The difficulty lies not so much in developing new ideas as in escaping from old ones.John Maynard Keynes
New House Speaker Kevin McCarthy has been engaged in talks with the White House over the past couple weeks, in an effort to prevent the US government from ‘defaulting’ on its debt later this year. As has happened many times over the last few decades, the US has hit its self-imposed debt ceiling, which is currently set at $31.4 trillion. Some emergency stopgap measures have been enacted, which will allow the government to pay its bills roughly through June. But if there is no agreement by then, there could be a government shutdown, a cash cutoff, a downgrading of the investment status of treasury securities, a collapse of the ‘full faith and credit of the US, etc. We have had multiple debt ceiling showdowns like this in the past, most notably in 1995-96, 2011, and 2013. The scripts around these fiscal crises are fairly static, a clear indication that they are more political theater than genuine emergency situations. But these showdowns are excellent Rosetta Stones, better even than elections or Supreme Court decisions, for understanding how the American plutocracy defines and enforces the incredible economic inequality and injustice that constitute the status quo. Debt ceiling crises, in short, are teachable moments, but not in the curriculum we’re used to following.
What is the “National Debt?”
Let’s start with the basics. What exactly is the national debt? Where is it kept track of, and who do we owe? For starters, the debt is made up of… wait for it… government securities. These are mostly treasury bills, more commonly known as government bonds. In other words, they are investment vehicles, places where people and institutions can park their money for safekeeping, garnering a modest return. So when the federal government ‘borrows’ money, it is not asking some bank somewhere to float them some cash because, ‘you know, man, I’m like, broke.’ The government borrows by ‘selling’ an investment product that people want, and that treasury security is created out of thin air, via keystrokes. The government doesn’t need to go ‘find’ those t-bills first, from some other place, in order to sell them to investors. It just creates them and then sells them, like writing an IOU. And where does all of this selling (borrowing) and buying (lending) take place? It happens inside accounts at The Fed. Banks, investors, foreign countries, and other large entities all have accounts at The Fed, one kind that accrues interest, and another kind that doesn’t. The US Treasury also has an operational account at The Fed, and bond sales happen via keystrokes between these accounts, moving money around as bonds are issued, matured, and redeemed. And while The Fed and the Treasury are nominally separate entities, they operate together in managing the enormous economy of the United States, the largest in the history of civilization.
Even in this brief description, we’ve sojourned into a strange way of talking about money, something very different than we’re used to encountering. We are accustomed to hearing that the federal government is like a household, and thus needs to be responsible and not ‘live beyond its means’ by borrowing more than it can earn. This is absolutely and monumentally not true, and is one of the most pernicious untruths sitting at the fulcrum of our national economic dysfunction. The federal government is nothing like a household, or a business, or even a state. Those entities are all currency users. The federal government (for countries that have their own currencies) is not a currency user. It is the currency creator. The federal government cannot ‘run out’ of money, any more than the scorekeeper at a football game can run out of points. The government can keystroke as much money as it wants to, at any time, to pay for anything it wants to, in its own currency. There are a ton of other issues at play which prevent countries from creating money willy-nilly: inflation, interest rates, the overall money supply, the unemployment rate, currency stability, international trade balances, etc. And in complex economies, the central bank (The Fed in the US) and the elected government must be diligent in monitoring and managing all of these variables, to preserve stability and continuity. But solvency is never a problem for a government that issues its own currency, unless it makes it a problem for itself, which is what the debt ceiling crisis is all about.
The national debt, in essence then, is the sum total of government securities issued for investors of all types. The government’s ‘debt’ is, by definition, everyone else’s gain in assets. It is a macro-push of capital out into other sectors, which can then be used eventually for all manner of productive activity, including further investment. With the Treasury and the Fed working in tandem, bond sales do not take place because the government ‘needs money,’ but to accomplish a slew of other macroeconomic goals. Neither are taxes necessary to ‘pay for’ government expenditures, unless the government shackles itself to that concept. Indeed, all modern industrial countries run continual budget deficits and accrue ongoing national debt at some level, usually far beyond what tax revenue alone provides. Like bond sales, taxes have other macroeconomic purposes. But tax revenue is not needed prior to the government being able to keystroke any spending it wants to, by issuing securities or engaging in any other kind of activity it deems necessary; unless, again, the government prevents itself from doing this.
This way of talking about government spending and currency, you might recognize, is called Modern Money Theory. I don’t have the space here to go into MMT in depth, but you should definitely check out some of these good intro works: “The Deficit Myth,” by Stephanie Kelton, “Modern Money Theory,” by Randall Wray, or the works of J.D. Alt, who provides some good visualizations for MMT.
How Big is the National Debt?
The brief description of the national debt above should immediately raise some questions about why our leaders continue to talk about the $25 trillion US economy like it’s a spoiled Millennial buying too much avocado toast. But before we get to the rhetorical uses of debt, labor, fiscal responsibility, and the like, let’s quickly look at how big the national debt is, and who ‘owns’ it. This quick survey should demonstrate the US is not unusual in its practices with debt instruments, and that ‘investment’ is a better rubric than ‘debt’ for talking about this stuff.
As mentioned above, US GDP in 2022 was around $25.5 trillion, the largest economy in the world (China is the second largest, at $18 trillion, with Japan a distant third at around $4.5 trillion). The US national debt of $31.4 trillion clocks in at a 123% debt-to-GDP ratio, which ranks around 12th in the world. Japan is the massive industrial outlier, with a whopping 266% ratio, second only to Venezuela (350%). So the US debt ratio is hefty, but not that far off from some close cultural comps: Canada and France have 113% debt-to-GDP, Belgium at 108%, and the UK at 97%. The best estimate for China (numbers are often murky) is 77%. And as mentioned, Japan is trying an utterly different tactic, due to a rapidly-aging population, hitting 266%. So by no stretch is the United States a gross or outrageous anomaly in its issuing of federal debt instruments.
Historically, the US debt-to-GDP ratio has lurched around, driven by wars, recessions, depressions, terrorist activity, and other global events. In 1930, the ratio was a lowly 17%. By the end of the Great Depression and World War II, the number had surged to 86% in 1950. The ratio slid down to 35% in the 60s-70s, climbing to 55% in the 80s and 90s, and then rising through the Oughts and 2010s up to the higher figure we have now (123%). Considering the aging of the US population (with more money needed for retirement and elderly health care), the long aftermath of the 2008 GFC, and the pandemic, it is not unusual for us to be running high debt-to-GDP ratios, especially considering the tax and spending trends in America (more on that later). And as mentioned, we are not an obnoxious outlier in our fiscal management.
And who holds all these government bonds? Who ‘owns’ the national debt?
Of the $31.4 trillion, $7 trillion is actually held by other parts of the federal government, the biggest being the Social Security Trust Fund ($2.7T) and the Military Retirement Fund ($1.3T). That leaves $24.4 trillion held by the public. A big chunk of this public debt, $7.4 trillion, is indeed held by foreign countries. Japan is the largest foreign creditor, with $1 trillion; China holds $870 billion, and the UK $645 billing. The Fed itself, not officially “intergovernmental,” but certainly a part of the federal apparatus, has $5.5 trillion in securities that fall into this public bucket as well. A couple other general creditor categories of note are mutual funds ($2.8 trillion) and state and local governments ($1.5 trillion).
Including the Social Security Trust Fund, almost half of the national debt is being held for retirement purposes. Despite the rhetoric about being in hock to ruthless foreigners, the big bad creditors who are gonna come looking for their money are, for the most part, our meemaws and peepaws. So when we talk about potentially defaulting on federal debt and not paying up, it will be the most vulnerable amongst us, our elderly, who feel the pain. As noted, foreign holding of the national debt is around 22%, with friendly Japan as the largest creditor. And these foreign creditors are holding US dollars not for any nefarious purposes, but simply to facilitate their own internal monetary stability and trade balances.Yes, there are certainly currency skirmishes and efforts to devalue other countries’ currencies, but the main players are too intertwined in global trade to want to cripple each other, as we have grown too interdependent for there to be clear-cut winners and losers in trade battles.
What’s Really Going on With the Debt Ceiling Standoff?
From the above sections, we’ve seen that:
- The national debt is made up of securities (bonds) that the government sells to investors, who want a safe place to park their money
- As such, the federal government is not so much “borrowing” as it is utilizing bond sales to manage the overall economy (interest rates, inflation, etc.)
- Half of the national debt is held by retirement accounts
- As the creator of the currency, the US government can always repay all of its debt commitments, unless it handcuffs itself with artificial limits and thresholds. The government cannot go broke, unless it chooses to.
So why would Democrats and Republicans both ignore these realities and embrace the rhetoric that equates the federal government with a household? Why would everyone pretend that the US can run out of money, or that a balanced budget is the ideal condition for the management of a $25 trillion economy? With all of the incredible complexity involved with modern industrial and postindustrial landscapes, why would our leaders keep pounding away with Dickensian moral hectoring and simplistic shopkeeper claptrap? It is tempting to blame just the Republicans, as they are the ones who generally want to hold the government hostage, to force cuts in ‘wasteful’ liberal programs. But the Democrats play the game too, simply by acknowledging the validity of having an arbitrary ‘debt ceiling’ in the first place. By continually having to negotiate the exact amount of bonds that the Treasury can issue (because that’s what constitutes the ‘debt’), they are purposely mis-defining this multi-faceted management tool of the government, instead locking in the misperception that federal ‘borrowing’ is spiraling out of control.
Why would the Democrats do that? Well, the answer is not pretty, but not surprising. Democrats playing the framing game just demonstrates that both parties are enforcement arms for the plutocracy. Our major parties serve the interests of big money. This is not a novel observation, obviously, and is not really that interesting in and of itself. After all, with the electoral rules we have in America, with the unlimited access money has to the political process, and with the continual expansion of the rights of corporate persons as the rights of actual people dwindle, the consolidation of control in the hands of the powerful few is essentially a fait accompli. We see the manifestations of this state of affairs every day, and the Polarization Industrial Complex is the system that has evolved to keep us preoccupied with intracultural grievances, as the collapse of our society reaches its end stages. But what the debt ceiling crisis does is provide a finely crystallized version of the economic undergirding of our plutocracy, something that normally just lurks in the shadows and hallways of Davos.
OK, that got a little ranty. Let’s put some flesh on these observations.
Framed as a national debt problem, everyone can look at a number like $31.4 trillion and be dumbstruck. Most Americans, after all, would struggle with unexpected expense of a few hundred bucks. So yeah, if the government owes 31 trillion clams, they must be reckless as fuck!
But not really. In 2022, the US government spent about $6.27 trillion, or about 25% of total GDP. Is that a lot? Anything with multiple “trillions” in it sure sounds like a bunch. But remember, US GDP was $25.5 trillion in 2022, the biggest economy in the world, so even federal spending in the $6T range is not unreasonable. Exact rankings can vary quite a bit, but the IMF puts the United States around 50th in federal spending as a percentage of GDP. The World Bank ranks us much lower, in 102nd place. In any case, our federal spending is certainly not exorbitant by global standards.
Taxes as a percentage of GDP is a second indicator to look at. In total, the US tax-to-GDP rate is 25.5%. The average for OECD countries is 35.5% (the OECD is made up of 38 countries with a total population of 1.8 billion, nations committed to democracy and free markets – so we’re looking at like countries with OECD numbers). In one specific area, the US is an outlier. We have very low consumption taxes (usually termed VAT: Value Added Tax), which is a major tool in raising revenue for most other advanced countries. Only 18% of our tax revenue is from consumption taxes, whereas the OECD average is 32%. And overall, around 125 countries in the world have higher consumption taxes than the US.
And what about other kinds of American debt, the non-governmental kind? US household debt is around 65% of GDP, clocking in at $16.5 trillion, and business debt is another $18.5 trillion, or about 73% of GDP. These are rough figures, but the general picture is that private debt substantially outdistances public debt. So despite the economy’s enormous size, or perhaps because of it, heavy debt is as American as apple pie. So moral lecturing over the federal debt ceiling is mostly grandstanding, as you’re not likely to hear our fearless congressional leaders pressuring business to stop borrowing or American consumers to stop taking our mortgages and car loans. Because when businesses borrow, it’s responsible investment and entrepreneurship, and when families go into hock for a giant pickup truck, it’s stimulating economic growth. But if the government ‘borrows’ by creating bonds that investors scoop up for secure retirement and portfolio security, that’s seen as reckless, as living beyond our means.
The Big Delusion
It’s time to close out this piece with some stark reminders of what all of this means in the wider view of how our plutocratic system is driving our economy and society to ruin. The United States, along with having the biggest economy in the history of civilization (24% of global GDP), also has 31.5% of the world’s wealth. Total household wealth is about $150 trillion, or about 6 times the size of annual GDP. But despite that enormous figure, by the end of 2022, 64% of American households reported living paycheck to paycheck. Around 10% of households have negative net worth, and nearly one-third of people ages 55-67 have less than $10K in retirement savings. Again, we have the biggest economy in history, with mountains of accumulated wealth, but most regular people are living on the cliff’s edge of financial disaster. Why? Because the wealth is at the top, with levels of inequality in Gilded Age territory: top 1% have a third of the country’s wealth, the bottom half have less than 3%.
And now that the long tails of the GFC and Covid have wound out, we’re into a true labor shortage situation, where there are 3.5 million fewer people working or looking for work (2 million excess retirements, 400K Covid deaths, and legal immigration down 1 million), so wages are being driven upwards, which adds to inflation pressures. That means that the government (The Fed) is now cooling the economy, raising rates so that unemployment goes up, wage pressures go down, and inflation eases back. And with the popular misconception that we spent too much money during the pandemic, which drove inflation, the general sense now is that people just have “too much money,” so we have to cut that shit off, pronto.
Do you know anyone with too much money? I don’t. And in what bizarro universe do 64% of households living paycheck to paycheck have excess cash? But this is Big Delusion, that money is scarce, and should be kept as such for regular people. Even though our monstrous economy is brimming with cash, by no means should it be easily available for 90% or so of Americans. We must continually scrape and scratch for every cent, working our asses off, taking minimal vacation time, borrowing for every large purchase, watching our deductibles go up everywhere, hoping that we don’t get sick (in a way not covered by our insurance, if we have any), and generally having to self-service every goddam thing instead of being able to pick up the phone and get help from a real person.
So regular people, exhausted, limping from paycheck to bill to paycheck to bill, see all around them the incredible excess and luxury spun out by the American economic cornucopia. But they can only ever get a little taste, which costs them dearly in work hours and interest payments. Money seems to be everywhere growing on trees, just not for them, not in their yards. This is fuel that drives our political and cultural divisions, and preventing those divisions from boiling over into full-fledged torch and pitchfork rebellion is the task of plutocratic laundering system know as the Polarization Industrial Complex. Yet it can only dam the dike for so long, and the water is sloshing over in increasing torrents as conditions on the ground deteriorate for regular folks.
That’s where we are now, and the debt ceiling showdown will be a good arena to test the rhetoric that gets thrown around about tightening our belts, enforcing fiscal discipline, maintaining the full faith and credit of the US government, and all that. Behind the performances lay the brute facts of our plutocracy. Money is easy to come by, for those that already have it, and scarce only for those that desperately need more of it.
To read about what I think is the only way out of this horrible quagmire, check out my earlier posts. We need to sneak some kind of Transparent Trojan Horse past the gatekeepers of our plutocracy, and institute a 3-pronged project: Universal Basic Income, Bigger Home Bases, and Modern Money Theory. Read my earlier posts for background on these issues.