The debt ceiling debate looms once again as Congress paints itself into a familiar corner; feigning horror at the big scary number that records all outstanding government bonds while simultaneously expressing the gravest of concern that a default would be unthinkable, precipitating a global economic catastrophe.
Default would, in fact, be an unconscionable act of irresponsibility, because financial default is not possible for the U.S. government unless our politicians foolishly choose to default for no reason.
The simple answer is that we issue our own sovereign currency and, as such, we can always afford to make any payment that is due in US dollars. We left the gold standard and global fixed exchange rate system a long time ago – it’s time we updated our thinking.
- We have no debt in other nations’ currencies.
- We make no promises to convert our currency to other currencies.
- We allow our currency to float in exchange.
- Our central bank, not financial markets, decides how much interest bond holders will receive.
This is what makes a currency issuer unique and free from the normal fiscal constraints that the rest of us face. This is also why comparisons between the finances of the American government and a standard household’s finances are so nonsensical. Congress spends, not by getting money from us, but rather simply by authorizing Treasury to add numbers to bank accounts, which it does via the central bank. It’s all just changing numbers on computers. Our government never needs to “borrow numbers”, nor can it ever “run out of numbers” to add to bank accounts.
As a nation, we have zero financial default risk. We have zero interest rate risk. We have zero bond vigilante risk. We are not, and can never be, like Greece. It is time for both Congress and the President to stop stating otherwise and to begin acting responsibly with how they manage our nation’s monetary system.
Now I know this may sound strange to many readers who are not familiar with how modern currencies work, but it should be intuitive to all of us that a currency issuer is completely different from households and businesses that use the currency. We should not be using simple metaphors that apply to you and I when referring to the responsibilities of the issuer of the nation’s currency.
The debt ceiling is meaningless as a method for determining the right size of government and, to the extent it is weaponized by Congress, quite dangerous. But the argument for eliminating the debt ceiling actually goes even further. Why do we call Treasury Bonds a “debt” when all our government “owes” is the currency it creates on demand? Government bonds are not actually “debt” in any normal sense of the word. We can’t even buy government bonds unless we first have government currency. If we first have to get the government’s money before we can buy its bonds, how can a bond be a source of revenue to the government? We actually have it backwards – government spending is the source of our savings, not the other way around!
It’s time we end the charade. Congress should end these undemocratic and outdated budget control rules and get to the business of managing the national currency in a way that promotes a healthy, growing and equitable economy – one in which all Americans can prosper.
This post is the first in a two-part series on the debt ceiling and the government's approach to monetary policy. For the second piece, "Like a Public Utility, the Government Should Serve the People," click here.