a debt spiral already unsustainable. All Republican Presidents have added significantly to the debt, even when they controlled both Houses of Congress. Trump did little to address the problem pre-pandemic and Biden is perhaps the most irresponsible President of all, regarding deficit spending.

As long as fighting over the debt ceiling is considered irresponsible while doing nothing about the problem is considered statesmanship, pessimism is justified.

One possible hope is the idea of a Congressional Deficit Commission, based loosely on the military Base Closing Commission. It might be chaired by Congressman David Schweikert of Arizona, one of the few Congressional leaders knowledgeable in this area and to his credit, one of the few who has been sounding the alarm. The idea with this approach is that spending cuts can be made and politicians can deflect blame onto the commission.  It recognizes that without political cover, our “leaders” are too feckless to act.

Absent real change, the trends that are accelerating will compound rapidly. Bond downgrades by all three rating agencies have started and are likely to continue.

Exactly how this game ends, is hard to say. History however is a guide and the story is not pretty. Inflation and default, or some combination thereof, has the potential to upend society.

Some suggest the sign will come when the US government can’t easily sell its debt to foreigners or private investors. The markets will say, we now must calculate the risk-return more towards the risk we won’t get paid or we will get paid in a currency falling rapidly. It would not surprise us to see legislation at some point, mandating that financial institutions and pensions buy government bonds.

Or, the FED will have to get back in the business of buying debt, with money conjured out of thin air. That means inflation.

But by the time the bond and currency markets tell us the system is unraveling, (soaring interest rates and a falling dollar) it will be too late to promulgate reforms to avoid the societal disaster.

Interest rates will soar to attract capital and keep money from fleeing the dollar. Those rising rates to defend the system will squeeze the domestic and worldwide debt bubble. 

Having the lynchpin of the Western alliance and the provider of the reserve currency of the world go through a debt crisis, by definition translates into a global crisis.

We are closer to that crisis than ever before, despite what seems like crying wolf. If you remember the parable, in the end, there was a wolf. Just consider that our government now has to borrow money just to pay its debt.  How long can that last?

What will it take to bring political urgency to this extremely dangerous situation?