The enormity of the Trump administration's assault on reasonable governance and the public welfare has been intellectually and emotionally overwhelming. As a consequence, it's been difficult for me to post on a regular basis so far this year. Today let me touch upon some topics we've previously encountered.
No Kings y Mas
In my last post I mentioned the "In America, We Don't Do Kings" scheduled for Saturday, June 14, at locations across the country. I had the opportunity to participate in the Kingston, NY, version of that rally with family members and, by my estimate, 2000 others. If you participated in such a rally, let us know, either in the Comments section below or vi email to politicaleconomywatch@gmail.com.
What’s next? Click that link.
Return of the Budget Scolds
Over the past two-plus years, Political Economy Watch has repeatedly called attention to the myths surrounding U.S. federal spending, the federal deficit and the national debt.1 These myths continue to prevail in both national politics and elite journalism covering national politics. The Trump administration, hell-bent on tax cuts for the rich, is playing accounting games to minimize the impact of such tax cuts on the federal deficit. A small number of Republicans in Congress are holding out against those accounting games (spoiler alert: they will soon bend to Trump's will). The elite media continue to fret over "unsustainable" deficits.
Let's examine a case of the latter.
Defict Mythology in 10 Charts
In the Washington Post this week, reporter Jacob Bogage published an "explainer," "How the national debt affects the U.S. — and you — in 10 charts", which reiterates some of the themes that other Post writers and the Post's editorial board have harped on in recent years.
"The U.S. owes lenders more than $36 trillion. That is close to an all-time high when comparing the debt to the country’s total economic output — a leading indicator of the nation’s ability to pay it all back."
Note the framing Bogage applies to this: "lending -- borrowing -- debt." He depicts the U.S. federal government as subordinate to its "lenders" and potentially unable to pay back what it has "borrowed." He portrays money as something which the "lenders" somehow have at the outset of the spending cycle and which the federal government, at least at the outset, does not have. The federal government has to go hat-in-hand to its "lenders."
Bogage, like most pundits and politicians, here falls into the logical fallacy we call the Household Budget Analogy. The Household Budget Analogy argues that the federal government is "... similar to a family taking out a mortgage on a home or a factory owner borrowing to expand their operation."
Reality check: An individual family or a factory owner (or even a state government) is a currency user. Before it can spend, it needs to obtain currency from someplace else. The U.S. federal government, however, is a currency issuer. It does not have to amass money created "someplace else" before it can spend. It creates the currency in the process of spending it into the economy. It then reverses the flow of that currency via taxation.
The U.S. is a monetarily sovereign country. It spends only in the currency which it itself issues: the U.S. dollar. It sells debt instruments (misleadingly called "borrowing") only in that same currency. It can always meet payments of interest and principal on Treasury bonds whenever they come due. It cannot be forced into default.
Bogage goes on to argue:
"As the national debt rises, the U.S. must pay more to maintain its borrowing. ...
"As the U.S. takes on more debt, investors demand higher returns, forcing up interest rates. So that 2 percent rate the U.S. offered when it had less debt — say, in 2013 — jumps to the more than 4 percent rate the government has to offer to attract lenders now."
Further reality check: The U.S. government has the ability to control interest rates. The government controls short-term interest rates via Federal Reserve monetary operations. It could similarly control long-term interest rates, as it did during World War II, but currently chooses not to do so. Private sector "lenders" do not have the ability to dictate the interest rates which they are paid on their holdings of Treasuries.
Moreover, there's no causal relationship between increases in federal debt and interest rates. In both the 2008 fiscal crisis and the 2020 COVID-19 crisis, federal spending in excess of tax receipts increased dramatically, but interest rates were cut to near zero.
Bogage asks, "What are the consequences of a growing national debt?" He responds:
"Growing interest costs crowd out spending on other priorities. In fiscal 2024, the government spent more money on debt service than it did on the Defense Department, or on the combined cost of departments of Veterans Affairs and Education, plus refundable tax credits and anti-poverty programs.
"As interest costs increase, the federal government has even less money to spend on other things."
This once again assumes that there is a fixed pool of money created some place outside of, and logically prior to, the federal government that the government then has to parcel among interest payments, warfare and social programs. But since, as we saw above, the U.S. government is monetarily sovereign, it is not financially constained in its spending. It is only constrained in the access it has to the real resources to be mobilized via its spending.
Furthermore, Bogage completely misses what is arguably the most problematic aspect of the combination of increasing interest rates and increases in the national debt: the distributional aspect. Only the very rich have the ability to say, "I'd like to swap the dollars I have in my checking account, for which I am being paid little or no interest, for the higher interest rate I can get on the ultimate safe financial asset: U.S. Treasuries." What the Federal government's "lenders" are really doing is simply diversification of their portfolio assets. Interest payments on the federal debt are, for the most part, just giving free money to those people who already have too much of it.
A Home Exercise
If you are following along at home and want to do a little self-test of your ability to see through articles in the mainstream media about federal deficits and the national debt, check out this June 27 editorial in the New York Times: "The National Debt Is Already Causing Bigger Problems Than People Realize". Pick out the logical fallacies and ideological distortions in that piece and post about them in the Comments below or by sending me mail at politicaleconomywatch@gmail.com.
Click on National Debt and Debt Ceiling Crisis for lists of articles on those topics.
As someone who invests in corporate debt securities for a living, it’s hard to even begin to explain how incredibly different US Treasuries are from other forms of “debt.” Every bond I analyze is governed by a bespoke contract (called an Indenture) that was negotiated between the issuer and the lenders and outlines the bond holders’ rights and claims. Liens, collateral, security, ranking, guarantees, restrictive covenants, etc. are all established in the Indenture.
Treasuries have none of these. There’s no indenture/contract. No negotiations over collateral and liens. It’s a completely different animal. It truly is like a savings account, except it’s a marketable security that you can trade. The marketability I think is what throws people off: treasuries can be bought and sold in a brokerage account, like a stock or a bond, so they must be similar. But form-wise, they are completely different.