Bruce Bartlett’s testimony: There is no debt problem if United States retains its present monetary regime of a non-convertible fiat currency, with a floating exchange rate, and no debts owed in any foreign currency. That’s because for such a currency issuer, whatever debt level exists and falls due at any point, that debt can always be repaid because it is denominated in the currency the debtor nation can issue at will. All repayment takes then is the willingness of the issuer to issue the money needed and to use it to repay the debt due.
1. The nominal debt is irrelevant. By this I mean the dollar figure, which, as this is written, is $18,138,459,241,907.59. That’s a lot of money and it scares people. It makes them accept policies that may not only be unnecessary, but harmful. Cutting spending in a recession is clearly counterproductive and I think that the cuts that have been enacted over the last several years were unwise and slowed growth in the economy. The fact that the U.S. economy is doing marginally better than some in Europe is because they cut spending even more than we did.
2. The debt is a stock, not a flow. To determine whether the debt is “excessive” we have to compare it to something that approximates ability to pay. Typically, we look at the debt as a share of the gross domestic product. But this is not a proper comparison; we are comparing apples and oranges. To get an apples-to-apples comparison, we should compare the debt to the federal government’s assets. The comparable figure to GDP would be interest on the debt. Presently, net interest is 1.3 percent of GDP, well down from 3.2 percent in 1992. CBO currently estimates that this percentage will rise in coming years to 3 percent of GDP in 2025. This is due primarily to a projected rise in interest rates, rather than a rise in debt. This problem could be mitigated if the Treasury issued more long-term debt now while interest rates are low.
The government has many valuable assets, and among them the most valuable financial asset is its constitutional authority to create money whose financial value it can specify at will (which under present legislation is delegated to the Federal Reserve System and its member banks, and to the Treasury.
So, there can never be any diminution or increase in the capacity of a fiat sovereign government like the US government to repay its debt instruments regardless how small or large the principal value of those debt instruments is. Whether that value is $50 million or $50 quadrillion the value of the federal money asset ratio is still zero.
3. . . . Budget conventions grossly overstate the interest cost. The reason is that the budget treats the Federal Reserve as part of the public rather than part of the government. Presently, the Fed owns $2.5 trillion of Treasury securities, on which it receives interest from the Treasury. . . . But the Fed pays almost all of it back to the Treasury. In 2014, Treasury paid the Fed $116 billion in interest. After subtracting various costs, the Fed returned $99 billion to the Treasury. . . This amount should be subtracted from the federal government’s interest expense, just as we do with interest paid on trust funds. Instead, the Fed’s payment to the Treasury is treated as a miscellaneous receipt. . . .
4. Tax cuts increase the debt. This may seem like an obvious point, but some of my conservative friends often act as though this is not the case. According to the Congressional Budget Office, tax cuts enacted between 2001 and 2011 added close to $3 trillion to the national debt. . .
More generally, the first four points in Bruce Bartlett’s testimony to the Senate Budget Committee provide many reasons why the “debt crisis” notion should be viewed as seriously overblown.
