The Sleight of Hand of Fiat Money

Treasury Secretary Bessent is downplaying the new milestone of profligacy attained by America. “There’s nothing magic about the $40 trillion number, and we can grow our way out of that,” Mr. Bessent says of the federal debt. He points to “misinformation,” blames the Biden administration, and vows that tariff revenue will next year trim the deficit. This analysis fails to factor in federal overspending, a product of our fiat money crisis.Mr. Bessent’s comments emerged amid the jitters in the markets for Treasury debt. Bond yields are rising in the context of investor fears about inflation and what Reuters calls “rising concerns over a deteriorating U.S. fiscal picture.” In an effort to calm the market, the Treasury secretary is vowing to ramp up so-called buybacks. That’s economic jargon for Uncle Sam spending cash, obtained by short-term borrowing, to repurchase its own longer-term debt.Yet these initiatives, involving billions of dollars, are a relative drop in the bucket in the $32.2 trillion market of federal debt held by the public. “They have reserved the right to increase the buyback, but I guess at some point, the markets might view that as desperation,” a managing partner at BTG Pactual Asset Management, John Fath, tells Bloomberg News. “The bottom line is that deficits are not going away.”Mr. Fath’s appraisal is hard to refute, absent a head of steam from the voters, who in recent years have appeared to be nonchalant about the surge in federal red ink. Yet the vast debt is already fueling the so-called affordability crisis, as these columns have reported, in part by making mortgages more costly. The debt is also hurting growth via what economists call “crowding out” investment, as Uncle Sam borrows money that could be used by private enterprise.Politicians and voters tend to shrug off the debt in part because of disinclination to make overdue spending reductions. Yet America’s ability to run up so much debt with, so far, so few consequences, is in large part due to the fiat money regime that was ushered in by the collapse in 1971 of the Bretton Woods system. Under Bretton Woods, dollars held by foreign governments were convertible by America into gold at the rate of a 35th of an ounce. The discipline imposed by gold convertibility helped put a brake on federal borrowing — and spending. In 1971, the national debt was $412 billion, or 35 percent of gross domestic product. Since then, the intertwined nature of the debt and monetary debacle is reflected by the dollar having plunged in value to less than a 4,500th of a gold ounce. Meanwhile the national debt, fueled by federal spending, has soared past 100 percent of America’s economic output.Viewed through that lens, Mr. Bessent speaks of “an increased focus on fiscal consolidation,” whatever that means, as a way to tame the federal budget deficit. Specifics were scant, but he suggested a task force to tackle fraud, which could cut “hundreds of billions of dollars” in wasteful spending. That could prove optimistic. Mr. Bessent, too, mentioned cutting “a lot of these programs that are being given to the states,” calling it spending that is “frittered away.”Speaker Johnson has mooted reforming the automatic cost-of-living increases on federal entitlement programs as a means to curtail the deficit. That risks punishing pensioners for the dollar’s debasement. Mr. Bessent points out that there’s no magic in the debt milestone. Reversing the red ink, though, would require a hard look at what enables the solons more easily to borrow than to spend within the nation’s means. Call it the sleight of hand of fiat money.

The Sleight of Hand of Fiat Money

The Sleight of Hand of Fiat Money

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