"The great enemy of the truth is very often not the lie -- deliberate, contrived, and dishonest -- but the myth . persistent, persuasive, and unrealistic. Too often, we hold fast to the cliches of our forebears. We subject all facts to a prefabricated set of interpretations. We enjoy the comfort of opinion without the discomfort of thought."
-- John F. Kennedy
David M. Walker is the comptroller general of the United States, and he's on a mission. His mission is to tell you and every other American that the United States is careening toward financial disaster. This former Arthur Andersen partner was appointed to serve a 15-year term as the nation's accountant-in-chief. That's longer than the time many politicians get to prove themselves, and it's certainly a long time to have an impact on policy.
Walker may be just an accountant and a bureaucrat, but lately he's been looking more and more like a candidate stumping for votes. In speech after speech across the nation, he has been delivering his urgent warning: that the most important problem facing America is not terrorism, the War in Iraq, jobs, the economy, high oil prices, or global warming, but rather America's" fiscal black hole" caused by the "recklessness of borrowing from foreign lenders to pay for the operation of the U.S. government."
The return of the doomsdayers
I will not even address that ridiculous last statement, because I have done so in several articles in the past. However, I will say this to Walker: "Put on your green eyeshade, please, sir, and go crawl back into your cubbyhole!"
You see, our comptroller general is a card-carrying member of the Debt Doomsday club. These are the Cassandras of doom who warn incessantly about debt, but never put it in context, and fail to understand or elucidate that "debt" -- also referred to as credit, checking accounts, demand deposits, and so on -- is money. Furthermore, the government's debt -- or, more accurately, IOUs -- is simply another form of wealth. The fact that the debt consists of secure, interest-bearing instruments that can easily be used as collateral for bank loans and other types of credit makes it so.
I'll let you in on a little secret that many people, including economists and lots of folks on Wall Street, don't understand: When it comes to the federal government's finances, there is a huge difference between the options that it has and, let's say, those that are available to a private business, an individual, or even a state.
The difference between you and the Feds
The latter three are all dependent on access to money before they can consume and invest, whereas the federal government, because it can literally "create" money, can pay its bills even if it does not have enough on hand to cover those outlays at the time it makes them. And it often does just that.
Moreover, the federal government, being the monopoly issuer of the currency and the sole legal entity with the authority to credit bank accounts, has unlimited means to pay. It can never be spending-constrained. The only thing holding back its spending ability is the degree to which that spending fuels inflation.
President Kennedy knew this. In a conversation with James Tobin, a member of his Council of Economic Advisors, Kennedy asked, "Is there any economic limit to the deficit? I know, of course, about the political limits ... but is there any economic limit? . There isn't, is there? The deficit can be any size. The debt can be any size, provided [it doesn't] cause inflation. Everything else is just talk."
Kennedy was -- and is -- right.
All countries that issue their own currency can never experience a payments crisis. They always have the ability to make good on their debts because they can literally print the money to satisfy the obligation. Sure, there's a chance that such a practice could become inflationary at some point, or that the exchange rate of the national currency could decline, but that is a completely different issue from not being ableto pay, or from the claim of insolvency, which is the term you hear a lot.
Back in 2005, Fed Chairman Alan Greenspan made this point clear in testimony he gave before Congress. When Rep. Paul Ryan of Wisconsin asked Greenspan whether he believed that personal retirement accounts would help bring solvency to the Social Security system and make future retiree benefits secure, Greenspan responded:
Well, I wouldn't say that the pay-as-you-go benefits are insecure, in the sense that there's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase? [Emphasis mine.]
Greenspan's point was that the solvency issue was really a non-issue, since the government can always create the money to pay. However, the solvency issue is exactly the myth that people like David Walker continue to propagate, much to the alarm of many Americans who believe that their benefits will not be there when they are old enough to start collecting them. This myth is also driving policy, perhaps for the worse.
Prof. Randall Wray, a scholar at the Levy Institute for Economics and author of Understanding Modern Money, says that a more honest debate would be one that discusses whether elevated levels of government spending (to bridge whatever funding gap existed) at some point in the future would raise inflation rates, and by how much. "No one has even mentioned this to any degree," Wray says. "The whole discussion has been about avoiding bankruptcy, which is silly," he adds.
Almost since Social Security's inception, actuaries have been declaring that the system would go bankrupt. Yet it has survived for more than 70 years, and even the comptroller general admits it is sound for another 30 or 40 years.
"The number of current workers needed to support each retiree has fallen to three, compared with 42 in 1940," says Professor Wray. By 2042, the estimated year that the trust funds will be depleted, there will be two workers supporting every retiree. However, gains in productivity could easily offset that scenario, and that's reason why listening to the government's chief accountant may be a bad idea.
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