On Sunday, U.S. Treasury Secretary Janet Yellen warned that "financial and economic chaos will ensue" if the U.S. government's borrowing limit isn't raised.
If that wasn't dramatic enough, she also said on ABC's “This Week” that a default would bring about an "economic calamity."
The implication is that enabling an already overindebted government to borrow more trillions will save the economy from disaster.
The reality is that authorizing the U.S. Treasury to continue ramping up its leverage against its tax base will also precipitate an economic crisis – if not suddenly, then gradually over time.
U.S. government debt surged to over 100% of GDP in 2020. Although government revenues have improved since the depths of the pandemic, the overall fiscal picture has gotten even uglier.
Veronique de Rugy writes in Reason:
Public debt since 2020 has grown by $3 trillion. According to the latest Monthly Treasury Statement, government spending in March of 2023 alone was twice the revenue collected. The deficit in the first six months of FY 2023 is about 80 percent as large as the deficit for the entire FY 2022.
Our mid-year deficit is $1.1 trillion, compared to $667 billion at the same point last year. Falling revenue collection is responsible for only 17 percent of this difference. The other 83 percent is overwhelmingly due to excessive and increased spending.
Enabling excessive debt-financed spending to continue is no strategy for averting a “calamity.” It's merely kicking the can down the road in hopes of staving it off a while longer.
Neither Janet Yellen, nor Chuck Schumer in the Senate, nor Kevin McCarthy in the House have proposed any viable path to paying down what the government owes.
Left unspoken in Official Washington is the shared assumption that inflation will be the primary tool for managing the otherwise unmanageable debt load. As long as the supply of new Federal Reserve notes keeps expanding at a sufficiently rapid pace, there will always be enough “dollars” to service previously accumulated debts.
For all of Yellen's histrionics about the threat of default, she knows as well as anyone that the Federal Reserve can always step in to monetize Treasury debt directly if needed. She was, after all, the former head of the Federal Reserve.
Does Yellen worry that current Fed Chairman Jay Powell might refuse a request for an emergency line of credit? Of course not. She just has to tell him how many trillions to digitally add to the U.S. Treasury's account.
But she probably does worry, rightly, that having the central bank bail out the government from default in such an overt manner would send a signal to the world that the U.S. is embarking on hyperinflation.
Under a fiat monetary system unconstrained by gold, a sovereign debt default can always be staved off. But what cannot be avoided is the currency crisis that follows from “solving” the debt crisis.
About the author
