America's chattering class always seems to try to make the "debt crisis" a thing. Just take the new Time Magazine cover story by James Grant.
For anyone who follows this stuff, Grant's argument is exasperatingly familiar: The $13.9 trillion the U.S. owes to creditors is unmanageable; the Federal Reserve artificially lowers interest rates with its magical money-creating powers; we'd be better off with "sound money" and balanced budgets.
There is too much error-by-way-of-half-truth here to directly rebut. Instead, let me tell you the correct story.
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Let's start where Grant does, with the idea that the federal budget is like a family's budget. As Grant awkwardly half admits later, this is totally wrong. Individuals, families, and businesses are all cash-constrained. To get money, they have to go out and do something: get a job, sell goods and services, or borrow. That's not true of the federal government, since the Constitution invests it with the unique power to create money. We've divided that power up between the Federal Reserve and the Treasury Department, and we usually speak of the former as "controlling the money supply." But as Grant says, the Fed is ultimately a creation of Congress.
So any government with a fiat currency system, which is what America and most advanced Western nations have now, can always just create money to pay off creditors in a pinch. That's why interest rates on U.S. debt are so low — a sign of investors' trust. It's why we've happily run a debt for almost two centuries, and why Japan's interest rates remain quite low despite a debt load far larger than ours.
That does not mean investors are somehow getting hoodwinked. A government with a fiat currency is simply a one-of-a-kind thing in the economy. Its bonds are distinct from those of a corporation or even a state. They're a uniquely safe investment, and the people buying them know this.
Which actually tells us something about the national (and global) economy, and what they need right now. In a sense, Grant is correct that super-low interest rates on U.S. debt are bad. But they're bad because of what they signal, not because of what they do. They signal the economy is sick and sluggish. Investors are voluntarily looking for a safe place to park their money, and can't find anything else in the economy they want to invest in. More than that, super-low interest rates are effectively a demand from the financial markets for more U.S. debt. Which is a signal the government needs to use its powers to step in and do something about the economy.
It's true, as Grant says, that printing money is not wealth creation. But it can enable wealth creation. The government can hire people to build roads and bridges, to clean up public spaces and parks; to provide education and health care. All that is real economic production made possible by the government's power to borrow and create money. Similarly, while simply giving money to the poor doesn't create wealth, it does give them the initial resources they may need to re-enter the economy — and thus begin creating wealth again.
Grant mocks the idea of stimulus, saying we doubled the size of the federal debt after the Great Recession and got only a sluggish recovery for our efforts. But plenty of economists looked at the economic hole left by the 2008 financial crisis, and concluded the stimulus policies on the table weren't nearly big enough to fill it. The size of the hole is all that matters. Whatever level of deficit spending is required to fill it is the right level of deficit spending. In fact, as the government has moved away from the things Grant pines for — like balanced budgets and "sound money" — the economy has become less volatile, and periods of mass unemployment far more rare.
None of this means the government is invulnerable. It may be safe from debt default, but it can still drive the country into runaway inflation. That — not the phantom menace Grant insists is coming — is the upper limit on how far the government can take money creation and deficit spending. Historically, though, hyperinflations have been really hard to pull off, precisely because the government has to go to such an extreme. Most have been associated with war or some other similar calamity. Even our massive debt and deficit buildups in WWII only briefly rocketed inflation to 10 percent before quickly falling back to earth.
Moreover, inflation is not a universal evil. Moderate inflation, in the range of 3 to 4 percent, is one sign of a healthy economy. It means employment is plentiful, labor markets are tight, and wages are increasing — which is what puts upward pressure on prices. What's remarkable is not that the Fed is trying to increase inflation, as Grant complains. It's that inflation is rock bottom and the Fed can't seem to make it go higher. The Fed can lower interest rates to make investing easier. But the Fed can't create new economic activity out of nothing. And if the private markets aren't doing so on their own either, even with low interest rates, government fiscal stimulus is the only remaining option. And yes, that might mean a budget deficit and more debt.
The problem for Grant and the rest of the debt hawks is they start with the assumption that debt is always bad. From there, they can only misread what the economy is actually telling us.
