We must make painful choices, the New York Times’ editorial board scolds us. 

Why? Because otherwise we’ll be borrowing too much. And borrowing is expensive! 

Since the essence of the Times’ editorial is about money, let’s think for a moment about what “money” means.

Money could be the paper currency in your wallet.  But it is more likely to be your checking account balance, that exists as some numbers in a computer some place that you can look at on your phone.  Or your money could be in your savings account. Or maybe you have a credit balance in your paypal account.  The definition of “money” includes many things, none of which have intrinsic value.  The actual paper in your wallet is not useful, it is only valuable because it can be converted into other stuff.

And that is the real definition of money: a claim on stuff in the economy.  If you have one hundred dollars in any of the forms from the previous paragraph, you can convert that hundred dollars into one hundred dollars worth of stuff.

Borrowing allows you to have money now, with an obligation to pay it back at some point in the future, together with additional money – interest – to compensate the person who lent you the money. When the Times says borrowing can be expensive, it’s that interest payment they’re talking about. 

Yes, interest payments can be expensive for individuals and businesses. But unlike people and businesses, and state governments for that matter, the United States of America can issue debt which is essentially money. US Treasury securities can be exchanged for dollars on a moment’s notice.  This is not the case with most other countries.  Countries which have gotten into trouble did not have the ability to issue securities which are essentially money.  Argentina has banks which maintain accounts for everyone in Argentine Pesos, but the government borrowed money in US Dollars.  Their debt was not a claim on stuff in Argentina, their debt was a claim on US dollars.

As the US population expands and grows and the economy expands, we need to increase the number of dollars in existence. And we do. Here is a chart of the total amount of money has been increasing over time (this is “M2”, for the economists in the audience).

You can see that it has been generally increasing steadily over time since 1959, with sharp increase during the pandemic, after which it has mostly returned to the long term trend.

Does the issuance of US Treasury debt increase the total number of US Dollars in existence? Not directly. But the ability to exchange Treasury debt for dollars allows it to function as money. And the Federal Reserve can and does buy US Treasury debt, which effectively converts it into money.  According to the CBO projections cited by the Times, the Federal Reserve currently holds over $5 trillion of Treasury debt and will hold over $7.5 trillion of the $45.2 trillion of federal debt projected to be outstanding in 2033.

That’s important in evaluating the problem the Times has with Treasury debt: specifically, federal revenue “going right back out the door to investors in the form of interest payments to investors who purchase government bonds.” A portion of those interest payments the Times references actually don’t go right back out the door or, technically, they come right back in the door after they go out. That’s because the interest payments paid on Treasury debt held by the Federal Reserve are returned by the Federal Reserve to the Treasury. 

Of course, there still would be plenty of interest paid to holders of Treasury debt other than the Federal Reserve. But as the Times acknowledges, Treasury debt plays a critical role in the global financial system. As the global economy expands over the next decade, the level of outstanding treasury securities logically should increase as well. Certainly, then, some amount of additional debt between now and 2033 would be sustainable. 

Which will leave the Federal Reserve to decide how much Treasury debt to buy or sell, so as to strike the right balance so as to limit the “revenue going right back out the door” that the Times fears will ruin us and the need of the global financial system to have sufficient outstanding Treasury debt.

Congress also has a role to play. While the Federal Reserve can make adjustments to the total outstanding Treasury debt, the sum of the outstanding Treasury debt and money also is important. It must be sufficient to meet the needs of the people, but not so much as to cause hyperinflation. And taxing and spending decisions can be important on that front. 

Is the prospect of hyperinflation such that Republicans and Democrats must make painful choices immediately? The Times hasn’t shed any light on that issue, but it doesn’t seem to be. Inflation has in fact been trending lower in recent months. 

Unless there’s a burning need to bring inflation under control, the measures the Times recommends – substantial tax increases combined with substantial spending cuts – might not be merely unnecessary. They could be affirmatively harmful. After all, the Times essentially is advocating an austerity program for the United States. Austerity programs at the national level can be disastrous (see Greece 2010). They can crash an otherwise healthy economy. 

Which means our leaders in Congress need not rush into any compromises, just for the sake of “doing something.” They have another option. They can make their respective cases to the voters in the 2024 election. 

That’s the option we recommend.