Relax, Debt-Limit Hysterics, Government Has No Credit As Is

May 25, 2023

By John Tamny for RealClearPolitics

The debt-limit discussion would be far more reasonable if it were broadly understood that government has no resources. And by extension it has no credit. Please think about whom government attains its “credit” from while contemplating all the hysteria.

Take the Cato Institute’s Romina Boccia. She contends that “What’s missing from the debate is serious consideration of the potentially catastrophic longer term scenario the United States could face if spending and debt continue growing unabated.” But isn’t the “unseen” of trillions and trillions worth of wealth extracted from the private sector over the decades what’s really catastrophic?

From there, let’s not forget what a bond is: it’s a claim on future income streams. It’s a reminder that the true debt-ceiling “crisis” is one of way too much revenue now, and a market expectation of exponentially more federal revenue in the future. Do they debate limits on borrowing in Argentina, Guatemala, and Zimbabwe? The question is rhetorical.

Boccia’s solution is to “increase the debt limit,” and the latter will surely happen. Politicians exist to spend the money of others, which means they’ll raise it; albeit only after both sides have vacuumed up as much political capital as possible by pretending they actually care about spending (Republicans), or that they don’t care (Democrats). The important thing for the mildly sentient to understand is that while the final outcome isn’t in doubt (the debt limit being raised), neither side cares about spending.

Boccia adds that a “fiscal crisis” born of default “could lead to a rapid increase in interest rates, inflation, and unemployment. This could trigger a recession and severely reduce economic growth.” Really? Why? If we ignore that politicians will never give up a perch that gives them control over the allocation of trillions, we can’t ignore why Treasury can borrow at such low interest rates in the first place. The answer is simple: it’s not Treasury borrowing.

The above isn’t some jingoistic statement meant for AM radio as much as it’s basic market economics. Treasury can borrow in size precisely because members of Congress have arrogated to themselves far too much of the earnings of the most productive people on earth now, and well into the future. To hopefully bring clarity to readers, Russian authoritarian Vladimir Putin isn’t constrained by a Kevin McCarthy equivalent in Moscow, but Russia’s total debt is “only” $190 billion. Is Putin a closet Classical thinker, or do markets not trust the productivity of Russian workers in the way they do that of the American people? Rhetorical question yet again.

Importantly, none of this will change if the U.S. “defaults” as it’s realistically done numerous times since 1933. The credit Treasury is borrowing on is that of the American people, and that will remain unblemished no matter what. Keep this in mind with interest rates in mind.

From there, wealth never sits idle. Assuming what won’t happen actually happens, the alleged worst case isn’t as dire as Boccia and others imagine. That’s the case because government spending is the truest tax on the creation of knowledge that is the actual wealth of the world. In other words, default would discredit a government that consumes way too much wealth, not those who create it.

None of this is a call for a default that won’t happen as much as it’s a suggestion to libertarians that they cease making the poltical class’s “catastrophic” debt case: government is nothing without the wealth always and everywhere created first in the private sector, so to presume that the private sector would be troubled by problems in Treasury is for self-proclaimed free thinkers to turn logic on its head.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book is The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution.

Syndicated with permission from RealClearWire.

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