The Biden administration is on track to generate the largest federal deficit, as a percentage of GDP, of any American president in history. Besides the $1.9 trillion in COVID relief just passed, the administration proposes about another $4 trillion in new infrastructure and social spending, on top of the government’s normal operating expenses (about $4.8 trillion in 2020), all essentially without raising taxes. Yes, I know there is a proposal to tax the rich and corporations more, supposedly enough to pay for all of this, but by the time the lobbyists and the corporate accountants and the tax lawyers are through this is not likely to happen. As it is, 90 of the largest U.S. corporations don’t pay any taxes today, despite the supposed 21% corporate tax rate, and most of the really wealthy also have lots of legal ways to shelter their income.
And in any case, if we confiscated ALL the income of the wealthiest 1% it would hardly make a dent in the deficit (do the math; it is revealing). And corporate taxes in any case currently make up only about 7% of federal income, so even doubling it doesn’t make that much difference. So in the end most of this additional spending will almost certainly just add to the federal debt, currently at about $28 trillion, already more than the nation’s annual GDP (about $21 trillion in 2020).
And this fiscal deficit is actually minuscule compared to the unfunded (and off-books) obligations the U.S., government already carries for Medicare and Social Security and federal and military pensions, a total estimated to run somewhere between $100-250 trillion, depending on what assumptions one makes about future growth rates, demographics, and trends. By comparison, the federal government’s total annual income is only about $3.5 trillion, clearly nowhere near enough to ever pay for these unfunded obligations.
All of which makes me think about the nature of money.
Bitcoin and its other digital cousins (Dogecoin, Ethereum, etc) are an interesting phenomena. They are currencies backed by …. absolutely nothing! In essence they are like the emperor’s new clothes. They have value as long as, and only as long as, everyone agrees to pretend that they have value. Yet speculators are bidding up the price of these currencies to astronomical heights. That certainly sounds like a crazy scheme to me.
But wait a second. The American dollars is also backed by …. absolutely nothing! Oh, not quite nothing. It is backed by “the full faith and credit of the American government”. But what exactly does that phrase mean? If I loan the US government some money (which is what I do when I buy a treasury bond), what exactly does the government’s “full faith and credit” actually mean? It means they promise to redeem my bond when it comes due with US dollars, which they can always do because they can always print (or its electronic equivalent) more dollars. But the dollar is actually not backed by anything either. So like bitcoins, this system works as long as, and only as long as, everyone agrees to pretend that the emperor actually has clothes on – so long as we all agree to pretend that dollars have value.
In fact, the government “prints” new money all the time. About 35% of the dollars currently in circulation have been “created” by the Federal Reserve over the past 12 months (the fancy euphemism for this is “quantitative easing”, which sounds ever so much more sophisticated than just “printing more money”). In theory I guess the government can always pay off its debts, however large, by just “creating” new dollars – electronically adding a few zeros to the balance. Does this worry you? It worries me.
The danger then isn’t that the government won’t have the dollars to pay off its debt – they can always print more dollars. The danger is that people will decide the dollar isn’t worth that much any more in purchasing power (that’s called inflation). And in fact, if one studies history there are a whole string of nations and empires that overspent, accumulated great debt, and then failed when their currency as a consequence became essentially worthless. Apparently, US politicians don’t study history, and neither do voters.
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