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Pragmatic Capitalism

Capital for Living a More Practical Life

It’s Time to Eliminate the Debt Ceiling

As a fully autonomous currency issuer the US government has no legitimate limit in its ability to finance its own spending. There is no such thing as the USA not being able to make a debt payment (see here if you’re already confused) due to a lack of funding since it can tap its own Central Bank for funds. But for some reason we have enacted a law that binds Congress by the “debt ceiling”. The debt ceiling is a misguided law for several reasons:

  • The debt ceiling is only reached when past spending results in current debt bumping up against the debt ceiling. This is like eating a full meal and then tying your stomach in a knot after the fact so you can’t digest the food you already decided to eat. It makes no sense.
  • Congress needs to be constrained in its spending.  But is debt the right target?  No. The USA, as an autonomous currency issuer can never “run out of money” or fail to make a debt payment. The debt ceiling imposes a fake limit on what the US government can actually spend as it implies some sort of funding constraint. This is misguided as it risks self imposed default due to political ignorance.
  • The true constraint for an autonomous currency issuer is always inflation. Congress should enact a process by which we measure the effect of spending on overall living standards and adjust policy accordingly. We should not have a debt ceiling. If anything, we should have an inflation ceiling.

The best way to get around the perpetual debt ceiling concerns? Just eliminate it. The law makes no sense anyhow and does not apply to our monetary system. There’s no need for us to keep having recurring “debt ceiling crises” just because policy makers have failed to update the legal system to match our evolving monetary system.

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