The US Government Debt and Its Impact on the Dollar
Ernest Hemingway once said, "The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring temporary prosperity; both bring permanent ruin. But both are the refuge of political and economic opportunists.” This quote seems to be a fitting description of the current state of the United States federal debt, which has skyrocketed to $35.3 trillion. This increase of $1.9 trillion in less than a year has occurred during a period of record tax revenues and economic growth.
The Treasury's predictions for the future are not encouraging. If the current administration remains in power, it is estimated that the national debt will grow by an additional $16 trillion by 2034. This projection does not take into account any potential recessions or slowdowns in tax receipts. The economic plan proposed by Kamala Harris is expected to add a further $1.9 to $2.2 trillion to the national debt.
The Harris campaign has yet to present a plan to balance the budget. Instead, they have suggested that “efficiency” and increased taxes for the rich will cover the increased spending. However, these measures have not been successful in reducing the growing debt in the past and do not address the current $2 trillion deficit.
The Impact of Debt on Economic Growth
The increase in debt is happening during a period of economic growth. However, when adjusted for government debt accumulation, the years 2021 to 2024 have been the worst for growth since the 1930s. In a recent article, Claudia Sahm suggested that debt is not inherently bad, but rather it depends on the economic return on borrowing and the societal goals it advances.
However, evidence from the United States suggests that the economic return on borrowing is extremely low. Entitlement spending has not bolstered economic growth, and debt continues to rise faster than GDP. Furthermore, government spending does not necessarily advance societal goals. It often results in a transfer of wealth from the productive sector to the bloated bureaucratic state.
The Fallacy of Unlimited Taxing Authority and Debt Issuance
Sahm's claim that the government has “unlimited” taxing authority and the ability to issue more debt, i.e., print money, is misleading. The government is constrained by economic, fiscal, and inflationary limits. Constantly increasing taxation can lead to economic stagnation and more debt. Fiscal constraints arise because expenditures are consolidated and annualized, while tax receipts are cyclical. Inflationary limits are reached when the constant issuance of new currency leads to a loss of confidence in the currency and a decrease in its purchasing power.
The Dangers of Ignoring Record Debt
When someone suggests that there is no need to worry about record debt, it is cause for concern. When they claim that the government has unlimited resources, it implies that the cost will be borne by the public through increased taxes, inflation, and lower growth. Furthermore, the assertion that $35 trillion of debt is insignificant compared to $142 trillion of American wealth suggests a willingness to absorb the wealth of the economy.
The Impact of Tax Cuts and Increases
The argument that tax cuts are the problem stems from the view that the private sector is an ATM for governments. However, tax cuts do not necessarily reduce revenues, just as tax hikes do not always increase them. Tax cuts can stimulate investment and growth by adjusting the taxable base to the real economy. Conversely, tax increases can stifle economic growth and productive investment.
The Role of Inflation
Inflation is a form of default where the government transfers its imbalances to those who receive their salaries in currency. This is a regressive form of taxation that primarily affects the poorest. When governments ignore the real demand for the money they issue, confidence in the currency can disappear.
The Future of the US Dollar
The US dollar is the credit of the US economy. If the US government loses its credibility, domestic and international agents may begin to reduce their use of the US dollar. Believing that the US dollar will never lose its reserve currency status is reckless and ignores history.
Bottom Line
The US dollar is under threat, and the assertion that the government has unlimited taxation and printing resources should be a cause for concern. It implies that the government has unlimited ways of making its citizens poorer. What are your thoughts on this issue? Do you agree with the points raised in this article? Share this with your friends and see what they think. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
The US Government Debt and Its Impact on the Dollar
Ernest Hemingway once said, "The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring temporary prosperity; both bring permanent ruin. But both are the refuge of political and economic opportunists.” This quote seems to be a fitting description of the current state of the United States federal debt, which has skyrocketed to $35.3 trillion. This increase of $1.9 trillion in less than a year has occurred during a period of record tax revenues and economic growth.
The Treasury's predictions for the future are not encouraging. If the current administration remains in power, it is estimated that the national debt will grow by an additional $16 trillion by 2034. This projection does not take into account any potential recessions or slowdowns in tax receipts. The economic plan proposed by Kamala Harris is expected to add a further $1.9 to $2.2 trillion to the national debt.
The Harris campaign has yet to present a plan to balance the budget. Instead, they have suggested that “efficiency” and increased taxes for the rich will cover the increased spending. However, these measures have not been successful in reducing the growing debt in the past and do not address the current $2 trillion deficit.
The Impact of Debt on Economic Growth
The increase in debt is happening during a period of economic growth. However, when adjusted for government debt accumulation, the years 2021 to 2024 have been the worst for growth since the 1930s. In a recent article, Claudia Sahm suggested that debt is not inherently bad, but rather it depends on the economic return on borrowing and the societal goals it advances.
However, evidence from the United States suggests that the economic return on borrowing is extremely low. Entitlement spending has not bolstered economic growth, and debt continues to rise faster than GDP. Furthermore, government spending does not necessarily advance societal goals. It often results in a transfer of wealth from the productive sector to the bloated bureaucratic state.
The Fallacy of Unlimited Taxing Authority and Debt Issuance
Sahm's claim that the government has “unlimited” taxing authority and the ability to issue more debt, i.e., print money, is misleading. The government is constrained by economic, fiscal, and inflationary limits. Constantly increasing taxation can lead to economic stagnation and more debt. Fiscal constraints arise because expenditures are consolidated and annualized, while tax receipts are cyclical. Inflationary limits are reached when the constant issuance of new currency leads to a loss of confidence in the currency and a decrease in its purchasing power.
The Dangers of Ignoring Record Debt
When someone suggests that there is no need to worry about record debt, it is cause for concern. When they claim that the government has unlimited resources, it implies that the cost will be borne by the public through increased taxes, inflation, and lower growth. Furthermore, the assertion that $35 trillion of debt is insignificant compared to $142 trillion of American wealth suggests a willingness to absorb the wealth of the economy.
The Impact of Tax Cuts and Increases
The argument that tax cuts are the problem stems from the view that the private sector is an ATM for governments. However, tax cuts do not necessarily reduce revenues, just as tax hikes do not always increase them. Tax cuts can stimulate investment and growth by adjusting the taxable base to the real economy. Conversely, tax increases can stifle economic growth and productive investment.
The Role of Inflation
Inflation is a form of default where the government transfers its imbalances to those who receive their salaries in currency. This is a regressive form of taxation that primarily affects the poorest. When governments ignore the real demand for the money they issue, confidence in the currency can disappear.
The Future of the US Dollar
The US dollar is the credit of the US economy. If the US government loses its credibility, domestic and international agents may begin to reduce their use of the US dollar. Believing that the US dollar will never lose its reserve currency status is reckless and ignores history.
Bottom Line
The US dollar is under threat, and the assertion that the government has unlimited taxation and printing resources should be a cause for concern. It implies that the government has unlimited ways of making its citizens poorer. What are your thoughts on this issue? Do you agree with the points raised in this article? Share this with your friends and see what they think. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
