Put Away the Smelling Salts, the Fed Doesn’t Threaten Washington’s ‘Solvency’

Russia presently has total government debt of $190 billion. The U.S. can claim total debt somewhere north of $30 trillion.

Are the Russians “Classical” in economic thought relative to the Keynesianism that infects the U.S. political class? Stop and think before answering.

The answer to the alleged riddle about Russian and U.S. debt is kind of obvious: investors trust the economic future of the U.S. exponentially more than they do Russia’s. While debt and government spending logically do not boost economic growth, the debt disparity between the U.S. and Russia is a noisy signal that borrowing is a consequence of actual private sector growth. The U.S. Treasury can borrow in gargantuan amounts because buyers of the debt know they’ll be paid back.

This is worth keeping in mind given the popular view that central banks enable government growth. Something about central banks really and truly brings out the intensely stupid that resides within all of us. Even though central banks are a creation of government, the deep in thought routinely tell us that the politicized creations of the political class finance the spending of same.

To understand the abject absurdity of such a view, consider yet again the debt gulf between the U.S. and Russia. It’s not enormously wide because Russian politicians are parsimonious or because the Central Bank of Russia is prudent. Government spending is always and everywhere a sad consequence of real economic growth. Central banks can’t enable it. The MMT notion bruited by a clueless Left is a myth, as is the Austrian School Right’s conspiratorial view that central banks facilitate endless government expansion. The wasteful swagger of the U.S. political class is a function of the staggering wealth created by the American people, period.

Which brings us to another myth about government that is tales to the heads coin about central banks as the source government finance. Economists who likely believe the heads myth similarly buy into the laughable notion that central bank fiddling with interest rates has an impact on government solvency.

One supposes there’s nothing really surprising about this. If you believe against all evidence that central banks instigate political profligacy, why not buy into the reverse whereby central banks can take away what they’re imagined to give? Count economist Brian Riedl as one of the true believers in magic.

In a recent report for the Peter G. Peterson Foundation, Riedl made the claim that rising interest rates threaten Washington’s solvency. Apparently it’s not just members of the Left who learned all the wrong things on campus.

Lest readers forget, central banks are outsourced creations of government. To pretend then, as Riedl does, that the Fed can decree via rate machinations the level of interest Treasury will pay is just not serious. For one, no political class would ever create an entity capable of disciplining it, after which the bigger truth is that central banks do not set interest rates.

It’s sad that something so obvious must be stated, but we’re in a time when the obvious must be stated over and over again. Central planning failed in stupendous, desperate, murderous fashion in the 20^th century. When governments attempt to control property and prices, the result is shortages of everything. Please keep this in mind with interest rates top of mind.

We borrow money for what it can be exchanged for, which is a veiled way of saying that interest rates are the most important prices in a reasonably capitalist, profit-motivated world. What this hopefully signals to the half-awake is that if the Fed controlled the cost of borrowing as Riedl imagines, the U.S. economy would be so destroyed as to not rate discussion, and it certainly wouldn’t support the musings of academics focused on central banks.

Put another way, the U.S. Treasury is able to borrow at the lowest rates in the world precisely because it’s backed by the most productive people in the world. Central banking has nothing to do with it, logically. In the real world markets always and everywhere speak, and they do so loudly. To then assume that the rate decisions of individuals like Jerome Powell trump those of the world’s best investors operating in the world’s deepest markets is not remotely serious.

For good or bad, the U.S. political class can borrow in abundance because the American people produce in abundance. In other words, the only threat to U.S. solvency is the productivity of the American people. Nothing else matters.