The “Debt Crisis” According to Bruce Bartlett: Capital Investment, the “Debt Burden,” Fiat Currency, and the Debt Limit

This is the second in a blog series of commentaries on Bruce Bartlett’s recent statement to the Senate Budget Committee. The first post in the series discussed a number of his comments on aspects of the “debt crisis,” a crisis he and I both believe doesn’t exist. I discussed a number of his reasons for doubting the severity of any debt problem and related each of them to the capabilities of the United States as a fiat sovereign.

In this post, I’ll cover the issues related to capital investment, the debt burden, fiat currency, and the debt limit. I’ll begin with Bruce Bartlett’s statement on how capital investments ought to be treated in the budget.

5. Capital investments are appropriately financed by borrowing. There is an unfortunate tendency to treat all government spending as if it is consumption. Economists will commonly subtract the deficit from national saving to determine net saving. But of course, the federal government makes unambiguous investments in physical, technological and human capital that provide benefits for future citizens as well as those today. It would be highly desirable to clearly separate capital expenditures from operating expenses in the budget. . . . It is penny-wise/pound-foolish to cut infrastructure investments. Those who note that the states have balanced budget requirements and favor one for the federal government never call attention to the fact that such requirements apply only to state operating budgets, not capital budgets. . . .

Joe: First, capital investments by fiat sovereign governments may also be just as appropriately financed by money creation including seigniorage. In both cases the same immediate addition of net financial assets to the economy occurs. In the case of borrowing, there is a further addition of interest payments over time, so long as these aren’t accompanied by additional taxes. But direct money creation can also be added to equalize the total contribution to the private sector if that’s what we want to do.

Second, I agree that it would be good to separate capital investment from other spending in the federal budget to give people an overview of what its composition is in terms of this distinction. But, of course, some federal investments are likely to have much more positive outcomes than others, and there is no getting around that question of effectiveness, which is, in part, a question of political and human value judgments. One can have a budget where 25% is spent on projected future benefits, and another where 15% of the same total amount is spent on such benefits. But if the projected net human value of the 15% exceeds that of the 25%, then the second budget is preferable, assuming that the projected outcome of both are equal or nearly equal in other ways.

Third, economists who subtract the deficit from national savings to determine net savings must not be macroeconomists, because macroeconomists all learn the accounting identity implying that federal deficit spending increases domestic aggregate private sector savings unless all of it leaks out to the foreign sector in the same time period over which the deficit is calculated. This is a consequence of the sectoral financial balances accounting identity central to MMT. In short, federal deficits increase net private sector saving in the aggregate, and can’t be viewed as reducing it.

Fourth, Cutting infrastructure investments is terrible policy when you have an infrastructure gap estimated at $3.6 Trillion. But failing to spend to close that gap is worse than penny-wise and pound foolish, since for a fiat sovereign there is no shortage of the capability to produce the money needed to close that gap.

There are considerations of inflation and resource impact that have to be kept in mind if proposed policies would spend too much within a given period on that problem, so that the spending went past the point of full employment or created shortages of material or human resources. But there are no financial capability problems involved in making the decision to close the infrastructure gap. So, the fact that Congress isn’t spending say $700 billion per year over 6 years on that problem, funded by seigniorage, is fiscally irresponsible, in my view.

Lastly, Bruce Bartlett is right to point out that those who point to the states as having balanced budget requirements as an argument for imposing such a requirement on the federal government, never point out that those same states don’t apply that requirement to the whole budget, but only to the operating expense portion of their budgets.

In addition, however, it is worth pointing out that far too many of the states were near basket cases of austerity in the aftermath of the crash of 2008, precisely because of that requirement. If the federal government had had the same requirement, then the Great Recession would certainly have become a Great Depression.

6. Those that fear the burden of the debt on future generations always forget that future generations inherit the assets as well. In the case of the national debt, it is true that future generations will inherit the obligation to continue paying interest, but they also inherit the bonds on which that interest is paid. While relatively few individuals may own Treasury securities, vast amounts are owned indirectly by pension funds and insurance companies for which they are a vital asset with which they will pay benefits to future generations. If the national debt were entirely owned by Americans, we would literally owe it to ourselves; there would be no burden in the aggregate.

Joe: I’ve heard this argument many times. It’s a good one; very plausible. But, it’s also true that the relationships between the people as individuals and certain of their Government’s assets and liabilities doesn’t exist. The language used by Bruce Bartlett, and many others who hold this same view of things shares the framing of the inter-generational accounting terrorists assuming that we as individuals legally share in the debts and liabilities of the federal government. Its only difference is in assuming that we also share in federal assets, so that our share of the federal balance sheet is very likely to retain a positive net worth even if the debt instruments on the liability side keep on growing as time passes.

But, I don’t think this describes the legal relationship at all, and that one gains nothing by accepting this framing of individual responsibility for government debts. You and I as individuals have no legal claim on the assets of the federal government, and “we” also have no contractual obligation to repay its debt instrument liabilities. We, as individuals don’t owe $18 Trillion, and no one of us owes $56,000 even though our government owes and must repay, as guaranteed by the Constitution, $18.1 Trillion.

I’ve outlined the argument in more detail in this post, but its meaning is clearly that legally there is no debt burden. It is an imaginary propaganda construct. Instead, there is only a train of assumptions ending with the conclusion that one day our government will impose on us enough tax obligation in excess of current spending to cover repaying the debt instruments issued by the government.

But that conclusion is neither inevitable nor obligatory. First, because the national debt can be continuously rolled over with new debt, if our government wants to issue and second, because, alternatively it can repay it and cease further debt issuance if it so chooses. So, right now no one of us has any liability for the national debt. It is a government liability and if we have any ounce of common sense, we will see to it that either the Government repays it using its fiat sovereign authority to pay it down, or, alternatively, it simply issues new debt to repay the old as it falls due.

7. The burden of debt owned by foreigners is not a problem as long as it is denominated in dollars. In every single case where a nation has gotten into debt trouble, such as Greece or Argentina, it has been because they sold bonds denominated in currencies they cannot control. Their problem wasn’t so much that they couldn’t service the debt as that they lacked the means to make or refinance principal payments when due. This cannot happen to any country that only sells bonds denominated in its own currency. In the early days of the Republic borrowers needed gold to service foreign debts. This is the principal reason why the Founding Fathers were opposed to government borrowing. In recent history, the U.S. has borrowed in foreign currencies only once back in the Carter Administration.. . .

Joe: That’s right, of course. But, it also means, once again, that there’s no debt burden relating to US debt instruments owned by anyone whether foreign or domestic.

8. The debt limit is a dreadful way to try and constrain the growth of debt. It manifestly does not work and creates unnecessary risk in financial markets when it is not raised in a timely manner. It should be abolished. . . . Since Congress is unlikely to do this, I have long urged the president to utilize his power under section 4 of the 14th Amendment to the Constitution to invalidate the debt limit. The legislative history of this provision makes clear that its purpose was to prevent Congress from holding the debt hostage to a political agenda. . .

Joe: I agree that the debt limit is a terrible piece of legislation that should have been repealed long ago, certainly by 1971, when the federal government went full-bore fiat. However, I don’t think the president has the legal right to use the 14th amendment, unless the Supreme Court first invalidates the alternative ways the President can call upon to avoid both default and breaching the debt ceiling, because if any of those alternatives are legally valid, then the debt ceiling law isn’t in direct conflict with the 14th amendment, and that amendment can’t justify a declaration that the law is unconstitutional.

Altogether, I’ve discussed seven options for ending debt ceiling crises and offered my reasons for thinking that the 14th amendment must be the last, rather than the first alternative tried by the President, in a previous series of posts. This one is the evaluation piece in the series. It has links to the previous posts other than the conclusion which is here. The series is also an appendix to my e-book.

8 responses to “The “Debt Crisis” According to Bruce Bartlett: Capital Investment, the “Debt Burden,” Fiat Currency, and the Debt Limit

  1. Kingsley Lewis

    Wonderful! Amazing! Absurd.
    A country can borrow unlimited amounts and can always roll-over debts with no costs.

    Bruce: 7. “The burden of debt owned by foreigners is not a problem as long as it is denominated in dollars.’
    Joe: “there’s no debt burden relating to US debt instruments owned by anyone whether foreign or domestic” .

    This is the same grave error as in the first post.

    Sure there is no danger of insolvency because the government can print money. That’s a trivial point. Insolvency is not the real burden of debt .

    The real burden arises when foreigners spend the dollars they get as interest payments or debt redemption.
    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

    In contrast to Lerner, the assertions made here ignore the real costs of government debt held by foreigners. Assuming that the economy is managed as closely as possible to full employment, interest payments and redemptions will reduce the resources available to citizens of the country making the payments.

    Some of these payments 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, sooner or later, 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 in 2014, equivalent to about 48% of GDP or $26,700 per US citizen, WILL be a burden on future generations, and this IS a real problem.

    The argument (in point 6 above) that “the national debt can be continuously rolled over with new debt” is wrong. Some debts may well be partly or entirely rolled over in some years. But eventually, sooner or later, foreigners will decide spend most of their dollars. (Otherwise they would never buy US Treasuries). Postponing repayments by rolling debts over increases the real burden due to yet more interest payments, albeit in the more distant future.

    • John Casper


      Remember all those cars we sold to pay for World War II? Nope, neither does anyone else. There’s stuff we can run out, clean water, clean air, sustainable energy, metals, minerals, safe food, land…. There’s stuff we can’t run out of. Dollars are an example of something we can’t run out of.

      Modern Monetary Theory doesn’t say federal deficits don’t matter. It’s that the federal budget doesn’t have to “balance.” As you clearly understand, what has to “balance,” are the three economic sectors, private (domestic), foreign, and public.

      Below is from @ptcherneva

      “And the third question should be “Should the government spend willy-nilly on whatever it pleases since it doesn’t face involuntary default?” and the answer to that question is most definitely NO. Not all deficits are created equal: some create more inequality and more rentier income, as it seems to be the case in the current crisis. Others can cause inflation. Yet others can directly create jobs, public investments, and productive capacity without generating inflationary pressures. In sovereign currency nations, a truly responsible government spending is one that is measured bot by the debt-(or deficit)-to GDP ratios, but by the real impact of that spending on the economy–job creation, poverty alleviation, stable prices, income distribution, social goods provisioning are all good measures for assessing how responsible government policy has been.”

      Yes, absolutely the US governement has been bailing out the wrong people, “Bank Of America Dumps $75 Trillion In Derivatives On U.S. Taxpayers With Federal Approval.”

      To put $75 trillion in perspective, US GDP in 2012 was around $16.5 trillion. We blew a lot more than the $6 trillion they’re claiming in Iraq and Afghanistan. Social Security’s Trust Fund is around $2.3 trillion. Bank of America is just one Wall Street bank. They all have derivative exposure. I’ve seen estimates of $700 trillion, but I don’t think anyone knows.

      If we’re making sound investments, more people will have good-paying jobs and they will spend. That drives aggregate demand and there will be times when we need federal taxes to manage demand-pull inflation/price stability. That’s consistent with one of the purposes of federal taxes. That doesn’t, however, change reality, “(Federal) Taxes For Revenue Are Obsolete”

      As you know, “the government deficit = non-government surplus to the penny‏.”

      From the @ptcherneva link above:

      “”If the government puts into the economy more than it takes out, the private sector as a whole takes in more than it pays out to the government….

      If you consider for a moment the financial position of the U.S. government vis-a-vis the financial position of the non-government sector (domestic and foreign), it is always the case that the government deficit “goes somewhere”–it is accumulated as a surplus by the private sector. There is no law that can repeal this logic. If the government puts into the economy more than it takes out, the private sector as a whole takes in more than it pays out to the government.

      If we want the government to correct its budget stand, then we must necessarily be asking ourselves to correct ours. If we demand that the government runs a surplus, then we are demanding that we, the private sector run a deficit.

      …So, take your pick: would you like the private sector to be in surplus or the government? You cannot have both. Presumably, we’d prefer the private sector to save and accumulate financial assets, which means that the government must run a deficit and accumulate financial liabilities. …”

    • Jack Foster

      KL, I think Joe is right, that the only thing foreigners holding u.s. debt can do is spend it. But in my mind, the problem is what they spend it on. IF they spend it on goods and services, hey Great! That keeps us employing people and circulating that money. But, in the case of China, they buy back from U.S. as little goods and services as they can, buying their own domestic products where they can. They prefer instead to buy assets in the U.S. And assets equals ownership. Asset ownership in China is not something anyone from U.S. can buy (unless you like always having a majority partner). Hence the real danger with China running around with too many dollars. They also tend to buy ownership of assets in impoverished places like south america where environmental consideration is often traded for cash.

      It’s bad enough with domestic oligarch’s like koch brothers running amuck, but what happens when Chinese govt begins to acquire massive ownership of u.s. businesses,property, and resources? And let’s not forget the ability to convert massive amounts of cash into legislative influence as well.

      I keep thinking, how long before china decides to build airplanes and farm equipment? We know they’ll do it for less $. After that what goods or services do they buy back from u.s.?

  2. John Casper

    Dr. Firestone, again, thank you so much for making complex issues so accessible.

  3. Jack Foster

    Joe, looks like the writers from House of Cards could use your help in developing a plot on how to fund the jobs program. apparently the show is going to have the president raid fema and cut s.s. to pay for it. Apparently they haven’t heard of the HVPCS option. It would make for a much more effective plot to use HVPCS. here’s the article:

    Or maybe you reach out to John Oliver to get a comedic angle on explaining how HVPCS could be used to negate all the stupid austerity projects the conservatives dream up…….adding a comedic edge to the cause might get it some attention.

    It just seems crazy to me, you have devised a solution to many of our problems, but it has not caught on because it is……..well, just too easy…….keepin’ the HVPCS faith – with ya.

    • John Casper

      Great idea. If Dr. Firestone doesn’t want to do it, not sure if Dr. Kelton would be right, given her new job title, “Chief Economist to the Senate Budget Committee (Democratic),” but that’s the kind of title that producers like.

  4. Jack Foster

    Joe, maybe you can hit this guy up on twitter: @DanaBrunetti, he is one of the producers or something for House of Cards….tweet him some HVPCS pointers. That would make the show R E A L L Y intersting!

  5. Jack Foster

    Joe, maybe you can hit this guy up on twitter: @DanaBrunetti, he is one of the producers or something for House of Cards….tweet him some HVPCS pointers. That would make the show R E A L L Y intersting!