RE: Facing the Coming Government Shutdown

Some commentary on Brett Stevens's recent post, Facing the Coming Government Shutdown.

[A] currency backed by debt is not as valuable as one backed by industry or other actual value.

Why would that be so? I suspect he may be violating The Compounding Debt Fallacy, an extremely common misunderstanding I see from smart people on the right. Why is a debt (i.e. contract) backed system lower in value than, say, a shiny-metal backed currency? And how do you back a currency by industry? The value of the debt backed currency derives from the US government's authority to enforce legal contracts.

He quotes from the Washington Post:

Jacob Funk Kirkegaard, a senior fellow at the non-partisan Peterson Institute for International Economics, argues in a new report that once you take these kinds of tax breaks into account, the U.S. actually devotes far more resources than many other countries to “social spending” — spending on pensions, health care, family support, unemployment, housing assistance, and similar benefits meant to help people out in hard times. And, compared with most advanced countries, the U.S. gets far less bang for its buck in terms of health outcomes and equality.

…The U.S. offers huge amounts of what Kirkegaard calls “tax breaks for social purposes,” including the Earned Income Tax Credit, tax-exempt pension contributions, and new tax breaks for Americans to buy health insurance. In contrast, many European governments give services or cash benefits directly to their citizens, but then take some of that money back by taxing those cash benefits, or the person’s spending more generally.

…Once you add in that private social spending and the effect of taxes, it changes the ranking entirely. Now the U.S. devotes more to social spending than Sweden, the U.K., Germany, and Denmark – actually, every other advanced country except France.

This is a subject that was discussed on this blog in January in the proposition for an Energy Backed Currency. In EBC, the government controls spending but income comes in solely through energy sales, removing their ability to tinker on that end. Currently the fiscal policy is like a ship with rudders at each end. The actions at one end can be negated by actions at the other and they can do sneaky things like redistributing wealth at the taxation end but calling it okay because they didn't increase spending.

In addition, the more we are in debt, the less stable we are as an investment, which makes companies and other countries value our currency lower than it could be.

Why should we worry about being a foreign investment? When foreign countries invest in America, they own a part of us. We lose a part of our sovereignty. America is rich enough that it isn't starving for foreign investments. And why would we want other countries to value our currency? Driving up the dollar hurts our manufacturing and other export sectors, furthering the state of America as a nation that doesn't make things, and is forgetting how to make things. Foreign entities acquiring our currency is the same as us acquiring debt. How does, say, China, acquire dollars? They trade real value for them, in the form of goods and services. At any time, China can use its dollars to extract real wealth back out of America. Thus we are in debt to whoever holds our currency, and have lost some of our sovereignty.

This leaves the US with two grim choices, which Trump is brave enough to take on where no other American politicians will:

1. Default and lose currency value, or
2. Cut social programs and pay off the debt

Our present path leads to the first option. At some point, we will simply have borrowed too much. The experts will tell us that since our debt service is still under 10% of the budget, we are doing fine, but the real effects will be secondary. Our currency will lose value, we will lose prestige, and our government will be manipulated by foreign debtors.

The first option is indeed the only real option. US debt is sure to implode at some point. In addition to this, the vast sums of US currency in foreign exchange reserves means that, if there is ever a run on the dollar, foreign entities will unload their dollars as fast as possible, sucking wealth back out of the US. The only way to prevent that scenario will be for the US to debase the dollar, and to do so while we're strong enough, militarily, to get away with it. The causal chain of currency devalued $$\rightarrow$$ manipulated by foreign debtors is not sound. No, devaluing the currency will be the only way to reduce manipulation by foreign debtors.

From here out Steven's transitions from economics to a political discussion.

For those on the Alt Right, a transition to minimal American government — funding military and infrastructure alone, and leaving everything else to the states — would be an optimal scenario. With the fall of entitlements, diversity also will fall, and with that, the economic model of the circular Ponzi scheme will fail. At that point, the US will politically fragment as it already has socially.

Agreed, this is the ideal outcome, and one in which we might even get some help from some on the left, as long as they don't think we're agreeing with them on anything.

I read Brett Stevens almost daily. My biggest gripe is that he writes so much it is hard to keep up with it (not the worst gripe in the world, to be sure), but when you see these kinds of economic fallacies mixed in you have to wonder what else is askew. The bigger point here is that even the smartest guys out there misspeak about the economy. If you, the reader, understand the criticisms made here and start seeing them for yourself in the wild, then you understand economic reality better than the vast majority of Americans, which is knowledge that may one day work well in your favor.