Many of my recent posts have focused on fairy tales I thought the President would tell in the SOTU and also those that he did tell. The reason for this is that I think people on the left have a greater need to be informed about Obama’s fairy tales, then they do about Republican fairy tales, since they are automatically skeptical about what Republicans say given their 40 year history of systematically lying about reality every chance they get.

I’m sorry that doesn’t sound very civil; but the national Republican Party has consciously chosen to develop political strategies crafted around lying to the public since the days of Richard Nixon and Lee Atwater. Regrettably, I’m not sure the Democrats are very different any more, but that’s a story for another day.

In any event, in spite of the automatic skepticism that most left-leaning readers, like myself, probably brought to Paul Ryan’s Republican response to the SOTU, I think it’s only fair to provide a textual analysis of parts of his speech dealing with deficit reduction in the same way I provided one about the SOTU. So let’s see what Congressman Ryan claims about the debt problem and what to do about it, and whether he makes any sense. This post is Part One of that examination.

We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.

The debt referred to here is the accounting construct of the national debt, or the face value of the debt instruments the Government has yet to redeem. But just why the “burden of debt” is so crushing, or even a burden at all to you and I really needs to be explained by Ryan and the other deficit hawks.

I don’t see any public debt burden on the American people at all. Why? Because a burdensome debt is one that you and I will personally have to pay back, and we just won’t ever have to pay the public debt of the US back from taxes that we are asked to pay to the Government. That is, we won’t unless Congress very stupidly decides to pay the debt by levying taxes, cutting Government spending, and running Government surpluses until it is paid.

That was done once in American history during Andrew Jackson’s Administration, when the public debt was paid. The result was that Martin Van Buren, Jackson’s successor became a one-term President, following the panic and very serious depression of 1837. A depression caused, in great part, by a shrinking of private demand caused by Government austerity, the successful pay back of the debt, and the continuing policy of balancing the budget. In addition, every sustained attempt in American history to run budget surpluses was followed by either a depression or a recession. A summary of the depressing record is here.

Congressman Ryan either believes himself, or wants you to believe, that the “crushing debt” will have to be paid for out of taxes levied on you and I. But there are a number of different ways to handle the national debt that don’t place any burden on us. First, there’s the way we’ve been handling it up to now, namely by rolling over previous debt and paying interest as it comes due. We’ll always be able to do that because a debt instrument is the functional equivalent of a savings account, and frequently those who hold USD including foreign nations have the effective choice of keeping their USD in a reserve account or buying a debt instrument. They’d rather buy the debt instruments because they earn interest. However, low the rate of interest is, it’s better than the rate they’ll get on reserves.

Can our national debt increase indefinitely? The short answer is: yes it can. The reason is that a Government like the United States with a fiat non-convertible currency, a floating exchange rate, and no debts in any other nation”s currency, has no solvency risk because it can always create money to pay its obligations. Its debt instruments are therefore nearly risk free. So, they’re a safe harbor for investors who’d rather earn a return on the USD they hold.

Second, in lieu of simply rolling over our debt and increasing it, as needed, Congress can decide to get rid of all the public debt, by simply removing its mandate forcing the Treasury to issue new debt when it deficit spends. This will require that the Treasury spend by directly marking up private sector accounts, or if it continues to spend through its Federal Reserve Accounts, Congress will have to give it authority to mark up its Federal Reserve accounts when it wants to deficit spend Congressional appropriations. If this is done, however, Treasury will be able to make all its debt payments when they become due, and most of the public debt will be gone within 10 years, except outstanding longer-term instruments.

In fact, the reason why any public debt at all exists right now is because Congress mandates that new debt be issued when the Government deficit spends. So, it’s Congress that’s been forcing the Treasury to manage the debt through the roll over method, and it is Congress’s own fault that the United States has any public debt today.

Third, another way the Treasury can pay back the national debt, if it wants to, and without increasing taxes, is for it to use coin seigniorage. Right now, Congress allows the US Mint to produce coins of arbitrary face value using Platinum. A coin with face value $One Trillion could be minted and deposited in Mint’s account at the New York Fed. The coin would be legal tender, so the Fed would have to accept the deposit and mark up the Mint’s account. The profit (the face value – the cost of making the coin) can be swept by the Treasury into its own account, and then used to mark up private sector accounts in Government spending, including repayment of debt instruments when they come due. Enough coins can be produced from time-to-time to both eliminate the gap between taxes and spending (the deficit), and also to redeem debt instruments.

So, there are least three ways to manage the public debt, two of them allowing it to be paid off, which don’t involve increasing taxes. That’s why the burden of that debt is illusory and that Ryan is telling us all a fairy tale.

What about his remark that the debt will soon eclipse our whole economy? I suppose that Ryan means that its size will soon match our annual GDP. But that’s a silly comparison, as is the debt-to-GDP ratio derived from that kind of thinking. The GDP is an annual statistic. The debt (roughly) is the accumulation of deficits since Andrew Jackson last paid it off in January of 1835. So the proper comparison, if Ryan wanted to make it, would be the national debt compared to the sum of the annual GDP since 1835. I won’t calculate that sum, but clearly the close to $14 Trillion national debt is a very, very small proportion of the GDP since that time.

To tell the truth though, neither the size of the national debt, nor the debt-to-GDP ratio are relevant to the capacity of the Government to spend either in the present, or in the future, because their size has nothing to do with the Constitutional authority of the US Government to issue currency and create money, and also has nothing to do with the solvency of the United States Government. So, not only is Ryan’s comparison inappropriate, but it’s also irrelevant to the real issue being raised which is the continued solvency of the Government.

On this current path, when my three children – who are now 6, 7, and 8 years old – are raising their own children, the Federal government will double in size, and so will the taxes they pay.

It will be roughly 20 years until Ryan’s children are raising their own children, and guess what? GDP will be between two and three times what it is now, and, as we’ve already seen there’s no reason why taxes should be any higher as a percentage of income for most people. Hopefully, the tax rates for the top 2% of the population will be far higher than they are now, and estate taxes will return to their levels in the 1950s, so that gentlemen like Congressman Ryan can begin to pay their fair share again, and the United States can once again have a wealth distribution that is more equal than the likes of Russia, China, Turkey, and Jordan.

The next generation will inherit a stagnant economy and a diminished country.

That depends on Congressman Ryan, the Republicans, President Obama, and other Democrats who think we have a deficit/debt problem, which must be treated with Government austerity. That’s a sure recipe for condemning the United States to a stagnant economy and a diminished country. How do these exponents of Hooverian crackpot economics expect the economy to grow when they are going to lower the aggregate demand provided by Government deficits? By blowing more private sector debt bubbles leading to a new collapse produced by lack of regulation and corporate account control fraud, and the further impoverishment of the American Middle Class?

Unfortunately, instead of restoring the fundamentals of economic growth, he engaged in a stimulus spending spree that not only failed to deliver on its promise to create jobs, but also plunged us even deeper into debt.

I too, think the Democrats have failed to end the recession, at least for most Americans, but I certainly don’t believe that Paul Ryan’s austerity policies would have restored “the fundamentals of economic growth.” Balanced budgets at the Federal level would only have depressed demand to such a degree that we’d be in a second Great Depression right now. Really, Ryan’s version of economic science is at the very least 100 years old. Some whiz kid! Between he and Eric Cantor, they’d have the economy flat on its back for the next 100 years.

The facts are clear: Since taking office, President Obama has signed into law spending increases of nearly 25% for domestic government agencies – an 84% increase when you include the failed stimulus.

I’d certainly like to know what Ryan considers a “domestic government agency,” because I’ve learned to distrust numbers like this. In particular, how much of this “spending” is a result of the operation of the automatic stabilizers in the safety net helping people get through the recession, created by the FIRE sector and its control frauds — spending over which the Obama Administration had no control that was also necessary, and how much of it was due to Homeland Security and its expenditures, which I’m quite sure Ryan would be opposed to cutting? In any case, numbers like the ones just above don’t mean anything, unless one thinks these expenses increase the solvency risk of the Government. Since we’ve already seen that they don’t, these “facts” of Ryan’s are of little or no importance.

All of this new government spending was sold as “investment.” Yet after two years, the unemployment rate remains above 9% and government has added over $3 trillion to our debt.

Again, the addition to debt doesn’t matter. Also, much of the new Government spending was due to the response of the automatic stabilizers to the crash of 2008, and wasn’t “sold as ‘investment’” at all. As for the stimulus package, only a relatively small part of it was justified as “investment,” as Ryan very well knows. By the time the Republicans, the Blue Dogs, and the President got through with it, the tax cuts in the package and spending geared toward maintaining the States, ate up more than half the stimulus over a two year period, and were in no way “investment.”

The stimulus itself was also only half as large as it needed to be in volume of spending to end the recession (as many asserted, including myself, at the time), and was less stimulative due to the fact that low-multiplier tax cuts were such an important component of it. So, it wasn’t any surprise to many of us that it failed to lower unemployment below 9%, or that the deficit remained high, since the primary cause of big deficits was the combination of high unemployment and the operation of the social safety net.

Congressman Ryan is a rising star in the Republican Party, and is often characterized as their foremost policy wonk and budgetary guru. But his performance in responding to the SOTU, indicates that if he’s their guru, and if the Republicans remain in charge of the House, then we’ll all be in trouble; because while Paul Ryan may be better at adding and subtracting than most of his colleagues there are very important things that he fails to understand about Macroeconomics and its relation to fiscal policy.

In particular, Congressman Ryan, seems to have no clue about the sectoral balance model of macroeconomics. One of the things that model implies is that if the US is running a negative trade balance (imports exceed exports), and the private sector needs to save to pay back debt, the Government budget deficit must be equal to the value of the trade deficit plus the value of private sector savings. If the Government tries to work against that dynamic by taking active steps to reduce that deficit as Paul Ryan and the Republicans so vigorously advocate, then the private sector is going to have to reduce its imports, its savings, or, most likely, both, because a reduced Government deficit will lessen demand in the private sector.

So, Government austerity is not going to create private sector prosperity as Ryan, and increasingly, President Obama are suggesting, but private sector privation, instead. Less private sector savings, less real wealth, and a stagnating economy. Paul Ryan may want that, but most of the rest of us don’t.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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Joseph M. Firestone, Ph.D. is Managing Director, CEO of the Knowledge Management Consortium International (KMCI), and Director and co-Instructor of KMCI’s CKIM Certificate program, as well as Director of KMCI’s synchronous, real-time Distance Learning Program. He is also CKO of Executive Information Systems, Inc. a Knowledge and Information Management Consultancy.

Joe is author or co-author of more than 150 articles, white papers, and reports, as well as the following book-length publications: Knowledge Management and Risk Management; A Business Fable, UK: Ark Group, 2008, Risk Intelligence Metrics: An Adaptive Metrics Center Industry Report, Wilmington, DE: KMCI Online Press, 2006, “Has Knowledge management been Done,” Special Issue of The Learning Organization: An International Journal, 12, no. 2, April, 2005, Enterprise Information Portals and Knowledge Management, Burlington, MA: KMCI Press/Butterworth-Heinemann, 2003; Key Issues in The New Knowledge Management, Burlington, MA: KMCI Press/Butterworth-Heinemann, 2003, and Excerpt # 1 from The Open Enterprise, Wilmington, DE: KMCI Online Press, 2003.

Joe is also developer of the web sites www.dkms.com, www.kmci.org, www.adaptivemetricscenter.com, and the blog “All Life is Problem Solving” at http://radio.weblogs.com/0135950, and http://www.kmci.org/alllifeisproblemsolving. He has taught Political Science at the Graduate and Undergraduate Levels, and has a BA from Cornell University in Government, and MA and Ph.D. degrees in Comparative Politics and International Relations from Michigan State University.

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