What’s the big deal about the federal debt ceiling? The controversy in Washington suggests that the federal government won’t be able to spend as much money if it can’t keep borrowing to do so.
That’s nonsense. Quite without incurring more debt the federal government has plenty of access to money.
For the government can simply create money, instructing the Federal Reserve to create it electronically, in whatever amounts the government wants, and deposit it in government bank accounts, whereby the government can spend it however it wants. The Treasury Department can be authorized to print infinite amounts of paper currency and mint infinite amounts of coinage.
The government also could get plenty of money through higher taxes or through not spending as much. In recent years federal spending has exploded without the imposition of any tax increases — so much so that during this time members of Congress and presidents have proposed all sorts of additional spending without giving a thought as to where the money is to come from, nor without a thought as to where the production of real goods and services to underwrite the money creation is to come from.
The government might create a lot of money through the infamous mechanism of minting a platinum coin with a face value of any fantastic amount — like a trillion dollars — and then depositing it with the Federal Reserve and instructing the central bank to create and distribute an equal amount of dollars.
Such a mechanism could be used to eliminate the federal debt — problem solved.
In their recent endeavors to spend ever more money than is backed by the economy’s production, members of Congress and presidents have been emboldened by the failure of the public to wonder what causes inflation, the devaluation of their money. For inflation is the main danger with money creation, and the country and the world are already suffering an inflationary disaster.
This disaster is largely of this country’s making, since the United States long has enjoyed what a French finance minister called the “exorbitant privilege” of issuing the world reserve currency, the dollar — the privilege of paying the country’s debts in its own currency, currency it can create for free while the rest of the world has had to do real work to produce and sell real goods and services to earn the dollars needed to participate in international trade.
On top of this, the dollar’s reserve status has long induced other countries to store their hard-earned dollar surpluses in U.S. Treasury bonds and other U.S. government debt, which additionally helps the United States live far beyond what its earns from its own economic production.
That’s really what the debt ceiling controversy is about. If the United States can’t keep borrowing more from the rest of the world — money that will never really be repaid, since the debt keeps growing and is used to repay earlier debt — the country will have to start living within its means. Or else the government will have to create so much more money that inflation will increase many times more than the current official and already much underestimated rate of 6%.
Other countries increasingly perceive how they are being exploited by the current financial practices — how the supposedly richest country is living at the expense of most other countries, including the poorest.
Many of these other countries are reducing their purchase of U.S. government debt, trading less in dollars and more in their own currencies, and, it appears from gold purchases by their central banks, preparing to switch back to gold as the reserve currency or as a large component of a new reserve currency, a reserve currency controlled by no single nation.
The concern in Washington isn’t really about the chance that the United States will default on its debt. The debt already is being defaulted upon through inflation and through its steady increase during which interest on the debt is being paid by more debt.
The concern in Washington is really about the possibility that the country might have to start paying for itself and making financial choices few in politics are prepared to make.
Chris Powell is a columnist for the Journal Inquirer in Manchester, Connecticut. (CPowell@JournalInquirer.com)