There are hundreds of headlines all over the news warning of the negative effects of a government shutdown. The negative effect on gross domestic product, according to Bloomberg, is estimated at 0.5 percent of the quarterly annualized rate if the shutdown lasts for two weeks. Clearly, that’s an annualized rate, not the overall hit. The most recent government shutdown lasted from Dec. 22, 2018, to Jan. 20, 2019, and the U.S. economy still grew at a 2.2 percent rate.
The Biden administration has signed a stopgap bill to prevent a government shutdown and fund the expenditures for up to 45 days if there’s no agreement. However, the entire debate is created around the monumental crisis that a shutdown would generate instead of focusing on the cause: excessive deficit spending and soaring public debt.
Government shutdowns, like debt-ceiling negotiations, are seen in some countries as an anomaly and even an anachronism. The narrative seems to be that governments and the public sector should never have to implement responsible budget decisions and that spending must continue indefinitely. However, the problem in the United States isn’t the government shutdown but the irresponsible and reckless deficit spending that administrations Republican and Democratic alike continue to impose regardless of economic conditions. When the economy grows and there’s almost full employment, governments announce more spending because it’s “time to borrow,” as economist Paul Krugman wrote. When the economy is in recession, governments say they need to spend even more to save the economy. In the process, government proportion in the economy increases, and record tax receipts are fully consumed in no time because expenditures always exceed revenues.
Those who defend the science-fiction fallacy of modern monetary theory say that if the government cuts the deficit, then the world will run out of U.S. dollars and there will be a global monetary meltdown. It’s so ludicrous a notion that it shouldn’t even have to be discussed. The world doesn’t run out of dollars if the U.S. government cuts its imbalances. Global dollar liquidity is a result of central bank swaps among monetary institutions. There’s no such thing as a global dollar liquidity crisis because of a U.S. surplus, as we saw when it happened in 2001. Furthermore, the idea that the dollar supply is created only by government deficit spending is insane. This distorted view of the economy places government debt at the center of growth instead of private investment. It tries to convince you that a deficit is always positive and that the only creation of currency must come from unproductive spending, not from productive investment credit growth. Obviously, it’s wrong.
In the Biden administration’s own projections, the accumulated deficit between 2023 and 2032 would be more than $14 trillion, assuming that there would be no recession or employment decline. Public debt has risen above $33 trillion, and the budget deficit in a period of growth and strong job creation is more than $1.7 trillion. As of August, it costs $808 billion to maintain the debt, which is 15 percent of the total federal spending, according to the U.S. Treasury. Interest rates are rising at the same time as the government rejects all budget constraints. This is a monetary timebomb.
All empires believe that their currency will be eternally demanded, until it stops. Global demand for U.S. dollars remains elevated, and the dollar index is rising because the monetary imbalances of other nations are larger than the United States’ challenges, and it still maintains freedom of capital and independent institutions with high investor security. But this doesn’t mean that the government can do what it wants. When confidence in the currency collapses, the effect is sudden and insurmountable. Global citizens may start to accept other independent currencies or gold-backed securities, and the myth of eternal U.S. debt demand vanishes. Unfortunately, governments are always willing to push the limits of fiscal responsibility because another administration will face the same continuing problem. The United States’ rising debt and deficit irresponsibility mean more taxes, less growth, and more inflation in the future. Government debt isn’t a gift of reserves for the private sector; it’s a burden of economic problems for future generations. Sound money can come only from fiscal responsibility. Currently, we have none.
