The Public Debt Will Not Cause the US To Go Bankrupt if it Grows
25 November 2016 | Pago Pago, American Samoa
The contrary is the perennial lamentation and whine of deficit hawks and permabears.
It is nonsense. The US cannot go bankrupt, because it has a fiat currency based on the full faith and credit of the United States and the taxing authority of the US with a system of flexible exchange rates. Further, it has a public debt of $23 trillion or a $100 trillion, depending on how you want to count it, and the US doesn't even have periodic or any public debt crises. That should tell the hawks and bears something, but they have their ear flaps closed. Moreover, this lack of a problem has been true throughout our history, except where some stupid, ignoramus politicians like Cruz et al. threaten to force the Treasury to default on the public debt.
The interest on the public debt is not and cannot become a problem either. It can be and always has been paid by government checks based on the credit of the US government. Once deposited by their recipients in their bank accounts, those checks become money and add to the reserves in the banking system. The only limitation on proceeding this way is the possibly of inflation, if we are at full employment of our resources, both human and others.
There is no necessary connection between federal revenues from bond sales and taxes and government expenditures by checks based on credit, except the one bears and hawks wish unsuccessfully to have applied. The government, unlike businesses and households, has no budget restraint or income restraint, because it owns the currency and has credit only subject to the limitation of inflation. Then of course there is the false hue and cry of hawks and bears for decades now, that big inflation is right around the corner, but that is whole another story.
That brings me to yet a further misconception of the hawks and bears.
The federal government does not need to issue bonds to raise money. It could stop running deficits and issuing debt altogether. Instead, it could just write checks based on its own credit -- independently of its revenues which suck bank reserves and money out of the public sector (to unnecessarily avoid inflation on the false assumption the economy is always at full employment - a eureka moment?) -- in order to buy the services and other output of many of those idle people and idle resources and so add the value of that additional output to the GDP. (another eureka moment?) Those checks and that credit becomes money once in circulation and add to the reserves of the banking system. It expands the public's balance sheet and US total output.
The core issues protecting the government's good credit with its checks are the avoidance of inflation which devalues the currency at issue and that credit is aided by an increase in US output or GDP from using its credit primarily and wisely as I describe. Pieces of government paper (checks) we believe have value and we can use to pay taxes and other bills, are, in effect, being used to mobilize idle resources and people into real productive activity producing real honest to God, goods and services we presently don't have. So where is the problem aside from the fact, the US has almost 92 million adults not even in the labor force, a number far too high.
Why can't people understand this? Why should we listen to economically retarded hawks and bears who try to keep the US in a relatively unproductive rut. The truth is their efforts are actually failing, but we unnecessarily remain stuck for now on using public debt instead of just public credit, but we are getting there. Some smart people in government are figuring these things out and will get past the economic ignorance of the bears and hawks in due course.
The US is slowly learning monetary theory and how our banking system and government actually operate and add to and take away from the public's consolidated balance sheet.