The Roots of America’s Worsening Debt Crisis

The alarm by a nonpartisan watchdog over America’s soaring national debt is best understood alongside, say, the Dow’s surge above 50,000 and the dollar’s plunging gold value. These extremes are symptoms of the fiat money era that was ushered in by the abandonment of the gold standard in 1971. The demise of a dollar defined as a fixed weight of gold opened the door to inflation that fuels today’s asset bubbles and the federal borrowing binge. While the record high of the Dow can be seen to reflect an inflationary “illusion of wealth,” the growth in Uncle Sam’s indebtedness is prompting talk, by the Congressional Budget Office, of impending disaster. America’s “fiscal trajectory is not sustainable,” the CBO’s director, Philip Swagel, cautions. This is in part because the borrowing, nearing $39 trillion, is coming to exceed the amount produced annually by America’s economy. By 2036, the CBO cautions, the debt held by the public will reach 120 percent of gross domestic product. That, the Times reports, “would surpass levels reached in the aftermath of World War II,” when the debt rose temporarily, and risk “a destabilizing debt crisis.” The Bipartisan Policy Center’s Jonathan Burks calls the situation “increasingly dire.” The debt is “now 100 per cent of GDP, and rather than pumping the brakes, we are accelerating.”This concern is particularly acute at a time when central banks around the world — and rivals like Communist China — are starting to look for alternatives to the greenback and Treasury debt, a trend that some are calling, as we’ve noted, “quiet-quitting” the dollar. Yet the market for federal debt, the FT reports, is “five times the size it was in 2008.” Investors, it adds, “have long been worried that the supply of Treasury debt is straining the limits of demand.”The federal profligacy has been enabled by the turn away from sound money in 1971 when President Nixon abrogated America’s pledge under Bretton Woods to redeem dollars held by foreign governments for gold at a 35th of an ounce. Freed from the discipline imposed by the need to maintain gold convertibility, the federal government loosened the fiscal restraints that had traditionally held down spending — and borrowing.At that point, the national debt held by the public stood at 26 percent of GDP. That level of indebtedness was bad enough, reflecting years of fiscal laxity brought on by LBJ’s spending on the Great Society and the conflict in Indochina. Yet in the intervening 55 years, the federal crisis of debt has come to be intertwined with the crisis of fiat money. The drop in the dollar’s value in recent weeks has lurked near a 5,000th of a gold ounce or less.Hence the need, in order to stave off a disaster of the stripe mooted by the CBO’s Mr. Swagel, to tackle comprehensively both the soaring debt and the plummeting dollar. As these columns have urged, a good first step would be forming a commission akin to the Reagan-era monetary panel that sought to chart a path back to an honest dollar coined and regulated by, per the Constitution, Congress.

The Roots of America’s Worsening Debt Crisis

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