I was raised by parents who lived through the great depression, which has no doubt affected the way I think about money. And so for most of my life I have believed that excessive debt was a bad thing, to be avoided if at all possible. Politically I was a fiscal conservative, believing that except for emergencies like wartime or significant recessions the nation ought to live within its means and have a balanced budget.
Clearly that attitude is out of date today. Both political parties are happy for the federal government to spend more than it takes in. Oh, there are differences – the Republicans tend to increase the debt by cutting taxes, the Democrats tend to increase the debt by increasing spending – but the end result is essentially the same, more federal debt. Fundamentally Americans want more services from the federal government than they are willing to pay for in taxes, so politicians of both parties cover the gap, and try to buy votes, by simply borrowing more.
As of this morning (Oct 20, 2021) the “official” federal debt – the amount of outstanding Treasury notes and Treasury bonds – is just under $29 trillion dollars, or about 123% of the nation’s annual GDP, with currently stands at about $23 trillion. The real debt, including unfunded future promises for Social Security, Medicare and Medicaid, federal pensions, and military pensions and future veteran health costs, runs somewhere between $100 and $200 trillion, depending on how it is calculated. Yet the federal government’s total annual income runs to only about $3.5 trillion. To see current debt figures as well as a lot of other interesting fiscal statistics, go here.
Here is a graphic to put it all in perspective:
So my question is, does the federal debt really matter?
US dollars used to be backed by gold deposits, so in theory at least one could always go to the government and exchange paper dollars for real gold, so a dollar had real-world value. That ended in 1933, so since then there has been absolutely nothing backing US currency. In that respect it is exactly like bitcoin – dollars have value if and only if we all agree to pretend that they have value. It also means that the government can always pay its debts by simply printing more dollars. Even that step isn’t really necessary in this digital age – the Federal Reserve just modifies a digital file and – presto – they have “created” new money. Here is a graph of how that has gone recently:
The euphemism for all this is “quantitative easing”, meaning the government buys federal or corporate bonds with the new money it has just created, thereby providing liquidity to the market. It can in theory, of course, reverse this process at any time, by just not buying new bonds as the old ones mature, thereby contracting the money supply, but thus far it has not done that.
Now there are valid arguments for incurring federal debt to keep the economy going in a recession (or pandemic), to keep people employed, and to do things that need doing, like repairing infrastructure, even if we don’t really have the tax base yet to pay for it. On the other hand, there is interest to be paid on all that borrowed money. At the moment, with the federal government paying about 2% interest on its outstanding debt, that interest, about $300 billion per year, amounts each year to about half of what we spend on the most expensive military in the world. Or about half of what we spend on all the rest of the government except for Medicare and Social Security.
So clearly we can always pay our national debts, because the government can always “print” more dollars to pay the debts. But what would those dollars be worth in buying power? How does this all end? Can we continue to increase the debt without limit? That seems unlikely, but it is not clear to me what the limit would be. Will it all end with hyperinflation, as has happened in the past to other empires that have overspent? As the country ages and the cohort of younger people, who are what drives consumption in the economy, shrinks, will this change the dynamic? That is what puzzles me.
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