Monetary Sovereignty and the Debt Limit "Crisis"

Part 4 of a series

Last time we left off asking, So why is the concept of monetary sovereignty relevant to the current U.S. debt limit "crisis"?

The short answer is: Since the U.S. is a monetarily sovereign country, the current debt limit controversy is not intrinsically an economic or financial crisis; rather it is a self-imposed political crisis that may spiral into an economic or financial crisis.

The "crisis" -- to the extent there really is one -- has multiple aspects: legal, political, ideological and economic. These aspects are not entirely distinct from one another, but it's useful to think about each in turn.

The legal aspect of the "crisis"

As discussed in the first post in this series, the legal aspect is that the United States has a tangle of provisions in its Constitution and statutory laws that set a limit to the amount of public debt that can be outstanding at any one point in time. For a variety of reasons, the amount of that debt tends to grow over time, so periodically Congress has to pass a law either raising the limit on the public debt or temporarily suspending that limit. Failure to raise or suspend that debt limit calls into question the authority and ability of the U.S. Treasury to pay interest on Treasury bonds or redeem those bonds as they come due, in which case the U.S. government would be defaulting on its debts. Such default would be voluntary in the sense that it would not be forced upon the United States by any creditors or any other sovereign power. If the executive branch believed that Congress would not act to raise or suspend the debt limit, it might have to drastically reduce spending required by law on other federal programs that are seen as necessary and are politically popular, such as Social Security, Medicare and defense.

Much ink has already been spilled about this, so I'll simply refer you to others on two points. The U.S. already has a perfectly legal way around the debt limit: minting a trillion dollar coin. And the debt limit law is itself of dubious constitutionality.

The political aspect of the "crisis"

Any act to raise or suspend the debt limit has to be signed into law by the President, which makes it subject to political negotiation within and between the houses of Congress and between the Congress and the executive branch. This is the political part of the "crisis." The debt limit becomes a weapon in the power struggle among different elements of the ruling class. Those elements are here represented by the two major ruling class political parties.

This is partly a question of policy: Does our commonly accepted understanding of the "public purpose" still include the mobilization of resources for, say, a modest level of medical care for the poor (Medicaid), or is that less important than reducing deficit spending? Should removing environmental regulations around oil drilling be used as a bargaining chip against the full faith and credit of the United States?

It's also partly a question of sheer political power: Can the Republicans, by dint of their narrow majority in the House of Representatives, impose their will on the Democrats who hold the White House and the Senate?

The ideological aspect of the "crisis"

Large numbers of people believe that federal deficit spending and the resulting national debt are inherently bad things. Most Democratic and Republican politicians -- the very people who authorized that deficit spending -- sometimes claim to share that belief. But even when they do not, in fact, share that belief, they're cynically willing to mobilize their supporters on the basis of fear of deficits and debt.

As we've discussed in earlier posts on this Substack, if you are a household, a business or even a non-sovereign (state or local) government, you are a currency user. You cannot create money, so before you can spend money, you have to amass it from someplace else.

But if you are the U.S. government, you are a monetarily sovereign currency issuer -- indeed, the currency issuer par excellence. You create money by spending it into the economy. You subsequently un-create that money by taxing it back from the economy. If you don't tax back all the money that you, the federal government, have spent into the economy, what you have not taxed back remains in the economy as the net financial assets of the non-government sector of the economy. The so-called national debt is a liability on the federal government's balance sheet but is an asset of equal amount on the balance sheet of the rest of the economy.

If you are the currency-issuing level of government, there is therefore nothing inherently bad or scary about deficit spending or the national debt. The federal budget is not the same sort of a thing as an individual household's budget. That, of course, does not preclude some politicians from trying to win support for their positions by confusing the public.

The economic aspect of the "crisis"

Once you understand the political and ideological aspects of this debt ceiling "crisis," you will understand that there is no economic aspect to it per se. The U.S. government already has the ability to meet any payment on the federal debt, whether for interest or principal, when that payment comes due. The U.S. government has tangled itself up in laws and congressional procedures that may once have had merit but now prevent clear thinking and clear budgeting. It's time for Congress to scrap the federal debt limit law and stop pandering to the notion that the federal budget works like a household budget.