National debt & societal trust

Mark Greathouse

(10/2020) Trust? Whom would you trust more, someone debt-free or someone deeply in debt? Someone with a great credit score or someone with a score deep in the tank? No matter how you care to slice it, debt is a component of trust. So, with a national debt off the charts, can we trust our government? Worse yet, our currency is what is called "fiat money," inconvertible paper money made legal tender by decree of the government. It’s not pegged to anything solid like gold.

Our national debt stands at $26.8 trillion. In 2000, the national debt was $5.7 trillion and the country operated with an annual budget surplus. Thus far this year, we’ve spent $6 trillion and taken in $3 trillion. Ummmm…that’s a $3 trillion deficit. COVID or not, it’s an ugly picture. Debt is by definition money owed or due, and the U.S. Government doesn’t have a plastic card it can whip out. Dare we trust our government?

Let’s get a perspective on our debt. We’re talking trillions of dollars. The typical person cannot conceptually grasp how much a trillion dollars is. If you were to stack $100 bills on standard wooden shipping pallets six-feet high, it would take more than 50 football fields of such stacks to store the U.S. debt! To look at a trillion a couple of other ways, a trillion years ago our solar system didn’t exist and a trillion seconds ago would put you in prehistoric times. Are you beginning to get the picture?

Okay, we have a lot of debt. Who are we borrowing from? Some folks go ballistic and suggest that we owe our fiscal souls to the Chinese. Nope. The Chinese hold only $1.3 trillion or roughly five percent of U.S. debt. Actually, nearly 40 percent is held by our own beloved government mostly as bonds. U.S. investors hold about a third, while foreign investors hold nearly 30 percent. Are you beginning to understand the picture being painted here? We are talking real money!

Inconveniently, the U.S. Government cannot declare bankruptcy. So, what do we do to get the national debt in check? I suggest at least five possible to actions to rein it in:

First, we can hold our Federal and state politicians’ feet to the fire to stop profligate spending. Feet to the fire might entail anything from phone calls to emails to parking our collective posteriors outside their offices. Lots of luck with these endeavors.

Second, we can educate our politicians to keep their grubby paws out of the national money trough. They crowd up to that money trough like pigs to slop. Educate? Anyone optimistic? My intuition says they’re unlikely to turn away their campaign contributors that influence them to spend on pet projects.

Third, we can elect new, fiscally-conservative legislators who follow-through on promises to not spend in excess of tax revenues. Hmmm. Promises made versus promises kept? How do we get them to keep those promises? See actions #1 and #2.

Fourth, we can have a balanced budget amendment to the U.S. Constitution to ensure that our Federal government is held to fiscal account. Efforts by the House to obtain the necessary majority to convene a Constitutional Convention have been DOA, but 28 or the required 34 states have passed resolutions to convene such an assembly. A downside to such an amendment is that it doesn’t take into account fiscal emergencies like war or pandemics.

Fifth, we can ramp up the economy to take in vastly greater revenues and thus be able to collect more tax revenue. Despite tax cuts and tax revenues not keeping up with expenditures, we are nevertheless taking in record taxes.

Frankly, my common sense says this fifth action holds the most promise. This still leaves us with how do we keep those supposedly fiscally-conservative politicians from letting us down? After all, politicians are all honest…right? Arrrgh! Is all this debt bad? Yes but..

Before everyone goes into a panic, consider that our gross domestic product (GDP) is $19.6 trillion. So, our debt stands at 136 percent of GDP. To place that in perspective, government debt as a percent of GDP is used by investors to measure a country’s ability to make future payments on its debt. This affects borrowing costs and government bond yields. How bad can this get? Since 2013, Greece has been flirting with a government debt of roughly 180 percent of the country's GDP. Greece was bailed out – reluctantly – by other European Union nations many of which weren’t that much better off. Did that need to happen?

Politicians throw around simplistic budgetary solutions like eliminating or severely cutting defense spending. Cuts to discretionary spending are like comparing band-aids to major surgery. Still more politicians are wed to new debt-building wild-hair Federal program proposals for healthcare, education, environment, and the like. What’s scarier than their lack of appreciation for spending trillions of dollars is their reliance on voters gullible enough to support them.

Can the Federal Reserve come to our rescue? Founded in 1913 and comprised of 12 districts, it’s run by a Board of Governors consisting of seven members who are appointed to 14-year terms by the U.S. president and confirmed by the Senate. As central bank, the Federal Reserve sets monetary policy, promotes financial system stability, promotes consumer protection, supervises and regulates financial institutions, and fosters settlement of system safety and efficiency. That’s all mostly beyond the average American’s pay grade. This quasi-government beast drives interest rates and strives to anticipate and hold inflation in check. We can thank Woodrow Wilson (28th U.S. President) for this – arguably – abomination. While giving Woodrow credit for screw-ups, we can also thank him for the income tax and the beginning of the end of the gold standard. But, the Federal Reserve has a chequered financial history, as in messing up in 2008 and more recently misjudging economic growth.

What do we do? For one thing, we can measure our economic success using gross output (GO) as opposed to GDP. The U.S. GO is more than $45 trillion versus the $19.6 trillion GDP. GO offers a far more sensitive barometer of how our nation is doing and what our future prospects are, as it immediately reflects when production and investment are growing or weakening. Does this mean we can add more debt willy-nilly? No!

In addition to GO, money must be stable and trusted. I suggest that this can only be achieved by a return to a gold standard. The ignorance of so-called money experts in the 1970s was responsible for the ending of a monetary system based on fixed exchange rates. Its replacement is today's system of fluctuating "fiat" money that has proven disastrous for the U.S. and global economies. In the past five decades, the U.S. dollar has dramatically declined in value while the U.S. and the world have seen a dramatic increase in major systemic crises. I suggest that unstable money combined with metastasizing debt are among key reasons behind the recent rise of political polarization and unrest. After all, stable money is a critically important facilitator of public trust.

We must dig deeper into fiscal fundamentals. Until recent tax cuts, deregulation, and trade deals supplied a quick-fix band-aid, economic growth had been below historic standards. We must build a vibrant growing economy, not the socialist, government-driven economic sleight-of-hand of the political leftists. We need capitalism on steroids, if we are to dig out of our debt crunch.

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