The “Debt Crisis” According to Bruce Bartlett: Fiat Sovereignty

Today, I’d like to offer the first of three commentary posts on Bruce Bartlett’s recent testimony before the Senate Budget Committee. Bruce Bartlett is a long-time veteran of the fiscal policy wars. He initially became known as a supply-side free market economist working for Ron Paul and then Jack Kemp in the 1970s. Later, he served as a senior policy analyst in the Reagan Administration, and then in the Bush 41 Administration as the deputy assistant secretary for economic policy at the Treasury Department. Since then he’s worked at conservative think tanks and as a well-known writer on economic policy and politics, becoming increasingly critical, first of the Bush 43 Administration and then of the increasingly rightward trend of the Republican Party. Today I think Bruce Bartlett is best characterized as a fiercely independent voice still respected in conservative circles, and also, among progressives such as Jamie Galbraith and Stephanie Kelton, but never afraid to call balls and strikes on any Administration or Congress as he sees them.

With that brief introduction completed, I’d like to turn now to a commentary on his testimony to the Senate Budget Committee from my own, individual, but Modern Money Theory -informed point of view. This post will discuss the first four points covered in Bruce Bartlett’s testimony.

Thank you for the opportunity to testify this morning on “The Coming Crisis: America’s Dangerous Debt.”

I should state up front that I don’t necessarily agree with the premise of this hearing. I don’t think there is a debt crisis looming in the near or medium term on the basis of present or foreseeable policies, or that the national debt is per se dangerous.”

Let me briefly make a few points about the debt that I seldom see in popular discussions of this topic.

Joe: So, right off he makes clear that he doesn’t think there is any “debt crisis.” Of course, I completely agree, since the very term “crisis” implies that there is not much time available to deal with some identified problem, but I also add that I don’t think there is any economic or financial debt level problem at all, provided only that the United States retains its present monetary regime of a non-convertible fiat currency, with a floating exchange rate, and no debts owed in any foreign currency. That’s because for such a currency issuer, whatever debt level exists and falls due at any point, that debt can always be repaid because it is denominated in the currency the debtor nation can issue at will. All repayment takes then is the willingness of the issuer to issue the money needed and to use it to repay the debt due.

1. The nominal debt is irrelevant. By this I mean the dollar figure, which, as this is written, is $18,138,459,241,907.59. That’s a lot of money and it scares people. It makes them accept policies that may not only be unnecessary, but harmful. Cutting spending in a recession is clearly counterproductive and I think that the cuts that have been enacted over the last several years were unwise and slowed growth in the economy. The fact that the U.S. economy is doing marginally better than some in Europe is because they cut spending even more than we did.

Joe: I agree with most of what Bruce Bartlett is saying here. But his meaning should not be overstated.

He isn’t taking the Modern Money Theory (MMT) position that the level of debt is irrelevant to the US Government’s capacity to repay it. But, I think he is saying instead, that whether or not a nation’s debt level is a problem depends on what the liability’s context is. This becomes more clear as he continues.

2. The debt is a stock, not a flow. To determine whether the debt is “excessive” we have to compare it to something that approximates ability to pay. Typically, we look at the debt as a share of the gross domestic product. But this is not a proper comparison; we are comparing apples and oranges. To get an apples-to-apples comparison, we should compare the debt to the federal government’s assets. The comparable figure to GDP would be interest on the debt. Presently, net interest is 1.3 percent of GDP, well down from 3.2 percent in 1992. CBO currently estimates that this percentage will rise in coming years to 3 percent of GDP in 2025. This is due primarily to a projected rise in interest rates, rather than a rise in debt. This problem could be mitigated if the Treasury issued more long-term debt now while interest rates are low.

Joe: Bruce Bartlett is right to say that comparing the debt to GDP isn’t a proper comparison because the debt is a stock and GDP is a flow and that we need to compare the level of debt of the federal government to the government’s assets. But then, I think he goes off the track by getting into a discussion of flows, a discussion which is irrelevant from the point of view of whether there is or is not “a debt burden” in the sense that repaying the debt due at any time need burden anyone. By moving into the discussion of flow he is implying that some flow ratio is relevant to the US capacity to repay, which isn’t so. Let me explain

The government has many valuable assets, and among them the most valuable financial asset is its constitutional authority to create money whose financial value it can specify at will (which under present legislation is delegated to the Federal Reserve System and its member banks, and to the Treasury). Now, how much is that asset worth compared to whatever level of debt is in question?

What is the value of the correct comparison ratio, the federal money debt to federal money asset ratio, when the denominator of that ratio, is, in effect, infinity? From where I sit that value always = zero, whatever the level of debt may be at some point, and that is all she wrote, as they say in the sports pages.

So, there can never be any diminution or increase in the capacity of a fiat sovereign government like the US government to repay its debt instruments regardless how small or large the principal value of those debt instruments is. Whether that value is $50 million or $50 quadrillion the value of the federal money asset ratio is still zero.

When Bruce Bartlett digresses to the issue of the proper comparison of some quantity to GDP (a flow), and identifies interest on the debt as the proper numerator, he implies that the ratio of interest on the debt to GDP during some time period is somehow related to the government’s ability to repay debt. And so he mentions CBO’s projection of a rise in this ratio from its current 1.3% of GDP value to a projected 3% of GDP in 2025, as a possible problem unless the Treasury issues more long-term debt at the low current rates and in this way lowers the projected ratio.

But, apart from the fact, that CBOs 10 year projection record is absolutely abysmal, and that they have no way of knowing what the interest rates on the public debt might be in 2025, because their models make contradictory assumptions and cannot take account of changes in policy variables, such as for example, whether the United States will even be issuing debt instruments in 10 years, or even if it does whether the Federal Reserve will push up Treasury interest rates by raising the Federal Fund Rate (FFR), there is also the much more important and decisive consideration, that the value of the interest to GDP ratio has no impact at all on the ability of the Federal Government to issue whatever reserves it might need to repay the debt due. So, as long as the US remains a fiat sovereign, the level of the interest due to GDP ratio is irrelevant for assessing the government’s ability to repay.

3. . . . Budget conventions grossly overstate the interest cost. The reason is that the budget treats the Federal Reserve as part of the public rather than part of the government. Presently, the Fed owns $2.5 trillion of Treasury securities, on which it receives interest from the Treasury. . . . But the Fed pays almost all of it back to the Treasury. In 2014, Treasury paid the Fed $116 billion in interest. After subtracting various costs, the Fed returned $99 billion to the Treasury. . . This amount should be subtracted from the federal government’s interest expense, just as we do with interest paid on trust funds. Instead, the Fed’s payment to the Treasury is treated as a miscellaneous receipt. . . .

Joe: This is certainly a well-taken point, if one thinks the interest to GDP ratio in some way determines or is an indicator of the ability to repay. But as I’ve argued just above, that ratio has nothing to do with that capacity when one is a fiat sovereign.

4. Tax cuts increase the debt. This may seem like an obvious point, but some of my conservative friends often act as though this is not the case. According to the Congressional Budget Office, tax cuts enacted between 2001 and 2011 added close to $3 trillion to the national debt. . .

Joe: Of course, this is true as long as the tax cuts are not accompanied by sources of revenue other than borrowing. But, as many people know by now, Bruce Bartlett, among them, I believe, revenues lost through tax cuts may also be augmented by money creation to repay debts, including, in the US, using High Value Platinum Coin Seignorage (HVPCS). So, this point has been true, in the past, but is overstated in asserting simply that: “Tax cuts increase the debt.”

More generally, the first four points in Bruce Bartlett’s testimony to the Senate Budget Committee provide many reasons why the “debt crisis” notion should be viewed as seriously overblown. But all overlook the importance of the fiat sovereignty of the United States in rendering the level of debt or the level of the debt to GDP ratio no problem at all. This is very important because the failure to explain this to the Budget Committee perpetuates the idea that the debt and the debt to GDP ratio are still numbers we need to keep its eye on, and that perhaps fiscal responsibility still demands a fiscal plan that will make sure we avoid a “debt crisis” at some time in the future.

On the other hand, the view that the United States can never experience an involuntary debt crisis threatening its solvency, clearly implies that the Budget Committee and the Government must develop an alternative notion of fiscal responsibility that has nothing to do with the view that it must avoid a financial crisis created by excessive debt. This, of course, does not mean that the debt subject to the limit should not be repaid. We may want to repay it and become debt free for political reasons, or because we don’t consider it good public policy to pay unearned interest to creditors providing unneeded funds to the Federal Government on a risk-free basis. But reasons like these have nothing to do financial need or with the non-existent incapacity of the Federal Government to repay its debt instruments.

(Cross-posted from New Economic Perspectives.)

16 responses to “The “Debt Crisis” According to Bruce Bartlett: Fiat Sovereignty

  1. If we look at a healthy country, we would see GDP being created as red blood cells are created in bone, and money flowing through the body like blood, bringing oxygen, disposing of waste, and the country growing like kudzu. We’re now in the vampire squid model, wherein we need more blood than our bone marrow can create. The demand can only be satisfied by blood, in USDOLLARS. Our body does not not process renminbis, euros, drachmas, or polyanas. We burn pesos in our furnaces as high grade ore additives to make steel for our rails and pipelines. There is no equivalency value between blood and antifreeze, and there is no equivalency value betwen dollars and euros. Like the Vampire Lestat, we have a use for these Greeks, as long as they continue to breed and don’t run out. If they go for platinum coins, that’s great. Like little kids following the bells of the ice cream truck as it moves through the neighborhood 🙂

  2. Can’t one simply monitor two pieces of data to govern fiscal policy … unemployment rate, and inflation? If unemployment is high and inflation low, run a bigger deficit and vice versa. It’s an oversimplification but fine control of the economy is probably not possible anyway. Then the question becomes what does the government invest in? Personally, I would prefer that we not spend money on for example, upgrading our strategic nuclear arsenal for $1T.

    • John Casper

      SteveK9, an excellent question and one that’s way above my paygrade.

      IMHO, we need to distinguish between demand-pull inflation (too many dollars chasing too few goods/services). I suspect this is what you meant, and imho, that kind of inflation is what responds to an increase in federal taxes. That’s their purpose, to manage aggregate demand.

      If it’s cost-push inflation, however, (we can run out of clean water, clean air, sustainable energy, minerals, metals, other commodities), then I suspect the answer is different.

      I’m very concerned about QE, on which I have a shaky handle to begin with, and it gets back to your question about inflationi. Did all that QE, which afaik, really inflated the Fed’s balance sheet, create more of the possibility for demand-pull inflation? I’m not sure if Dr. Firestone’s addressing this when he wrote, “or because we don’t consider it good public policy to pay unearned interest to creditors providing unneeded funds to the Federal Government on a risk-free basis.”

      OT, Dr. Firestone, can’t thank you enough for your post. I learned a lot.

    • No, I don’t think two indicators are enough. There are many kinds of impacts of fiscal policy on things we value. Inflation and Unemployment rates are outcomes we attach value to, and they are very important, but there are a whole range of other outcomes we value as well. So, I think we need to look at a range of indicators and weigh the likely effects of fiscal policies on agendas and all of them.

    • No, I don’t think two indicators are enough. There are many kinds of impacts of fiscal policy on things we value. Inflation and Unemployment rates are outcomes we attach value to, and they are very important, but there are a whole range of other outcomes we value as well. So, I think we need to look at a range of indicators and weigh the likely effects of fiscal policies on agendas and all of them.

      On QE, I think it has caused asset inflation, but not demand-pull inflation in the day-to-day cost of living.

  3. Joe, very good essay. However, isn’t the power to create money only as valuable as the real stock(assets) that underlies that power?

    For the United States that means what are the conditions of its 310 million or so citizens. By citizens, I don’t mean .1, 1, 10, or 20 per cent, I’m saying ALL of them. If everyday a larger percentage of those citizens are getting less healthy, educated, and secure in their old age or if disabled, in my mind, we are degrading our country’s real assets and damaging the value of our power to create money.

    It seems we use numbers – in our country’s case, dollars – to obscure by not truly measuring the value of our real assets, humans. By doing this, aren’t we missing the whole purpose of why have dollars to count/measure our debts and assets in the first place?

    • Generally, I agree. But whether it’s the stock of assets or not depends on how you define that. Does it include institutions or processes? Anything else? And yes, we’ve been degrading whole classes of real assets, while inflating the money value of scarce assets whose subjective value is very high for the rich.

  4. Charles Fasola

    Does the treasury actually issue and/or create money, our currency, directly? It creates a small fraction of money in circulation as I understand it. While the vast majority of money is created by private banks through the issuance of debt/loans. The legislation allowing the US Treasury to issue our money by directly creating it or directly spending it does not currently exist. It appears to me that the “conservatives” within the MMT faction are always putting the cart before the horse. What’s worse is that those same persons are quite alright with the “free market” capitalist, private banking dominated, system; which creates economic crisis, inequality and neo-feudal societies.

    • 1. The Fed orders the creation of currency by the Bureau of Engraving and Printing, which is within the Treasury Department.

      2. The Fed creates reserves out of thin air when it views such creation as essential to fulfilling its mandate.

      3. The Treasury directs the Mint, also within Treasury to create coined money. That money is mostly sent to the Fed, which buys it at face value and distributes it to banks. The difference between the Mint’s costs to create the coins and get them to the Fed banks, and the face value the banks pay for them is the coin seigniorage, which currently earns billions every year for the Treasury.

      4. The Secretary of the Treasury has had the authority since 1996, to order the US Mint to create 1 oz. platinum coins whose face values are specified at the discretion of the Secretary of the Treasury. The Secretary, could, have the Mint create a 1 oz. platinum coin with a face value of $100 Trillion. That coin could then be deposited at the New York Fed. The resulting seigniorage would be nearly $100 T. The Treasury couldn’t spend all of that, because it needs appropriations to spend. But it could repay all debt instruments as they fall due, and then use the rest to cover deficit spending appropriations currently and in the future. All this is in my e-book, here

      • “The difference between the Mint’s costs to create the coins and get them to the Fed banks, and the face value the banks pay for them is the coin seigniorage, which currently earns billions every year for the Treasury.”

        The annual report of the US Mint shows seigniorage income of $208.2 million in 2012, and that is “before protection cost” (sic). And only $105.9 million of that was through circulating coins; the rest from bullion and numismatics.

        http://www.usmint.gov/downloads/about/annual_report/2012AnnualReport.pdf

        Have you a source for the claim that coin seigniorage currently earns billions every year for the Treasury?

  5. Aloha! As Detroit went broke and now Chicago and a host of other smaller cities it is reassuring to know that we can all depend on the “corrupt free” fiat teat. As States cut budgets and school districts cut back education it is reassuring to know that we can all depend on the “corrupt free” fiat teat. As an entire generation of elders go broke eating cat food on 1% returns on 40 year nest eggs facing double digit rising medical costs it is reassuring to know that we can all depend on the “corrupt free” fiat teat. As police departments and fire departments lay off and move to a “Romanesque” militancy to preserve their sacred pensions it is reassuring to know that we can all depend on the “corrupt free” fiat teat. As the rest of the World descends into World War 4 because they aren’t the reserve currency and they do issue debt in foreign currency and they have these “pacts” with theIMF and the US Military for protection, like the Ukraine, it is reassuring to know that the entire world can be policed into infinity depending on the “corrupt free” US fiat teat.

    If we could only get Congress to demand the US Mint produce a $18TRIL Platinum coin then we could all hold hands across the world swaying and singing to Lady Gaga’s rendition of God Bless America! Is it really a “debt crisis” or is it a “moral crisis”? After spending $2TRIL on Halliburton in Iraq and Afghanistan killing millions to avenge 9-11 I feel completely confident that all that US Treasury issued debt and the bank issued debt money funding taxation is being well spent! Nobody spends my hard-earned tax liabilities better than 535 strangers that have Jamie Dimon on their speed dial! Debt seems to bring out the worst in people and governments, perfect for the perception of the 1.5% sociopaths who own the banks and the duopoly ruling the 99%! Why waste time … lets mint up two $18TRIL Platinum coins then we’ll have a $16TRIL credit! Then we can start the first “Credit Ceiling”!

    The problem with any currency or any monetary system is “human nature”. Our Founding Fathers understood that and so proceeded to do their best to put in place a money system that would “limit” human nature not celebrate it! After all debt is nothing more than a promise to pay later! Whose to say when “later” is? It also depends on what your definition of “is” … is! Welcome to the Debt Standard. Good for Jamie Dimon and Harry Reid bad for me and you!

    I can’t believe Bruce wasted his time testifying before the Gang of 535! Did they swear him in and everything? You for sure don’t wanna get caught lying to Congress! Let’s start a sub-committee and fund it with $400MIL to study the effect of “blank checks”~

    I’m all for the idea of MMT , but under the 1792 rules not the 2015 rules! Debt quality can only be attained through a complete and total reform of politics as we know it otherwise MMT is just another name for WW4! Obama didn’t register and Cheney was 4F! Monetarily speaking there is no such thing as the 1% or the 99% we’re all the 100%! Discuss …

  6. If you look up Bartlett’s CV, you will see he is definitely *not* an economist. He’s a historian and attorney who got into the flim-flam business we call “Supply Side Economics.” Krugman may have his faults, but his Peddling Prosperity book nicely dismantles the kind of con games played on behalf of voodoo economics. He doesn’t spare either Reagan or Clinton.

    Best point of that book: The fabulous “Morning in America” (the Reagan recovery) was actually an average business cycle recovery marked by record low capital investment.

  7. Kingsley Lewis

    ” fiat sovereignty of the United States” renders “the level of debt or the level of the debt to GDP ratio no problem at all”.

    This is a grave error by some MMTers, e.g. Joe Firestone here and Bill Mitchell on his blog, e.g. http://bilbo.economicoutlook.net/blog/?p=30205

    The error lies in failure to distinguish external debt owed to foreigners.
    In the case of the USA in 2014, 59% of the net debt was held by foreigners. This is equivalent to about 48% of GDP or $26,700 per US citizen.

    Abba Lerner recognised that external debt was akin to household debt and therefore fundamentally different to internal debt. See his “The Burden of the National Debt , 1948. The key passage is given in https://larspsyll.wordpress.com/2015/02/11/the-true-nature-of-public-debt/

    In contrast to Lerner, the analysis here ignores the real costs of government debt held by foreigners. Assuming that the economy is managed as closely as possible to full employment, the real resources available to the US government, firms and consumers will be reduced when interest and redemptions of debt are paid to foreigners.

    These real costs arise because sooner or later foreigners will spend most of their new dollars. (Otherwise they would never buy US Treasuries).
    Some of the interest payments and redemptions will be spent on US goods. This directly reduces the resources available for domestic investment or consumption by US citizens.
    Most of the rest will be exchanged for foreign currency, causing a devaluation. This increases the demand for exports and import substitutes, which also reduces the resources available for domestic investment or consumption by US citizens.

    So the 59% of US debt held by foreigners WILL be a burden on future generations, and this IS a real problem.

    • 1. When Lerner wrote the US was still on the gold standard in international exchange, and foreigners could demand repayment of the debt they held in gold. In 1971, France tried getting gold for its dollars, and our gold supply would have run out. So, Nixon closed the gold window.

      2. Since then we’ve allowed the dollar to float on international exchanges. Foreigners have decided they want to hold dollars n return for their exports. They hold both reserves and securities (debt instruments). They can’t buy anything with the debt instruments. They can use reserves to buy goods, services, and real assets, of course. But they don’t want to. They’d rather accumulate more dollars. One day they’ll decide that they want to spend their dollars and to begin to divest themselves of debt instruments. But they can’t do that too fast, or destroy the value of their dollar assets. So they have to do this slowly over many years. Meanwhile, we’re creating many more dollar assets, and also much more in goods and services. So, the end result is that accommodating their purchases isn’t likely to be a burden, and certainly won’t result in individual Americans having to come up with unexpected expenses.

  8. Andrew Patton

    The reason you can’t just arbitrarily create large amounts of currency to pay off debts owed to foreigners is that if foreigners lose trust in our currency as a store of value, they will stop holding dollars or any assets denominated in dollars, which means that they will buy anything they do trust as a store of value with dollars and stop accepting dollars as payment in trade. In short, our status as the reserve currency is contingent on foreigners trusting our currency, and the loss of that reserve status will result in a catastrophic reduction in the dollar exchange rates and the availability of commodities. Forget $100 oil; we’d be lucky to get a barrel of oil for $300.

    • I don’t understand. Why would anyone lose confidence in the dollar if there’s no default risk. Isn’t “losing confidence” just a euphemism for “rising default risk”?