National Debt and President Trump’s Magic Wand

Barack Obama called George Bush’s $12 trillion national debt unpatriotic.  Obama brought the national debt up to $20 trillion. The current national debt is $24.1 trillion, equal to about – $75,000 per living person in the United States.

Budget deficit is the difference between what the federal government spends, and what it takes in annually. National debt is the result of accumulated federal government borrowing money to cover budget deficits. In spite of national debt, the United States is the world’s largest economy. The U.S. dollar is the most used international currency, and is the foremost reserve currency in the world.  

A university student picketing for free tuition for all was asked by a television interviewer “How will the government pay for free college tuition?  She replied, “It will come out of the President’s stash.” Misconception abounds among the uninformed that there is money sitting in Washington D.C. that can be tapped. 

The U.S. Treasury receives money from individual and corporate taxes, excise taxes, social security, retirement and payroll contributions, and is authorized to sell federal assets.  

Congress holds the purse strings.  Federal spending is allocated to mandatory programs such as Medicare/Medicaid and Social Security programs which make up 47% of federal spending.  Congress approves disability pensions, transportation, infrastructure, veterans’ benefits, international affairs, public education, and issues that are for “the common good.” The “common good” may be pork-barrel money favored for a congressional district or a pet institution like the Kennedy Center.

As the wolf that guards the chicken coup, Congress authorizes debt limits to make up for the amount it spends over the amount of revenue received. The federal government then borrows funds up to the debt limit to make up the annual shortfall, which increases the national debt. 

Borrowing is conducted through the issuance of Treasury debt securities: Treasury Bills, Notes, Bonds, and Treasury Protected Securities. Treasury Secretary Steve Mnuchin’s department announces details of a pending Treasury auction, and financial institutions bid directly. Sale proceeds from auctioned securities create revenue in the Treasury. Last year 322 auctions brought in $11 trillion. Domestic and international investors purchase these securities through a broker/dealer or a financial institution. Securities are traded in the secondary market after issue. Treasury security owners are paid interest and the principal at maturity. Currently, interest paid on the national debt is about 8% of federal spending.

The Board of Governors of the Federal Reserve System (FRB), chaired by Jerome Powel, sets monetary policy, and is in charge of the Central Bank. Open market operations control the money supply by tightening money or printing money from thin air, with a goal of sustained economic growth. FRB are members of the Federal Open Market Committee which determines the federal funds rates, one of the world’s most important interest rates which impact margin rates, bank loans, mortgages, etc.  

Monetizing the debt is the re-purchase of issued treasuries in the secondary market with funds from the Central Bank. The Central Bank prints money from air (as Rumpelstiltskin’s daughter spun gold from straw) to make these purchases, putting new money into circulation. Newly printed money increases the money supply, which has the potential for inflation. Milton Friedman, with a Nobel Prize in Economic Sciences, likened this money to “helicopter money” that just floated down from the sky. It is not a free lunch, but a liquidity trap. 

Historically when a government prints money to cover deficit spending it causes inflation. If money is not tightened, and more money is printed it leads to hyperinflation, which is too much money in circulation chasing too few goods, and prices skyrocket. Most recently we saw this in Venezuela.

Print money, raise taxes - Bernie Sanders and Alexandria Ocasio-Cortez support a Modern Monetary Theory (MMT). MMT is the progressive belief that it is not necessary to pay for programs with tax revenue or other spending cuts. MMT lifts Congressional spending restraints. Funding through deficit spending for leftist/socialist goals such as universal healthcare, green energy, free college tuition, guaranteed jobs, etc. will be paid for by simply printing more money. If inflation becomes an issue, they recommend a raise in taxes to reduce the amount of money in circulation. MMT uses taxation rather than monetary policy to regulate the money supply. 

Previous administrations kicked the national debt can down the road for future generations. The Tax Cuts and Jobs Act signed into law by President Trump in 2017 had a goal of boosting economic growth enough to increase government revenues to balance the budget, ending the cycle of budget deficits, and impacting the national debt. Prior to the pandemic, it was working. Treasury Secretary Mnuchin predicts the economy will rebound this summer and early fall.

Before the pandemic, the stock market was at record highs, the economy was roaring, tax and regulation cuts were bringing companies and jobs back to this country, as Donald Trump had promised during the campaign. President Obama said “How’s he going to do that? Does he have a magic wand?”

Perhaps President Trump does have a magic wand, as he has kept that campaign promise.