The Atlantic Gets it Wrong, Again.

The Atlantic gets it wrong, again.

Let’s say I have a mangrove tree. That tree loves salt water, so every day I pour a bucket of salt water on my tree, and it thrives.

One day, I decided to buy another mangrove tree. Now I’ll need two buckets of salt water. Is that a problem for me?

No, because the mangrove trees on my property are near the Atlantic Ocean. Although my usage of salt water has increased by 100%, my infinite supply ensures I always will have enough. I just keep getting water from the ocean.

This example illustrates the U.S. federal government’s capacity to create an unlimited number of dollars. In fact, it can produce more dollars than there are molecules of water in all the oceans of the world.

The federal government never can run short of dollars. It invented the first dollars by simply passing laws. It continues to create dollars by passing more laws.

So long as there is no limit to the federal government’s ability to pass laws, it always will be able to pay any dollar-related bill.

Given these facts, why would a renowned publication like The Atlantic publish an article like this?

The Debt Is About to Matter Again

When interest rates outpace growth, very bad things can happen.

By Rogé Karma

In 2019, Lawrence Summers and Jason Furman, two of America’s most influential economists, published an essay titled “Who’s Afraid of Budget Deficits?”

In it, they argued that Washington’s long-standing worries about the national debt had been overblown. Other prominent experts, including the former head economist of the International Monetary Fund, an institution known for imposing harsh fiscal austerity on developing countries, came to similar conclusions.

The reason: Deficit hawks had been fixated on the wrong number.

So far, so good. “Washington’s long-standing worries about the national debt had been overblown. ” Sadly, from here on it’s all downhill.

The debt, according to these economists, still mattered.

But whether it would become a serious problem, they observed, depended not on how big and scary the number was (about $28 trillion at the time, and today closer to $36 trillion), but instead on a simple formula involving the variables r and g.

As long as a country’s economic growth rate (g) is higher than the interest rate (r) it pays on its national debt, then the cost of servicing that debt will remain stable, allowing the government to roll it over indefinitely without much worry.

Here, the economists, make the mistaken assumptions that the U.S. borrows dollars and needs to borrow dollars.

Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency. There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”

Think about it. Why would a country, that has the infinite ability to create dollars, simply by passing a law and pressing a computer key, ever need to borrow those dollars. It makes no sense whatsoever.

Even the St. Louis Federal Reserve agrees, when a representativ said:

“As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.”

Do you see that phrase, “not dependent of credit markets“? In plain English, it means, “We don’t borrow” wha we can create at the touch of a computer key.

Given that interest rates had been close to zero for a decade, Furman and Summers concluded that the “economics of deficits have changed” and called on Washington to “put away its debt obsession and focus on bigger things.”

No, the economics never changed. The understanding changed. We always had the unlimited ability to create dollars. We only invented a self-inflicted pair of handcuffs with the various gold and silver standards we imposed on ourselves through the years.

We decided, for no good reason, that we wouldn’t spend more than our taxes plus the then current value of gold and silver we had in vaults. Thankfully, in the greatest act of his administration, President Nixon unlocked the handcuffs, and in doing so, unlock the greatest economic expansion of our history.

But what was true then is true no longer. The combination of Donald Trump’s growth-inhibiting tariff crusade and the GOP’s deficit-exploding tax bill is likely to push the relationship between r and g into extremely dangerous territory.

The relationship between GDP growth and interest rate growth is meaningless. GDP growth, by formula, requires federal deficit spending.

GDP=Federal Spending + Non-federal Spending + Net Exports.

It mathematically is not possible for GDP to grow without additional money coming into the economy, and one of the most important sources of money is federal deficit spending.

Federal deficits not only are part of the first term (Federal Spending) but they are part of the  second term (Non-federal Spending.) Deficits add dollar to the private sector whose spending is reflected in “Non-federal Spending.

As for interest rates, those are controlled by the Fed, not to attract lenders, but to (mistakenly) control inflation. The U.S. does not need lenders. Those Treasury Securities are not loans. Their purpose is not to provide dollars to the U.S. government. Their purposes 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 reward, and
2. To assure demand for the U.S  dollar by requiring tax be paid in dollars.

Further, the government has the infinite ability to pay taxes, and the more taxes it pays, the more growth dollars enter the economy.

People believe Treasury securities are loans because of the names: T-bills, T-bonds, T-notes, which in the private sector, refer to loans. The meaning is quite different when referring to the federal sector.

Look at that dollar BILL in your wallet. It says, “Federal Reserve NOTE.” It’s goverment created MONEY.  A T-bill, T-note, T-note, T=bond, dollar bill, and Federal reserve note all are government created money.

Do you ever hear that there are too many dollar bills? No, you don’t. But mistakenly you hear there are too many T-bills.

The people who criticize the federal “debt” unknowingly are criticizing .the amount of money the government has created. In short, they are criticizing GDP growth, and don’t realize it.

“In a short amount of time, the fiscal picture has gone from comfortably in the green-light region to the red-light region,” Summers recently told me. In other words, now would be a very good time for Washington to bring back its debt obsession.

Translation: Summers is  saying, the federal government should add fewer growth dollars to GDP. Really?

The “debt doesn’t matter” consensus had a strong start. During the coronavirus pandemic, Congress spent trillions of dollars to keep the economy on life support without worrying about paying for it.

The U.S. debt load reached new heights, but interest rates continued to fall. No bond vigilantes or debt spirals were to be seen.

It fell because the Fed lowered it. The so-called debt “load” does not cause interest rates to rise. The pandemic proved it. Interest rates arbitrarily determined by the Fed in a mistaken effort to control inflation.

We say “mistaken effort” because raising interest rates increases business costs, which are passed on to consumers in the form of higher prices.

In the years to follow, however, the Fed raised interest rates dramatically in an effort to tame inflation.

It didn’t work, because inflation is not caused by interest rates being too low. Inflation is cause by shortage of key goods and services, notably oil and food.

To cure inflation, the government must spend more, not less, to cure the shortages.

As a result, government payments on debt interest soared to $881 billion in 2024, more than the United States spent on either Medicaid or national defense. The same economists who had helped usher in the new debt consensus, including Summers and Furman, began warning that America’s fiscal picture had become concerning.

What were they concerned about? The government has infinite dollars, and inflation is the result of shortages — and these a cured with additional government spending to support farmers, the oil industry, and other areas of scarcity.

Even so, the situation was far from a crisis. A post-pandemic economic boom had kept the relationship between g and r on a stable trajectory, and in the fall of 2024, with inflation waning, the Fed began to lower interest rates.

The post pandemic boom was the result of federal spending, not any mythical relationship between GDP and interest rates.

Then Donald Trump took office and threw the world economy into chaos.

The interest rate on government debt is ultimately determined by investors’ confidence that the U.S. will eventually pay it back. (When fewer people want to buy your debt because they view it as excessively risky, you have to offer a higher return.)

This is nonsensical because:

1. The Fed arbitrarily determines interest rates
2. The government doesn’t need to offer Treasury securities. It could pay all its obligation forever, without offering even one T-bill.
3. It is not a burden on the government to pay more interest, which it can do by pressing computer keys.

So what is the problem?

The mere possibility of a global trade war and a huge, unpaid-for tax cut has shaken that confidence.

The government “pays for” tax cuts (i.e. runs bigger deficits) merely by creating dollars, which it can do endlessly — and yes, without inflation.

Last week, Moody’s, one of the world’s major credit agencies, downgraded America’s credit rating from its premium Triple-A status, causing interest rates on long-term government bonds to rise to near their highest point in two decades (above even the “yippy” level that prompted Trump to recall his “Liberation Day” tariffs).

A credit rating describes a creditor’s willingness and ability to pay its bills. The government has the infinite ability to pay any bills. As for the willingness, the ridiculous “debt ceiling” casts doubt on that.

It is the debt ceiling and the useless Republican Congress’s fealty to Trump that causes a downgrade of America’s credit  rating, not interest rates.

Rates surged again yesterday morning, when House Republicans narrowly passed a version of their tax bill that would add more than $3 trillion to the deficit over the next decade. If Trump signs that bill into law while expanding his global trade war, then investors may choose to dump their U.S. Treasury holdings en masse, causing interest rates to spike even higher.

So creditors would “dump” T-securities, which are  paying higher rates than before?  Would you rather hold a government security paying 3% or one paying 4%? Let’s get real.

And if creditors did dump Treasuries, how would that affect the goverment? Not even a little. The Treasuries are just insurance for dollar holders; they don’t provide the government with spending money.

“For years, we lived in a world where there was basically zero risk premium on U.S. debt,” Jared Bernstein, the former head of Joe Biden’s Council of Economic Advisers, told me. “In four short months, Team Trump has squandered that advantage.”

The “risk premium” has to do with Trump’s lack of sense, not with debt or deficits.

Rising interest rates might not be such a big issue if Trump’s policies were simultaneously supercharging America’s economic growth, so that g stayed ahead of r.

Instead, almost every credible growth forecast this year has fallen significantly in response to those policies. With Trump proposing new tariffs seemingly at random—including, just this morning, a 50 percent tariff on the European Union and a 25 percent tariff on all imported Apple products—businesses face paralyzing levels of uncertainty, a fact will likely drag down growth even further.

In normal times, the Federal Reserve could step in and mitigate both of these problems by cutting interest rates to boost growth or buying up Treasuries to quell financial-market panic.

That is highly unlikely, however, when the central bank is also worried about the possibility that the tax bill and Trump’s tariffs could set off an inflationary spiral.

If there is inflation it will not be because of tax reduction. It will be because of higher tariff costs and shortages and uncertainty. 

This confluence of rising interest rates and slowing growth is the exact set of circumstances capable of turning America’s national debt into a genuine crisis.

When r remains higher than g for a sustained period of time, a vicious cycle emerges.

Rising debt-servicing costs force the government to borrow more money to make its payments; investors, in turn, demand even higher interest rates, which pushes debt-servicing costs even higher, and so on.

WRONG!

The government never borrows, and inflation is caused by shortages.

In the best-case scenario, this process unfolds gradually, and the consequences are painful but not catastrophic.

And here comes the paragraph that demonstrates the author and his sources are using non-monetarily sovereign beliefs to evaluate Monetarily Sovereign facts. It’s like analyzing science by using religious beliefs.

As more and more of the government budget is diverted to finance ever-growing debt-servicing costs, less room will be left to fund key social programs and productive investments; higher interest rates will mean less business investment and slower growth; and the government will be less capable of responding to a future economic crisis that requires heavy spending.

The above paragraph is so wrong, one scarcely knows where to begin.

1. “. . . more of the government budget is diverted . . . The money in the budget is not “diverted.” The dollars scheduled for “key social programs” still can be used for those programs. New dollars can be used to finance interest payments.
2. “Less room will be left to fund . . .” The federal government cannot run short of dollars. There is infinite room left.
3. “Higher interest rates will mean less business investment and slower growth. . .” Businesses investment is based on prospective return. We can find no data showing high interest rates reduce business investment. Growth is based on federal spending.
4. “. . . the government will be less capable of responding to a future economic crisis . . . “ The federal government always is 100% capable of responding to any economic crisis that requires heavy spending.

Look at the following graph and decide for yourself whether higher interest rates (red) caused slower growth (blue).

And what about inflation? Does increased federal deficit spending result in inflation?

The above two graphs demonstrate that federal deficit spending and debt do not correlate with inflation, while supply and shortages of oil do correlate with inflation. In short, inflation is supply-based, not demand-based.

If, however, the debt snowball were to gather momentum quickly, the damage could be far worse.

Investors might conclude that U.S. debt is no longer a safe investment, causing the equivalent of a bank run on the Treasury market as investors rush to sell their bonds for cash.

The above two sentences demonstrate abject ignorance of U.S. Monetary Sovereignty. A “bank run” is a problem only because a bank does not have an infinite supply of money. It can run out of money to pay depositors. The U.S. Treasury cannot run out of money.

Further, as the St. Louis Fed said, “The government is not dependent on credit markets. Investors “rushing to sell their bonds for cash (U.S. dollars aka Federal Reserve Notes?) would have no effect on the government’s ability to pay its obligation.

Once that kind of psychological panic sets in, anything can happen. “This scenario is more serious than 2008,” Adam Tooze, an economic historian who wrote the definitive history of the financial crisis that triggered the Great Recession, argued recently on his Substack.

“At some point, everything just goes parabolic,” Mark Zandi, the chief economist at Moody’s Analytics, told me. “That’s when parts of the financial system might start to break.”

The Great Recession of 2008 was caused by the collapse of the U.S. housing bubble, which exposed high-risk lending, poor regulation, and dangerous financial products like sub-prime mortgages,  mortgage-backed securities (MBS), collateralized debt obligations (CDOs).

It had absolutely nothing to do with U.S. Treasuries. Using that recession as an example of federal debt is deceptive.

On April 9, Trump’s Liberation Day tariffs went into effect and the American bond market nearly melted down, stabilizing only after Trump paused most of the tariffs.

“The phrase ‘nearly melted down’ is a significant exaggeration.” Investors began selling both stocks and Treasuries simultaneously, interpreting Treasury debt no longer as a risk-off refuge.

And that is exactly what is supposed to happen as a circuit breaker for unsound policies. Did it affect the federal government’s ability to pay its bills? Absolutely not.

The author illustrates that high federal debt is a problem by using an irrelevant example. It’s akin to discussing dangerous driving by referencing a plane crash.

If something similar happened again—say, in response to the final passage of the Republican tax bill—averting a sustained panic might not be so easy.

The U.S. would be left with terrible choices: Impose painful austerity measures to reassure the market, default on the debt (which would likely trigger a severe, possibly global economic crisis), or print money to pay it off (which would trigger rampant inflation).

As we now know, none of that happened. The author set his hair on fire, screaming “disaster,” and all is quiet. Not to say that the Republican tax bill won’t hurt the economy. It will.

But it does not require austerity. It does not require default. And if we have “rampant inflation, ” it will come as a result of Trump’s nonsensical tariffs, not the tax bill.

None of these possibilities appears to concern Trump and his allies in Congress, who are barreling forward with their agenda, warnings be damned. Perhaps they are betting that economists, who for so long predicted debt crises that never materialized, will be wrong one more time. That is a very high-stakes gamble indeed.

Economists often misunderstand federal “debt crises” because federal debt is nothing like personal debt, which is a crucial distinction.

The Atlantic is another in a long line of “debt-is-a-ticking-time-bomb” articles going back to 1940. Here are a few. Somehow, that bomb never seems to explode.

Rodger Malcolm Mitchell

Monetary Sovereignty

Twitter: @rodgermitchell

Search #monetarysovereignty

Facebook: Rodger Malcolm Mitchell;

MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;

https://www.academia.edu/

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A Government’s Sole Purpose is to Improve and Protect The People’s Lives.

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