The U.S. government shutdown is not the issue. Public debt is the problem

There are hundreds of headlines all over the news warning of the negative impact of a government shutdown. The negative impact on GDP, according to Bloomberg, is estimated at 0.5% of the quarterly annualized rate if the shutdown lasts for two weeks. Obviously, that is an annualized rate, not the overall hit. The last government shutdown lasted between December 22nd, 2018, and January 20th, 2019, and the United States 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 is 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 spending must continue indefinitely. However, the problem in the United States is not the government shutdown but the irresponsible and reckless deficit spending that administrations continue to impose regardless of economic conditions. When the economy grows and there is almost full employment, governments announce more spending because it is “time to borrow,” as Krugman wrote. When the economy is in recession, governments say that they need to spend even more to save the economy. In the process, government size 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 MMT say that if the government cuts the deficit, then the world will run out of US dollars and there will be a global monetary meltdown. It is so ludicrous that it should not even have to be discussed. The world does not run out of dollars if the United States government cuts its imbalances. Global dollar liquidity is a result of central bank swaps between monetary institutions. There is no such thing as a global dollar liquidity crisis because of a United States 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 is wrong.

In the Biden administration’s own projections, the accumulated deficit between 2023 and 2032 would be over 14 trillion US dollars, assuming that there would be no recession or employment decline. Public debt has risen above 33 trillion US dollars, and the budget deficit in a period of growth and strong job creation is over 1.7 trillion US dollars. As of August 2023, it costs $808 billion to maintain the debt, which is 15% 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 (DXY) 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 does not mean that the government can do what it wants. When confidence in the currency collapses, the impact is sudden and unsurmountable. 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 problem. The United States’ rising debt and deficit irresponsibility means more taxes, less growth, and more inflation in the future. Government debt is not a gift of reserves for the private sector; it is a burden of economic problems for future generations. Sound money can only come from fiscal responsibility. Currently, we have none.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

3 thoughts on “The U.S. government shutdown is not the issue. Public debt is the problem

  1. The political games and corruption in Washington can be compared to a metastasized cancer that until the “intelligent” elected officials standup to the uncaring self serving politicians it’s a downward spiral that may lead to a much deeper recession that any of “talking” heads are willing to acknowledge until they are “underwater”. Spending much be curtailed dramatically migration and blooming entitlements tightly controlled. The “media” certainly not effectively serving the needs of its viewership with irresponsible/fake reporting. Media seems to be incapable to understand why its viewership continues to decline exponentially they need to cleanup their reporting and become honest and objective on their reporting. It’s is real mess with no intelligent solutions in the offing

  2. That’s one reason why the government loves inflation. It can then inflate away the debt.
    A 30 year government bond is just about the worst investment you can make. Your principle and interest is reduced to just about nothing, and because the interest is paid out of your own taxes, then essentially you are paying your own interest!

  3. Government ***SPENDING*** that perennially grows faster than the private sector part of GDP (aka the tax base) is the problem.

    The growing pile of public debt is merely a symptom.

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