The Myth of the Debt Apocalypse
Promissory notes are stacked to the Treasury Department’s proverbial ceiling, $31.4 trillion dollars’ worth of them. Over $5 trillion of those dollars have been purchased and are held by the Federal Reserve bank; meaning the federal financial system, in effect, lends money to itself.
Because of a statutorily-set debt limit, the Treasury hasn’t be able to borrow more money from itself to fund government operations since January, 2023. To make matters more dire, soon the Treasury won’t be able scrounge any more cash to pay all the bills through “extraordinary measures.” Congress and the President need to find a way to increase the debt limit or default on obligations.
Howls of impending disaster fill the air.
Treasury Secretary Janet Yellen articulated the situation in a May 1st letter to Speaker of the House Kevin McCarthy:
“After reviewing recent federal tax receipts, our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June… if Congress does not raise or suspend the debt limit before that time… If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”
Since Secretary Yellen mentions federal tax receipts, it is worthwhile to note that in Fiscal year 2022 the federal government collected $4.9 trillion in revenue, primarily from personal and corporate income taxes, spent $6.27 trillion, and financed a deficit of $1.38 trillion. This means approximately 22% of government spending was done with borrowed money in 2022.
It was the borrowed $1.38 trillion that brought the national debt to its “ceiling” and has forced the Treasury to fund government operations through “extraordinary measures.”
In her letter, Secretary Yellen is unclear about which hardships she thinks American families will suffer if the nation defaults on its obligations. Is it the suffering from the current 4.9% inflation? The collapse of regional banks? The diversion of taxpayer dollars to millions of migrants flowing over the southern border? Or perhaps it’s the tens of thousands dead Americans due to Fentanyl overdoses?
And what global leadership position is Secretary Yellen worried about losing if she can’t borrow more money?
Our global leadership position is already on shaky ground.
While, in preparation for the not-such-a-surprise Spring Counteroffensive, Washington pours munitions and weaponry into Ukraine, Ukrainian President Zelensky recently had a friendly phone-chat with China’s President Xi and appointed the first Ukrainian Ambassador to China since 2021. And it’s China’s State Department, not Anthony Blinken’s, that is brokering peace between Ukraine and Russia; with a little help from their Turkish friends.
It should also be noted that Chinese diplomacy, not American, recently restored diplomatic relations between Iran and Saudi Arabia.
In a related development, Saudi Arabia agreed to buy 10% of China’s Rongsheng Petrochemical Co., will supply 480,000 barrels of crude oil per day to China, and is considering taking the Petroyuan, not the U.S. dollar, as payment.
BRICS -- the loose confederation of Brazil, Russia, India, China, and South Africa -- is figuring out how to reconfigure trade without using the U.S. dollar as the common currency while Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Seychelles, Tanzania, Uganda and the United Kingdom are beginning to trade in Indian Rupees.
And, speaking of India, the world’s largest representative democracy is ignoring U.S. sanctions and buying Russian oil; 57 million barrels of Russian crude in March alone.
France’s Emanuel Macron recently travelled to China with French business leaders. On the return flight, while discussing a possible conflict between the U.S. and China over Taiwan, he said "The worst thing would be to think that we Europeans must become followers on this topic (war between China and America over Taiwan) and adapt to the American rhythm..." Macron also stated “…we could become the third pole [in the world order] if we have a few years to develop…”
It seems the Global Leadership Position Secretary Yellen is worried about losing is, to quote an old Eagles tune, already gone.
For politicians and bureaucrats in Washington, default can only be prevented if the government can “borrow” more money; the loan’s collateral being the promise of repayment by the American taxpayer of course. And it should be restated that when the Fed purchases U.S. treasury bonds the government is, effectively, both borrowing from and lending to itself.
When 1/5th of the federal budget is borrowed and politicians want to continue this process indefinitely with neither the intention nor the inclination to pay down the loans’ principal, it makes holders of the dollar-based securities wary of both the dollar and the people implementing fiscal policy. Foreign governments hold over $7 trillion dollars in U.S. debt. They can see what’s going on and their confidence in the dollar is collapsing because of these shenanigans.
Meanwhile, in behavior reminiscent of Nero’s fiddling, our political class plays for the groundlings, building up a false tension by screaming “catastrophe if we can’t borrow more by June 1st!”
No. That’s not right. Their behavior is more like a spoiled 18-year-old who’s reached the limit on the credit card Daddy pays for and whines for more.
The truth is, since tax revenues continue to pour in, the government will be able to pay many of its obligations once “extraordinary measures” are exhausted -- just not all them. Nonetheless, Democrats say the only way to avoid catastrophe of apocalyptic proportions is for Congress to pass a bill raising or eliminating the debt ceiling. Then the government can resume its “tax, borrow, and spend” strategy. The ultimate endgame of this strategy is, to many, unclear.
In a show of false magnanimity President Biden met with Senate Majority Leader Chuck Schumer, Senate Minority Leader Mitch McConnell, and House Minority Leader Hakeem Jeffries this week to search for a way to raise the rafters of the debt ceiling and save the day. Unfortunately, even though Speaker of the House Kevin McCarthy has pushed a bill through the House that would raise the debt ceiling by $1.5 Trillion, catastrophe was not averted. The Senate and the President rejected the Republican bill out of hand. McCarthy’s bill would only keep this new, higher ceiling through March of 2024 and it would roll back federal spending to 2021 levels while limiting budget growth to 1% annually.
This is unacceptable to Democrats. So the “debate” over the debt ceiling continues.
In William Shakespeare’s Hamlet, the doddering old bureaucrat Polonius warns his son, “Neither a borrower, nor a lender be. For loan oft loses both itself and friend. And borrowing dulls the edge of husbandry.”
The federal financial apparatus does not heed Polonius’ advice. It is both a borrower from and a lender to itself. While this may be sound practice in the esoteric world of high finance and modern monetary theory, to the uninitiated, it seems like a recipe for disaster.
The edge of the government’s husbandry-blade is blunt indeed and this limitless borrowing may be the parent of a disaster far greater than a mere default will ever be.
A.F. Cronin is a writer living and working in Los Angeles. He has written for American Thinker, The Federalist, other periodicals, and his book Reading Shakespeare, a text on how to understand Shakespeare’s writing, can be found on Amazon.
Image: Wallpaper Flare