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The US Government is not Bankrupt Like Detroit

Here’s a whopper from Stephen Moore who writes a masterful scare mongering piece about government spending and government debt. It’s filled with all the usual nonsense about how scary debt is. Of course, Moore doesn’t put the article in any useful perspective as he ignores the asset side of the balance sheet and makes false comparison after false comparison. The worst of which is his comparison of the US government and Detroit:

“Here is the biggest worry about an $18 trillion debt: What happens if/when interest rates start to drift back upward? Answer: This is the economic equivalent of the nuclear option.

Each 1-percentage-point rise in interest rates causes the U.S. deficit to rise by more than $1 trillion over ten years. So a 300-basis-point rise in rates — nothing more than a return to normalcy — would mean about $5 trillion in federal deficits.

If that happens, the debt-servicing costs grow astronomically and interest payments would become the biggest expense item in the budget. We start to pay more and more taxes just to finance past borrowing. This is what happened in Detroit; look at how that turned out.”

This is a classic scare mongering tactic about government debt. Detroit is a currency user much like Greece is. They cannot tax the entirety of US output. They don’t have a Central Bank that can print money to finance their spending. And they don’t issue the dominant risk free asset in the global financial system.  This is why Greece ran into a real solvency crisis in recent years. They don’t have the legal authority to simply print the money that would have kept them from running out of money. This can’t happen to the US federal government so the idea of a solvency crisis at the Federal government level is entirely misleading and based on misunderstandings about the US monetary system.

Of course, this doesn’t mean that government spending and debts can’t contribute to high inflation or other problems. I am certainly not in favor of just “printing money” or running up debt levels and government spending. But comparing us to Detroit and making up empirically incorrect comparisons is not the best way to highlight the dangers of government debt.  We have to understand these facts at an operational level and make realistic projections about potential outcomes. The problem is that Moore has been predicting inflation as long as I can remember.  In fact, he’s been fear mongering about government debt for over 10 years at times justifying more debt from tax cuts, but then scaring people about debt when it suits his narrative. In 2010 he said gold was going to $2,000 thanks to high inflation.  He also declared a bubble in T-bonds.  He had those trades precisely wrong as gold topped out just months after that article and T-bonds have rallied 40%.  He appears more concerned with promoting a political agenda than understanding the monetary system for what it is.

Moore’s analysis has been based on misunderstandings and the conclusions have been predictably erroneous. This is the sort of faulty analysis we’ve been hearing for years from people who don’t understand the operational realities of the US monetary system and instead just spread their political propaganda. Conservative economists can make valid points about the dangers of government debt without writing scary articles based on flawed understandings.  Doing so doesn’t help the Conservative cause.  It only discredits it when these misunderstandings end up leading to erroneous predictions.