Public debt, not the US Government Shutdown, is the real issue.
Commentary
There are hundreds of headlines all over the news warning of the negative impact of a government shutdown. The negative impact on GDP, according to Bloomberg, is estimated at 0.5 percent of the quarterly annualized rate if the shutdown lasts for two weeks. Clearly, that is an annualized rate, not the overall hit. The last government shutdown lasted between Dec. 22, 2018, and Jan. 20, 2019, and the United States economy still grew at a 2.2 percent rate.
The Biden administration has signed a stopgap bill to prevent a government shutdown and fund the expenditures for up to 45 days if there is no agreement. However, the entire debate is created around the monumental crisis that a shutdown would generate instead of focusing on the cause: excessive deficit spending and soaring public debt.
Government shutdowns, like debt-ceiling negotiations, are seen in some countries as an anomaly and even an anachronism. The narrative seems to be that governments and the public sector should never have to implement responsible budget decisions, and spending must continue indefinitely. However, the problem in the United States is not the government shutdown but the irresponsible and reckless deficit spending that administrations Republican and Democratic alike continue to impose regardless of economic conditions. When the economy grows and there is almost full employment, governments announce more spending because it is “time to borrow,” as economist Paul Krugman wrote. When the economy is in recession, governments say that they need to spend even more to save the economy. In the process, government proportion in the economy increases, and record tax receipts are fully consumed in no time because expenditures always exceed revenues.
Those who defend the science-fiction fallacy of modern monetary theory (MMT) say that if the government cuts the deficit, then the world will run out of U.S. dollars and there will be a global monetary meltdown. It is so ludicrous a notion that it should not even have to be discussed. The world does not run out of dollars if the U.S. government cuts its imbalances. Global dollar liquidity is a result of central bank swaps among monetary institutions. There is no such thing as a global dollar liquidity crisis because of a U.S. surplus, as we saw when it happened in 2001. Furthermore, the idea that the dollar supply is created only by government deficit spending is insane. This distorted view of the economy places government debt at the center of growth instead of private investment. It tries to convince you that a deficit is always positive and that the only creation of currency must come from unproductive spending, not from productive investment credit growth. Obviously, it is wrong.
In the Biden administration’s own projections, the accumulated deficit between 2023 and 2032 would be more than $14 trillion, assuming that there would be no recession or employment decline. Public debt has risen above $33 trillion, and the budget deficit in a period of growth and strong job creation is more than $1.7 trillion. As of August 2023, it costs $808 billion to maintain the debt, which is 15 percent of the total federal spending, according to the U.S. Treasury. Interest rates are rising at the same time as the government rejects all budget constraints. This is a monetary timebomb.
All empires believe that their currency will be eternally demanded, until it stops. Global demand for U.S. dollars remains elevated, and the dollar index (DXY) is rising because the monetary imbalances of other nations are larger than the United States’s challenges, and it still maintains freedom of capital and independent institutions with high investor security. But this does not mean that the government can do what it wants. When confidence in the currency collapses, the impact is sudden and unsurmountable. Global citizens may start to accept other independent currencies or gold-backed securities, and the myth of eternal U.S. debt demand vanishes. Unfortunately, governments are always willing to push the limits of fiscal responsibility because another administration will face the continuing same problem. The United States’s rising debt and deficit irresponsibility means more taxes, less growth, and more inflation in the future. Government debt is not a gift of reserves for the private sector; it is a burden of economic problems for future generations. Sound money can only come from fiscal responsibility. Currently, we have none.
How does excessive deficit spending and soaring public debt impact future generations?
Ent and entrepreneurship.
The consequences of excessive deficit spending and soaring public debt are severe and far-reaching. First, it puts a burden on future generations who will have to pay off the debt. As the debt accumulates, interest payments rise, which requires more tax dollars to be diverted towards debt servicing instead of being invested in education, infrastructure, and other essential areas. This hampers long-term economic growth and limits opportunities for future generations.
Second, excessive deficit spending and public debt erode trust and confidence in the government and the economy. Investors, both domestic and foreign, become wary of investing in a country with a high debt burden, fearing that it may lead to unsustainable fiscal policies, inflation, and economic instability. This can lead to a decrease in foreign direct investment and a decline in the value of the national currency.
Third, the reliance on deficit spending to stimulate the economy masks the underlying structural issues and impedes necessary reforms. Instead of addressing fundamental problems such as excessive regulations, inefficient bureaucracies, and barriers to competition, governments opt for short-term fixes through increased spending. This creates a cycle of dependence on government intervention and perpetuates a culture of entitlement.
It is high time that governments, including the United States, take a more responsible and sustainable approach to fiscal policies. This includes reducing unnecessary government expenditures, implementing structural reforms to promote economic competitiveness, and fostering an environment conducive to private investment and entrepreneurship. Only through these measures can we ensure long-term economic prosperity and secure the well-being of future generations.
In conclusion, while government shutdowns may grab headlines, it is important to recognize that the real issue lies in excessive deficit spending and soaring public debt. The focus should not be on preventing government shutdowns, but rather on addressing the root causes of fiscal irresponsibility. It is only through responsible and sustainable fiscal policies that we can safeguard the economy and secure a better future for all.
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