Since Grant was Ron Paul’s choice for Fed Chair, it should be no surprise that the article reads like a Doom Paul meme in essay form:
We owe more than we can easily repay. We spend too much and borrow too much. Worse, we promise too much. We conjure dollar bills by the trillions — pull them right out of thin air. I won’t insist that this can’t go on, because it has. I only say that it will eventually stop.
Unfortunately for us, James Grant is right. The US government has grown far too large, spends way too muchand has an economy supported largely by increasingly absurd monetary policy. While these basic facts are obvious to most that follow the news, the response from the left reminds us of their never-ending war on reality:
While it’s difficult for anyone to tweet out a true critique of an article you disagree with, Jordan Weissmann’sresulting blog post indicates that he didn’t read Grant’s piece before attacking.
For example, Weismann writes that:
As a rule, it does not matter how much money a country owes if it can easily meet its interest payments. So long as that is the case, bond investors are typically happy to continue lending money, and everything goes smoothly. It’s the same way you or I can carry a mortgage or credit card balance without triggering personal financial catastrophe, and without scaring away our bank….Currently, interest on the debt only takes up about 6 percent of the federal budget. As a percentage of GDP, it is lower than any time since the 1970s. In the future, we will only have to pay down enough debt to make sure our interest payments remain sustainable, as they are today. We will never have to eliminate the whole balance.
Of course Grant addresses this very point in the article:
Debt per se is neither good nor bad, though less is usually better than more. How it’s priced and how it’s used are what tips the scales. If chocolate cake cost a penny a slice, the best of us would be tempted to break our diets. Well, government debt is priced at less than 2%, and Washington fell off the wagon years ago.
The public debt will fall due someday….In the short term, the debt would no doubt be refinanced, but at which interest rate? At 4.8%, the rate prevailing as recently as 2007, the government would pay more in interest expense — $654 billion — than it does for national defense. At a blended rate of 6.7%, the average prevailing in the 1990s, the net federal-interest bill would reach $913 billion, which very nearly equals this year’s projected outlay on Social Security.
So yes, Weismann is correct that at the current historically low interest rate, the United States has little problem in paying back the money it is owed — but there has been no serious effort by anyone in government to make the painful cuts necessary to start making a dent in the underlying debt obligations and no reason to believe that current interest rates have a never-ending shelf life.
In fact, as Ryan McMaken pointed out recently, foreign governments are already reconsidering their holdings of US securities. And this was before the threats made this past weekend by Saudi Arabia to dump US debt if Congress goes forward with a bill that would potentially make their government liable in US courts for 9/11. While it’s likely that the Federal Reserve, as the largest holder of US debt, will try to pick up the slack — this will undermine the assurances of the Fed and it’s defenders that it is not “monetizing the debt,” further undermining trust in the dollar and possibly making interest rates rise even further.
Or, to put it in a way that Matt O’Brien could understand:
The idea that the US government doesn’t have a debt problem right now is so perniciously stupid. I can’t even.