Well, at least he didn’t call it a “ticking time bomb.”

The Debt Crisis Is Getting Real
Rising bond yields mean the national debt will be much more expensive in the next few years, and we keep adding to it.
ERIC BOEHM | 10.4.2023

There is no “debt crisis.”

The fact that the so-called, misnamed “national debt” will be more expensive is a good thing. As is usual for Eric Boehm, he confuses federal bills, notes, and bonds with private debt. They are not at all alike.

His confusion stems from the words “bills, notes, and bonds,” meaning something entirely different for the federal government vs. the private sector.

For private borrowers, higher interest rates are a burden (though a benefit for lenders). The situation is different for the Monetarily Sovereign federal government.

1. 1. It isn’t “national,” which would include federal, state, local, and private debt. The term, as used, refers to the federal government.
   2. It isn’t “debt.” It’s dollars deposited into T-security accounts wholly owned by the depositors. The federal government never touches — never takes ownership of — those dollars. They forever remain the property of the depositors.
      The federal government merely provides a safe place to store the dollars, stabilizing the U.S. dollar’s value. Upon maturity, the government returns whatever dollars are in the accounts. Think of a safe deposit box. A bank does not owe a depositor the contents of the box.
   3. The federal government, which has the infinite ability to create dollars by pressing computer keys, never borrows dollars. Those T-bills, T-notes, and T-bonds do not represent borrowing. They represent the acceptance of deposits into accounts owned by depositors.
   4. The federal government pays interest on the deposits. If the depositor is an American, those interest dollars go into the U.S. private sector, where they grow the U.S. economy. The higher the interest rate, the more growth dollars are added to the economy.
   5. Paying interest does not burden the federal government or U.S. taxpayers. The government creates interest dollars by pressing computer keys. Taxpayer dollars do not fund federal interest payments.
   6. Interest rates are not forced on the government. The Federal Reserve creates interest rates by fiat.
   7. The government does not need to set rates high enough to sell T-securities. Not needing or taking possession of the dollars, the government doesn’t need to sell T-securities, and if ever the government wished to sell more T-securities, the Fed has the infinite ability to buy them, regardless of interest rates.

Writing at Vox in June 2016, liberal commentator Matt Yglesias argued that low interest rates meant governments were practically obligated to borrow more and run bigger deficits.

Wrong. The federal government is not obligated to borrow, and it never does borrow.

Running deficits is necessary to grow the economy. Whenever the federal government fails to run sufficient deficits — i.e., fails to pump enough money into the economy — the U.S. goes into a recession.

“The right course of action is really pretty obvious: If the international financial community wants to lend money this cheaply, governments should borrow money and put it to good use,” he wrote.

The above statement would be true of monetarily non-sovereign entities: States, counties, cities, businesses, euro nations, and individuals. It is not valid for Monetarily Sovereign entities: The U.S., Canada, Japan, China, etc. They have the infinite ability to create their sovereign currencies, so do not borrow their currencies.

The basic interest rate on Federal T-securities is not market-determined. It is determined by the Fed.

“Good use” could mean different things to different political factions, he acknowledged. Yglesias favored more infrastructure spending, but he also suggested that taking on more debt could be used to finance a broad-based tax cut.

Yglesias demonstrates he lacks an understanding of federal finance. Not only does the government not “take on debt,” but at any time it wished, it could end all federal taxation and still continue spending as always.

Unlike state and local governments, the Monetarily Sovereign federal government does not use tax dollars to fund its spending. The purposes of federal taxes are:

1. To control the economy by taxing what the government wishes to discourage and by giving tax breaks to what the government wishes to encourage.
2. To assure demand for the U.S.  dollar by requiring taxes to be paid in dollars.
3. To enrich the rich, who control America by widening the financial Gap between the rich and the rest. Tax laws are constructed so that the rich pay a lower percentage of their income than people with lower incomes.

The specifics might differ from place to place, but as long as there was cheap money to be had on the international bond markets, loading up on debt was a means to a positive end. “While it lasts, everyone could be enjoying a better life instead of pointless austerity,” he concluded.

Austerity is pointless, actually harmful, for Monetarily Sovereign governments. The U.S. government can afford to provide any benefit, no matter how costly, without collecting taxes.

Unlike state/local tax dollars, which remain in the economy at banks, federal taxes are destroyed upon receipt by the U.S. Treasury. 

All taxes are paid with dollars from checking accounts that are part of the M1 money supply measure. When the dollars reach the Treasury, they cease to be part of any money supply measure because the Treasury has infinite dollars. Those federal tax dollars effectively are destroyed.

I don’t point this out to pick on Yglesias. He was—as he often has throughout a successful and productive career—serving as a sort of avatar for the liberal political consensus on an important issue.

With deficits falling and interest rates at all-time lows, borrowing seemed to make both fiscal and monetary sense on the political left—which was frustrated by the political constraints (that’s what Yglesias meant by “pointless austerity”) Republicans had placed on then-President Barack Obama’s second term.

Sure, the economy was doing pretty great in the mid-2010s, but cheap borrowing meant it could be doing even better.

Yes. Cheap borrowing does help the economy. It doesn’t help the federal government one way or another. The federal government never borrows.

Conservatives didn’t share this rhetorical perspective in 2016, but soon enough, they would reveal that they more-or-less agreed. On the campaign trail, Donald Trump promised, unbelievably, to pay off the entire national debt within eight years.

Had Trump kept his promise, history shows we would have fallen into a depression. Fortunately for America, Trump is not one who keeps promises.

U.S. depressions tend to come on the heels of federal surpluses.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

Once in office, however, he set about adding to it—with the gleeful agreement of Republicans in Congress, who hiked spending, cut taxes, and let additional borrowing fill the gap.

The federal government “hiked spending and cut taxes,” but there was no borrowing. The government merely pressed computer keys to create the spending dollars.

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Quote from former Fed Chairman Ben Bernanke when he was on 60 Minutes:
Scott Pelley: Is that tax money that the Fed is spending?
Ben Bernanke: It’s not tax money… We simply use the computer to mark up the size of the account.

During Trump’s four years in office, the national debt grew by nearly $8 trillion, and you can only blame the COVID-19 pandemic’s emergency spending for about the last $3 trillion of that total.

Boehm fails to mention that the federal deficit spending grew the economy. When COVID shutdowns caused a recession, additional deficit spending quickly cured it.

“One of the reasons I do feel comfortable with us spending all this money is because interest rates are very low,” then-Treasury Secretary Steve Mnuchin said in 2020. “And we’re taking advantage of long-term rates.”

Either Mnuchin was ignorant or lying. The Monetarily Sovereign federal government does not “take advantage of” low rates. It creates all the dollars it needs by tapping computer keys.

A year later, President Joe Biden took over and cranked the spending spigot open even wider, requiring even more borrowing.

False. There was no borrowing by the federal government.

When Yglesias wrote that column for Vox in 2016, the federal government owed about $19 trillion. Today, it owes more than $33 trillion, and we just added another $2 trillion in a fiscal year with no major national emergencies.

The federal government does not owe $33 trillion. It pays all its bills on time. Those $trillion are dollars deposited into T-security accounts. If it wished, the government could pay them all off today simply by returning those dollars to their owners. This would be no financial burden on the government.

In short, the federal government followed Yglesias’ advice. But it might be more accurate to say it went along with what was clearly a bipartisan consensus formed in the mid-2010s: that borrowing was cheap, debt was easy to afford, and deficit spending allowed everyone to enjoy “a better life” with none of the downsides of austerity.

Again, total ignorance of Monetarily Sovereign finance is demonstrated.

Unfortunately, the downsides have arrived.

The yields on U.S. Treasury bonds are now hitting levels not seen in decades. The 10-year Treasury bond is nearing 5 percent, while the 20-year bond has already crossed that threshold—and some analysts expect higher yields to be coming, CNBC reported Tuesday.

Why does that matter? “We took out a mortgage thinking we’d be paying 2%, but now we’re paying 5%,” Marc Goldwein, director of policy at the Committee for a Responsible Federal Budget (CRFB), wrote on X (formerly known as Twitter) on Tuesday.

The CRFB is notorious for confusing personal finance with federal finance. Interest rates are not high because of federal deficits.

Interest rates are high because the Federal Reserve, in its misguided “solution” to inflation, intentionally, unnecessarily, and harmfully has raised them. Deficits do not cause interest rates. The Fed causes interest rates.

(Sadly, the Fed’s interest rate hikes actually exacerbate inflation by raising the prices of everything.)

Unlike most mortgages, which have fixed interest rates, much of the U.S. government’s debt is tied up in short-term bonds, which periodically “roll over” into new bonds with updated interest rates.

As a result, higher interest rates mean higher interest payments—and those funds come directly out of the federal budget, leaving less revenue for everything else the government might aspire to do, whether funding welfare programs or buying more fighter jets.

The previous paragraph is misleading. The Monetarily Sovereign federal government has the infinite ability to create U.S.  dollars. Paying high interest does not “leave less revenue for everything else.”

“That debt, borrowed at low rates, is now being rolled over into Treasuries paying interest rates between 4.5 and 5.6 percent,” the CRFB explained last month. “Though borrowing seemed cheap during those periods, policymakers failed to account for rollover risk, and we are now facing the cost.”

“We” are not facing the increased cost of federal interest payments. The federal government pays the interest by creating new dollars ad hoc. (It is true, however, that higher interest is a burden for non-sovereign state and local governments.)

Interest payments on the debt will be the fastest-growing part of the federal budget over the next three decades, according to the Congressional Budget Office’s (CBO) projections.

In the shorter term, interest payments are set to triple by 2033, when they will cost an estimated $1.4 trillion—a total that will only grow higher if more unplanned borrowing occurs before then or if interest rates rise higher than the CBO expects.

The dollars being paid for federal interest will grow the economy:

Gross Domestic Produce = Federal Spending + Non-federal Spending + Net Exports

That’s a huge bill for future taxpayers, and it’s one that won’t get them anything for their money in 2033. It’s simply paying for the things the government did in the past.

False. Federal taxpayers do not fund federal spending, though state/local taxpayers do fund state/local spending.

Among other things, the CBO warns that paying for all that debt will “slow economic growth” and “elevate the risk of a fiscal crisis.”

Federal “debt” (deposits) does not affect economic growth. Federal deficits do affect economic growth. The more deficit dollars entering the economy, the greater the growth. Simple mathematics.

In other words, all that borrowing didn’t ensure that people could enjoy “a better life.” It meant that things could be temporarily better but that the bill would eventually come due. As it always does.

No, there is no bill to come due. Federal taxes don’t pay for federal spending.

There was available evidence that rampant borrowing would not be costless—and even that growing deficits might push interest rates higher, creating the exact mess in which we now find ourselves.

Deficits don’t “push interest rates.” The Fed arbitrarily sets rates in its mistaken method for curing inflation, regardless of federal deficits.

In a 2014 paper, the CBO economist warned that higher debt loads, even when borrowed at low interest rates, would result in “lower [economic] output and lower national saving lead to a lower standard of living.”

Another CBO working paper published in 2019 found that every one-percentage-point increase in debt as a share of gross domestic product (GDP) would add more than 2 points to interest rates.

Wrong, from several standpoints. The anonymous “CBO economist” is talking about the misleading DEBT/GDP ratio. It is a nonsense ratio having zero meaning.

The numerator (“debt”) is a cumulative, multi-year measure. The denominator (GDP) is a one-year measure.

That ratio, so often mentioned, does not indicate anything. It does not indicate the financial health of a Monetarily Sovereign government. It doesn’t indicate the government’s ability to pay its bills.

It doesn’t indicate the financial health of the economy. It doesn’t impact the size of your tax bill. It doesn’t predict anything. It doesn’t measure anything meaningful.

I’ll put this kindly: The Debt/GDP ratio is the biggest bullshit ratio in all of economics, and anyone who claims it means something is simply wrong.

Next time you see it as a warning, immediately discount everything the writer says.

Those potential consequences were ignored by the political class.

Two months after Yglesias argued for more borrowing in Vox, Paul Krugman made essentially the same point in The New York Times, writing that “these are the best of times for the world’s most ravenous borrower, the United States of America.”

Yes, the best of times. And now, the worst.

Paul Krugman, winner of the fake Nobel, is wrong again. The federal government doesn’t borrow dollars. 

But at least Boehm didn’t call the federal “debt” a ticking time bomb,” as so many have been doing since 1940 when the “debt” was about $40 billion. Today, it’s nearly $30 TRILLION.

Still waiting for that bomb to explode