Floating currencies lead to the idea that the government can print and spend US dollars indefinitely. Indefinite overspending. Indefinite deficits. Like a college student running around with her parent's credit card at the mall, nations using fiat currencies don't know when to stop. And we know what happens when more and more of something is dumped into a system: the value of each thing gets less.

Enter our favorite government body, the Federal Reserve, or what the author Edward Griffin has famously dubbed “The Creature from Jekyll Island.” The institution of a Federal Reserve—a central bank dedicated to controlling the money and the supply of money in the American financial system—began after a financial panic in 1907. But the idea had its genesis years earlier in 1895 when the US Treasury was close to bankruptcy. There was also a financial panic in 1893. By 1895, the great financier JP Morgan struck a deal to sell his own gold reserves to the government for a favorable 30‐year bond.

Morgan in effect saved the Treasury but was going “long US economy”—he was helping to save the government, for a tidy profit, so it could remain solvent while his other business ventures played out. Smart. Good work if you can get it.

Well, he got it. In 1907, a dozen years later, there was another banking panic. J.P. Morgan again stepped in with a group of bankers to save the American government. But what could possibly go wrong when a single banker—or even a group of them—control the finances of an entire nation?

There was a theme developing that didn't sit well with the public or many politicians. It also looked like an opportunity for the banking community in New York to build a third central bank.

In November 1910, in a secret meeting at the Jekyll Island Club, off the coast of Georgia, six men—Nelson Aldrich, A. Piatt Andrew, Henry Davison, Arthur Shelton, Frank Vanderlip, and Paul Warburg—met to reform the nation's banking system. What came out of the meeting would, after a few years of intense politicking, create the Federal Reserve, a third central bank for the nation. It also would eventually establish 12 regional Federal Reserve banks—what is known today at the Federal Reserve System.

It's still astounding to economic historians that the Jekyll Island meeting and its intended purpose were kept secret. The six men who met did not even admit the meeting took place for another two decades, long after when their plan had passed through Congress; long after World War I; long after the Roaring '20s and into the Great Depression. Only then was the Jekyll Island meeting revealed.

While the outrage of having a small group of powerful bankers control the nation's finances existed, it was “solved” in a secret meeting by a small group of powerful bankers.

The Federal Reserve Act was ultimately passed in 1913 under the Wilson administration. The act established a bank to preside over the nation's money and the star of our show: the American dollar. And, by extension, the government's ability to issue debt.

TOO BIG TO FAIL?

The shock and awe of the “bailouts”—when the government covers banks' speculative bets by buying bad debt off their hands—initiated by then Secretary of the Treasury, Hank Paulson in 2008 was surprising to monetary historians.

There has been a long series of panics and bailouts in United States monetary history. We could recount the list here. We could name names. We could name conflicts. This treatise would be longer. But our cause here is only to illustrate a more simple point. We've been having the conversation about finance, economics and the markets, the currency and society, since the United States became a nation.

Why do we spend so much time worrying about our recent history? Because it matters to our own wallets. That said, there's good reason to still be anxious: government debt, the historical record of nations in debt, and the management of a fiat currency are not good. Oh yeah, there's that thing about the reserve currency of the world, too, which we will get to later.

If the history of US federal budgets—and the debts that grow out of them—tells us anything, it is this: The dollar is in it up to its eyeballs. Today's level of debt and continuing deficit spending is only the visible portion of that problem; beneath the surface, we face an unavoidable day of reckoning for our great national pastime: spending money.

In reviewing the following history, we make a distinction between deficit spending and the national debt. Many people are confused about the differences, and some, even experts, use debt and deficit interchangeably.

A debt is the total amount of money owed. A deficit is when you don't have enough money to cover your expenses for that fiscal year. Every year that the government runs a deficit adds to the national debt. For example, if the government begins the year with $5 trillion in national debt, and during the year spends $1 trillion more than it brings in in tax revenue, the government is running a deficit of $1 trillion. By the end of the year, that deficit will have increased the national debt to $6 trillion. These are, of course, quaint figures meant to illustrate the point. In 2021, the government deficit was $3.6 trillion bringing the total debt to more than $31 trillion.

Since long before Lord Keynes opened his mouth in the 1930s, the attitude in Washington and among academics has been that we don't really have to ever repay debt. It can be carried indefinitely for future generations to worry about. Most today would claim that debt doesn't matter or even that it is a wise policy to spend more than you bring in. The mind boggles.

Early on in US history, we Americans learned from our British ancestors that empires could be built on a foundation of debt—and continued indefinitely. In the early part of the eighteenth century, Sir Robert Walpole introduced an innovative system for financing Britain's colonial expansion and ever‐growing military might. Government, Walpole demonstrated, is able to create a revenue stream by issuing bonds and other debt instruments. The interest is paid regularly, and eventually, upon maturity, the face value is paid off—and for every maturing bond, a new one is issued. This simple method for the expansion of revenue through debt was the venue by which Britain built its empire, from the 1720s through the next 100 years. Among those who observed this phenomenon of endless debt financing was the first secretary of the Treasury of the United States, Alexander Hamilton.

In the early days of the American nation, a host of fiscal problems faced Hamilton and the other Founding Fathers. The War for Independence left a large debt; there was no unified currency, and each state issued its own money; the currency itself was of dubious value; and inflation made it difficult to imagine how the young nation would even survive. Hamilton's view was that growth and expansion would be possible with the use of debt:

Hamilton's rationale for a perpetual public debt included his belief that it would help keep up taxes and preserve the collection apparatus. He believed Americans inclined toward laziness and needed to be taxed to prod them to work harder.¹

Not everyone agreed. In Thomas Jefferson's view,

It was unjust and unrepublican for one generation of a nation to encumber the next with the obligation to discharge the debts of the first. After all, the following generation cannot have given their consent to decisions made by their fathers, nor will they have necessarily benefited from the deficit expenditures.²

During the nineteenth century, American debt did not grow substantially. When Jefferson began his first presidential term in 1801, the nation had an $83 million debt, mostly left over from the costs of the war. During his two terms, Jefferson reduced the debt to $37 million even after spending $15 million on the Louisiana Purchase. The early stewards of the nation's money were at least conscientious of the value it brought to citizens.

It wasn't until 1965 that politicians started spending on political promises so aggressively, that the value of the dollar—the amount of goods and services you could buy with each one—took a precipitous turn. The demise accelerated in 1971.

Using the official CPI data calculator,³ it's easy to see what happened to the value of the dollar in the presence of political values. What it took to earn a living and raise a family, run a farm, maybe send kids to school, was relatively stable for a little more than 150 years. Then politicians learned they could promise the national bounty in exchange for votes. It's not Washington or Wall Street who get strong‐armed by the demise of the dollar; it's everyday Americans who are trying to make ends meet.

For a couple periods in the ensuing history, most notably in 1838 and 1898, then again briefly in 1929, the purchasing power of the dollar rose. Since Bretton Woods in 1944 and the end of World War II, the US dollar hasn't been able to buy as much as it did the year before.

BACK TO THE FUTURE

In James Madison's term of office, the ill‐fated War of 1812 ran the national debt up to $127 million by 1816. James Monroe and John Quincy Adams were both able to reduce the debt during their terms of office, and by 1829 the debt had fallen to $58 million. And then, during Andrew Jackson's presidency, the national debt was entirely paid off. For the first and only time in its history (and the last) the United States had no national debt.

Unfortunately, the attention to deficits disorder began soon after. And never went away. It's a progressive condition, meaning once it starts, it's hard to stop. By the modern era in which we're writing, it has become a full blown psychosis. During the early part of the country's history, presidents and Congress saw it as their duty to either balance the books or at least pay off debt incurred for defense or expansion of the national boundaries. (Where are these people today, one wants to ask in the most cynical way possible?)

Over the decade following Madison, the country ran up $46 million in new debt, and by 1848 the national debt had risen to $63 million. However, in all fairness, one advantage of this was that the Mexican War resulted in US expansion all the way to the Pacific and the acquisition of the entire Southwest, including California. Under the Franklin Pierce administration, the debt was paid down to $28 million, but it never got that low again.

The Civil War exploded the national debt up to $2.8 billion, or 100 times higher than it had been in 1857. Debt in 1860 was $2 per capita; at the end of 1865, per capita debt was $75. The temporary tax measures in place during the war were repealed, and by the end of the nineteenth century the debt had been reduced to $1.2 billion, less than half of its 1865 level.⁴

Given the vast expansion of US territory and the wars the country fought to create and then hold together the United States, this does not seem a large debt level. In fact, in its first 110 years of history, the United States had shown its ability to fund expansion while reducing debt over time. And this was accomplished without an income tax. In fact, in 1869 and again in 1895, the Supreme Court ruled federal income taxes unconstitutional.

The story was quite different in the twentieth century. By the end of World War I, the national debt had risen to $26 billion. Even though the debt level had been reduced over the next decade, the Great Depression caused further deficit spending, and FDR's New Deal tripled debt levels up to $72 billion.

World War II created yet higher debt levels. By 1945, the country owed $260 billion—small by today's standards but gargantuan in its time. One outgrowth of that war was a new one, the Cold War. Military spending took the national debt up to $930 billion by 1980, and under Ronald Reagan's administration it rose to nearly $2.7 trillion. Ten years later, after Bill Clinton's eight years, the debt more than doubled to $5.6 trillion. In other words, the national debt was already growing exponentially.

There are always political justifications. For Reagan it was the Cold War. Clinton rearranged some numbers, and it looked like the United States was on its way to a decline in the rate at which the debt was increasing. Then came 9/11 and the War on Terror. Globalization and a new competitive international market gave its incentive. All the while, the levels of debt kept setting new records, virtually on a month‐to‐month basis. In 2005, the US debt was already growing at a rate of $1.4 billion a day on the first edition of this book, more than $1 million a minute; “the most famous debt clock in the country,” we wrote at the time, “located on Times Square in New York City, will become obsolete once it hits the $10 trillion mark.”

Ten trillion dollars now seems like a quaint figure.⁵

Our political class's incapacity to pay attention to deficits has propelled us beyond $31 trillion as of December 2022. Of course, we had the pandemic to help justify this latest acceleration in spending and debt accumulation.

I still love the following comments, issued in a joint October 2007 statement by Henry Paulson, the secretary of the US Treasury, and Jim Nussle, the director of the administration's Office of Management and Budget. Paulson: “This year's budget results demonstrate the remarkable strength of the US economy. This strength has translated into record‐breaking revenues flowing into the US Treasury and a continued decline in the federal budget deficit.”

True, but we still have annual deficits. Even more massive ones now. And the ensuing, prevailing, mindset from 2008 through 2020 (the pandemic year) didn't change anything. Debt has become institutionalized. While citizens may be concerned, government—including both the elected representatives and those who remain year after year in the growing bureaucracy—are inoculated to annual deficits and the skyrocketing national debt.

In 2007, Nussle continued back: “Our short‐term budget outlook is improving, but beyond the horizon is a huge budgetary challenge—the unsustainable growth in Social Security, Medicare, and Medicaid; … for the sake of our children and grandchildren, Congress should begin to take action to prevent this fiscal train wreck.” They did the opposite. For years. Who gets held accountable? Virtually and realistically, no one.

DEBT AND SPENDING ABOVE OUR MEANS

Why does the government need to spend more than it takes in? After all, in most of the nineteenth century there were no income taxes, except during the Civil War. And the debts the nation incurred were paid down time and again. Even by 1900 the debt level was manageable. Not so today. Not even close.

So what are the root causes of deficit spending and the resulting debt?

In short, debt itself has become institutionalized. Today, many people simply accept as a fact of life that the national debt is unimaginably high. There aren't too many people alive who have lived in a time when it wasn't.

The problem, though, is that we cannot continue the exponential expansion of debt without a catastrophic economic outcome. And it isn't just the stated trillions of dollars of official debt. If you add in the obligations of the US government under Medicare and Social Security, the real overall debt is many times higher than the 2007 level of more than $9 trillion. The real debt in 2007 was estimated at almost six times higher, about $53 trillion.⁶ Other estimates are that such “mandatory spending programs … actually inflate the national debt by a factor of 10.”⁷

“How much is $53 trillion?” we asked 15 years ago. “It is difficult to imagine,” we tried to answer. “A stack of $100 bills would be about five feet high to reach $1 million. A $1 billion stack would be one mile high, and a $1 trillion stack would be 1,000 miles high. So $53 trillion would equal 53,000 miles of tightly stacked $100 bills, which would reach around the earth more than twice!”

That was astounding when we wrote it the first time. Fast forward to December 2022, the unfunded liabilities of the US government are now estimated to be nearly $148 trillion—nearly three times as much. So using basic math, we could now circle the earth six times with a mammoth, gargantuan, ridiculously large stack of $100 bills.

And that is one huge problem with explaining the severity of US debt levels is that the real scope of the problem is beyond imagination. And since we mostly use digits on computers now, rather than paper bills, the analogy is practically moot. We're beyond imagining what a real hole we've dug ourselves into.

The situation we have seen growing throughout the twentieth century, since the founding of the Federal Reserve, is going to come home to roost in our future. Historically, it's just a fact. Policy makers and career politicians seem to actually believe they can beat 5,000 years of human history.

A FAIRY‐TALE ECONOMY

During the Clinton administration, when the government boasted of “budget surpluses,” there really was no surplus at all. Even if we confine the discussion to the stated debt, we realize that in the eight years from 1992 to 2000, the debt rose from $4.065 trillion to $5.674 trillion. The claimed surpluses, or what one scholar has called a “surplus hoax,” were achieved through a little trickery:

Imagine a corporation suffering losses and being deep in debt. In order to boost its stock prices and the bonuses of its officers, the corporation quietly borrows funds in the bond market and uses them not only to cover its losses but also to retire some corporate stock and thereby bid up its price. And imagine the management boasting of profits and surpluses. But that's what the Clinton administration has been doing with alacrity and brazenness. It suffers sizable budget deficits, increasing the national debt by hundreds of billions of dollars, but uses trust funds to meet expenditures and then boasts of surpluses, which excites the spending predilection of politicians in both parties.⁸

In the Clinton years, the administration churned obligations through short‐term debt in the hope that interest rates would not increase. At the same time, the Congressional Budget Office estimated that federal spending for Social Security and Medicare would grow from 7.5% of gross domestic product (GDP) in 1999 up to 16.7% by 2040.⁹ So the claim of budget surpluses was disingenuous not only insofar as it described the nominal national debt but also because it ignored the reality of ever‐larger long‐term obligations under government programs.

Clinton‐era Treasury Secretary Robert Rubin's scheme was continued in a sense by Treasury head Paul O'Neill in the administration of George W. Bush. (This fiscal philosophy came to be known sarcastically as “Rubinomics.”) By 2002, it was clear that neither party had any serious intention of respecting a debt ceiling. Although such a ceiling exists, it is constantly revised by Congress as the debt continues its upward acceleration unchecked. In fact, since 1960 the debt ceiling has been raised 78 times. One wonders why they bother calling it a “ceiling” at all.¹⁰

The post‐9/11 imperative to fight the War on Terror—coupled with a stated desire to jump‐start the economy—led President Bush to present ever‐higher budgets while insisting on tax cuts. Were these initiatives accompanied by a serious reduction in government itself, it would make sense; otherwise, we are left with ever‐higher budgets in which spending is invariably higher than revenues. It has become clear that both parties and the entire federal government reside in their own economic cloud‐cuckoo‐land.¹¹

Ironically, the Federal Reserve's attempts to stimulate the economy via ever‐lower interest rates led to a huge expansion in credit, both among consumers and in government. So we ended up with a mortgage bubble in addition to the other economic bubbles brought about by debt‐based economic expansion. As housing prices grew nationally by 5% to 7% per year, consumers continually refinanced to remove equity at lower and lower rates, further fueling the bubble.

The official position concerning economic expansion ignored the reality. Then‐Fed Chairman Alan Greenspan repeatedly pointed to high levels of consumer spending as evidence of a strong economy. This ignored the basic economic principle that makes a distinction between productive and consumptive debt. An example of productive debt is investment in plant and machinery, which leads to higher and more competitive manufacturing—a type of activity that is falling in the United States, not rising.

Economists recognize that productive debt leads to permanent and long‐term economic growth. In contrast, consumptive debt—which is the modern basis for the economic “recovery” pointed to often by the Fed and the Bush administration—is spending to purchase material goods. The spending does not go into savings or investment; it merely involves buying more stuff. And the modern form of consumptive debt is based on growing levels of credit card and mortgage debt. The consumer‐based credit problem mirrors the national debt (and longer‐term national obligation) problem. It is growing.

In the past, conservative politicians stood for balanced budgets and fiscal responsibility—or at least that was the claim. But beginning with the Reagan years, the concept of lower taxes as a generator of higher revenues, what Bush senior once termed “voodoo economics,” became the new rule. Reagan ran on the promise of smaller government, spending cuts, and balanced budgets. But in Reagan's very first year in office, in 1981, he asked Congress to increase the statutory debt limit above $1 trillion. Argued for as a one‐time measure needed to bring the economic house into line, this departure opened up a new era; and now, a quarter century later, we find ourselves at nine times the $1 trillion “magic number” of the pre‐Reagan debt ceiling. The inane argument offered up by Professor Abba Lerner in the 1930s, and also repeated in many other economic textbooks, is that there is nothing wrong with a national debt because “we owe it to ourselves”¹² demonstrates the twisted thinking used to justify current policies. It is the same thing as saying it is all right as consumers to pile on mortgage debt on our homes because “we owe it to ourselves” in the sense that it is our equity. Astute homeowners would not accept such a vacuous argument, and yet it is offered with a straight face by some economists concerning the national debt.

Another justification is often put forth that the US “net worth” justifies ever‐higher debt levels. In other words, as long as our assets are higher than our liabilities, a large national debt is no problem.

Vast land holdings via national parks and preserves, government buildings, and other valuable assets, for example, are cited as examples that we have nothing to worry about. We get that there is a bounty in the land. But under current administrative law that bounty is owned by the government and subject to political will.

The argument fails on the merits. On corporate balance sheets, one justification for growing debt would be that it enables the expansion of markets and capital assets. But let us not forget that the federal government produces nothing. The debt may go partially for necessities or entitlements that large segments of the population want to continue, but the debt itself is not an example of productive debt. So the arguments that it's okay because (1) we owe it to ourselves or (2) our assets are greater than our liabilities are both false justifications for a problem that, ultimately, may define the collapse of the entire US economy. Who's ready for that?

In fact, we don't “owe it to ourselves.” The phrase itself became popular in the mid‐2000s when public debt was still being debated in public. “We owe it to ourselves” implies that the United States economy exists independent of the globally connected economy we all depend on. Alas, Congress doesn't even debate public debt anymore, except when the debt ceiling debate comes up and the parties have to shirk and say something like, “Yeah, but if we don't agree the government will be shut down,” and their gravy trains will also shrivel up and become inedible.

The real fact is, the portion of the national debt held by foreign central banks grows month after month, and in the near future a majority of the stated debt will be held overseas. And let me repeat again what is becoming the mantra of this third edition: the more you run up in the system, the less each individual dollar is worth.

It was true when we wrote the first edition of Demise of the Dollar; it's even more true now. At the end of 2006, the amount of our debt held by foreigners had increased by $463.9 billion during the year, to $2.7 trillion. That's 46% of the national debt at the time—up from 44% in 2005. Two percentage points in a year was a very big deal then. By 2021, just the top three countries holding US debt—Japan, China, and the United Kingdom—totaled more than $2.8 trillion. The next 10 countries on the list from Luxembourg to India account for another $2.8 trillion. That brings the total among the top 13 holders of US debt to $5.6 trillion.¹³ (This will be an important point to keep in mind when we discuss the dollar's role as the “reserve currency” of the global economy.)

Economists enjoy comparing government debt to entrepreneurial debt. In 2008, we observed “the highly leveraged business owner Donald Trump has suffered financial reversals and even the bankruptcy of his casino empire; but at least he provides jobs, construction activity, and commerce for thousands of people. His debt, while leveraged, is an example of productive debt.”

GOOD DEBT VERSUS BAD DEBT

In spite of the long‐standing belief that people in debt are habitually poor and creditors are habitually rich, it's often the other way around. In fact, in business the more successful entrepreneurs are often also the most in debt (but productive debt). This has no comparison to government debt, which—again, it may be classified as necessary or even contractual with the people receiving entitlements—is not a form of productive debt. As long as Congress has the attitude that higher revenues (even if artificial) open the door to higher spending levels, this economic promiscuity is not likely to end, at least not until the end is imposed upon Congress, and upon the people.

Government spending is not productive for two reasons. As explained earlier, the government produces nothing in the form of investment or capital assets. But in addition, it generates no revenues. It finances its own growth and expansion in three ways. First is tax revenue, or taking of money from people, corporations, and imports. Second is inflation, a system under which debt literally loses value and can be repaid with depreciated dollars. Third is debt itself, an expansion of the system that has no end until an end is imposed upon the government. The trouble with the third item is the government must impose the limits on itself. You may be aware that every few years Congress has to vote to increase the “debt ceiling” or it will run out of funding for its own operations. They make a big deal out of it on the floor of the House of Representatives and in the media, but invariably both parties want to increase the debt ceiling and vote to do so.

In the nineteenth century, a series of presidents took debt seriously and, other than in periods of war, diligently paid down the national debt. It may be coincidental, but that all changed at about the same time that the federal income tax was imposed. After repeated decisions by the US Supreme Court that the federal tax was unconstitutional, the Court finally accepted the tax in 1913. Since then, deficit spending has become the rule and balanced budgets the exception. The concept of actually paying down the debt is an oddity. The even more distant idea of eliminating the federal debt is viewed as unrealistic, even un‐American. But we should recall the warning provided 250 years ago by Adam Smith:

It is the highest impertinence and presumption … in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense.¹⁴

The chosen path of the United States, in spite of Smith's wise warning, was to come to view the national debt as a “national blessing.”¹⁵ Well, an unbridled spending program may indeed be viewed as a national blessing by those in Congress and among economists who justify debt levels by classifying the debt as productive debt. But any honest study of how and where government spending occurs would have to conclude that the undisciplined growth of the debt is anything but productive.

While the national debt ebbs and grows with wars and pandemics, it's currently at its highest percentage of GDP since 1946, just after World War II. They call this the debt‐to‐GDP ratio. But in our current political environment, there's little appetite, or resources, for paying it down as was done following the war. Loads of people in government believe, perhaps sincerely, that deficit spending is a positive force, that it works to improve the economy. As we've shown, it's been going on for generations. The idea is taught in colleges and universities. Students leave believing there are no lasting negative consequences. And why should they?

Congress appears either to agree with this point of view, or to go along with it, in the interest of spending ever higher levels of public money. It's public money. Which means it has to be raised from taxes. Even though often expressed as a joke, we should view Congress in light of this now famous congressman's comment,

I've had a tough time learning how to act like a congressman. Today I accidentally spent some of my own money.¹⁶

One of the most destructive facts—and one obstructing any reform of the problem—is that those in Congress do not think about public money as real money. There exists an intentional self‐imposed disconnect between what Congress spends and who pays for it.

Because the House of Representatives create the spending initiatives, there is no will among those elected to change the rules.

Complicating the dialogue is the never‐ending class warfare surrounding government spending and tax policy itself. Republicans claim that tax cuts stimulate growth and improve the jobs situation, thus improving the economy overall. Democrats criticize the “huge tax cuts for the rich” as a burden on less fortunate Americans. Both arguments are flawed in some degree, but the appeal is made to distinct voting blocs. Class warfare based on envy and resentment does nothing to improve the understanding of the problem among the people; in fact, arguments made with a political bias only close the door to any meaningful education or discussion of the problem—ever‐higher debt (of both the public and the government), trade deficits, and numerous economic bubbles.

In the final analysis, it does not matter whether we raise or lower taxes if spending outpaces revenue. Higher taxes affect consumers, creators, business owners, and investors. Higher government spending that consistently outpaces its own tax revenues does greater damage in the long term. Anyone with common sense can see the system is unsustainable. No one is saying the folks who are making these decisions are stupid or unable to understand. The perversion of their own self‐interest is what's at stake. To survive politically, they must comply. I believe, if you asked any member of the House or Senate if they agree with the way allocations of public funds are distributed they'd say, “No, I don't agree.” And yet, each spending bill makes its way through. Tit for tat. My plan, for yours. The cost goes up. And then it goes up again. And again.

Here's the problem: The Representatives and Senators don't pay for any bills they propose. You and I do.

And yet, somehow, especially since Donald Trump entered the political fray, we think the system of lobbying and influence in Washington can be fixed. We think the “revolving door” between Wall Street and Washington will, what, suddenly not happen in the next administration, the next generation? Influence is what it is. Mind you, I have written on several occasions, the worst thing Donald Trump did in his career was get into politics; he made people care about politics again.

The result is clear. The value of the dollar is undermined when the government spends beyond its means. While these differences may be obvious to many, one Congressional report did a good job of comparing the two, in respect not only to their attributes but also to the economic consequences and ramifications involved. Pointing out that an individual is able to offset deficits by working harder, spending less, or applying for a temporary loan, the report notes:

In contrast, government revenue comes mainly from taxes, which are compulsory. When government increases its revenue by increasing its tax collections, there is no presumption that people will be better off.

They may not want to give more of their income to the government. Therefore, closing a budget deficit by raising more revenue does not necessarily make the economy grow; it can discourage growth by making leisure time and other untaxed activity relatively more attractive. Raising tax rates, or keeping them higher than they need be, increases what economists call the “deadweight loss” or “excess burden” of taxation—income that is not transferred from taxpayers to government, but is simply lost because excessive taxation reduces economic growth by inducing people to behave less productively.¹⁷

This observation is true, but it refers to only part of the problem. History has demonstrated that tax policy does not help eliminate deficits. Increased taxes have not closed budget deficits, but have only inspired Congress to spend more; and reductions in the tax rate have one of two outcomes, depending on which side you believe: Either these lower taxes only add to the deficit, or the resulting “trickle‐down” revenues—again—result in higher annual budgets and the resulting higher deficits.

What if we didn't think of the Federal Reserve and the government as the beginning and the end of economic activity? That might change things a little. Alas!

A recurring argument in all of this debate over taxes and the national debt is that deficit spending actually helps the economy through stimulus. We saw this in spades with the direct stimulus checks to individuals or households during the government‐mandated lockdowns beginning in March 2020. In fact, the government has come to view its role in the economy as a driving force that can and should take steps to fix recessions or to curb inflation. In times of recession, the proposal to increase government spending is invariably argued as a method for fixing the problem.¹⁸

What do we say now of post‐pandemic lockdowns? Of inflation after increasing the money supply? After a decade of interest rates at zero or in some cases negative levels? What about Fed policy when it declares it has to slay inflation…that it caused? What are we to make of their press conferences and the Fed minutes that get released?

The argument defies logic. Especially in a free society. Governments produce nothing. Governments doesn't make anything. They don't make goods or move them on rail lines or produce energy. They don't grow food or make cool sports shoes. They don't grow or distribute coffee. You get the point. There is no logical way that increased spending for government services would have any positive effect on the economy.

The one thing the government has, by law, is the power to enforce contracts. It has a role in protecting its citizens, from threats internal and external. Government has a role in helping to encourage and supporting economic exchange among a free people. Today, however, government is used as a tool to regulate and prohibit the economy from flourishing based on the special interests of those who pull the strings. Our political process is not so much a debate on who gets to run the government efficiently, but rather who gets to divide the spoils.

Were the argument made to increase investment in manufacturing plants and equipment, provide incentives to higher savings, or actually reduce government deficit spending, it might make sense. But claiming that higher spending on the part of government would fix an economic recession is like claiming that the best way to put out a fire is to pour gasoline on a burning house.

There are situations in which deficit spending has a positive impact on the economy, but such instances are limited, to say the least. When such spending reallocates resources from less productive use and into more productive use, it is conceivable that deficit spending would improve a weak economy. But as a general observation, government spending has the opposite effect, reallocating resources from more productive use and into less productive use.¹⁹

The problem with using taxing policy in an attempt to control the economy has historically been ineffective. This may be true in part because tax policy has so often been used to reward or punish, to feed into the class warfare and resentment we see in different voting groups. Tax policy has done more to widen the gap between classes than any other force in US history. The problem goes beyond the arrogance to believe that the economy can be tinkered with, as though a simple adjustment of the tax thermostat is all it takes to fix the problem.

Tax policy is far more complex, and the consequences of changes in policy invariably belie even the best of intentions. This inevitability was explained more than 150 years ago by Senator John C. Calhoun, who stated:

On all articles on which duties can be imposed, there is a point in the rate of duties which may be called the maximum point of revenue—that is, a point at which the greatest amount of revenue would be raised. If it be elevated above that, the importation of the article would fall off more rapidly than the duty would be raised; and, if depressed below it, the reverse effect would follow: that is, the duty would decrease more rapidly than the importation would increase.²⁰

Although Calhoun was arguing about a tariff bill, the same point applies to the income taxes; the difficulty is in identifying the “maximum point of revenue.” That varies depending on the political party in power, the desired voting bloc to which the speaker is appealing, and the economic perception in play. It appears evident that the point resides somewhere around a 20% effective tax rate. Above that level, individual behavior erodes economic performance and, thus, revenues.²¹

The point is, the government can't control the economy through tax policy or any other policy—a lesson the government, a body of representatives with contrary incentives, has yet to learn. And frankly may never learn. Most, in my opinion, care more about getting re‐elected than representing their constituents. The incentives are completely misaligned. It's an age old conundrum, but worth understanding.

The recent economic history of the United States has been based on the premise that government initiatives can (and should) affect and even alter the course of the economy. Looking back, we see a clear distinction between the eras in US history. From 1789 through 1912, government appeared to understand that the economy operated independently from government. In fact, as national debts were accumulated (as during the Revolutionary War, the War of 1812, and the Civil War), subsequent administrations paid those debts down. The presidents during those first 125 years or so took their responsibilities seriously and recognized the real nature of the national debt.

Government does hold the power to finance its various programs, and even wars, through building up national debt. But that debt—at least during the first 125 years of US history—was not viewed as a permanent fixture in the US economy. Rather, the view appears to have been that debts accumulated in one period must be reduced or paid off in another.

From 1913 forward, we entered a different phase. Beginning with the three major changes that occurred that year (passage of Owen‐Glass Act, which created the Federal Reserve System; the Seventh Amendment, which eliminated state legislature election of senators;²² and creation of the federal income tax), the whole view toward the economy and the government's role changed once and for all. Monetary policy was no longer viewed as an adjunct of government's economic role; it became a primary tool in the control over the pace and direction of the economy itself. Government became the economic god in the twentieth century, and monetary and tax policy was available to reward allies and to punish enemies. To me, that's contrary to a well‐run republic.

With this new direction—used quite specifically by Presidents Wilson, Roosevelt, Nixon, and Clinton, for example—the line between economic policy and political incentive grew ever less distinct. Today, we see no line whatsoever. Economic and monetary policies are debated along party lines for the most part, with both sides pushed further apart as the political debate heats up and as the next election cycle approaches.

The fallout from this nearly 100 years of monetary adventurism has no end in sight. We've lived with an income tax for nearly 100 years, but our national debt is higher than ever; in fact, it is higher than anyone could have imagined in 1913. Is there a connection? Clearly, there is. The nature of government is to spend more than it receives, and as the income tax has become an institution in the United States, government spending has consistently outpaced revenues. Prior to 1913, debts came and went, but importantly, they went. Presidents and Congress did not overspend because the revenues simply were not available, so the lack of an income tax made it impossible to accelerate the debt problem.

Today, when the gold standard is but a distant memory, it has become possible for the United States and the Federal Reserve to authorize reduced interest rates and increased deficit spending.

If we look back to the decisions made during the Nixon administration, two forces were at work. First was inflation, a chronic problem Nixon tried to fix with wage and price controls and import tariffs. Second was the overprinting of money that led to the risk of a run on gold—the so‐called international margin call. Nixon's solution was simply to remove the United States from the gold standard and allow unending printing of money.

It is the printing of unpegged fiat money that led to yet more inflation. In more recent years, government and the Federal Reserve have figured out how to make it look as though no inflation is taking place. Low interest rates equal no inflation, right? According to the Federal Reserve, low rates are good for the economy. But by definition, inflation means a loss of spending power. That can be viewed as one of two outcomes: higher prices or less purchasing power for our dollars.

As we measure inflation, it is elusive. The consumer price index (CPI) includes many components—food, durable goods, housing, fuel, and more. Often, as one price sector rises, another falls. On balance, we have a published rate of inflation that is supposed to explain how our dollar buys more or less. A shortfall between wages and prices means a loss of spending power, under traditional definitions. But if we measure the dollar against the euro, we get a more realistic view of inflation. In fact, as more and more fiat money is printed, we continue to lose spending power, which is most accurately measured against other currencies.

Among the changes that followed Nixon's 1971 decision was a change in the way that government debt was financed. Deficit finance bonds are sold through the financial markets to private investors. Of course, “private investors” does not limit the market to mutual funds or individuals in the United States; overseas central banks are included as well. The bond market exploded as a result of this change. In 1970, less than $1 trillion in bonds were issued. By 2006, the volume grew to $45 trillion.²³

The change has, effectively, made price inflation invisible in the US landscape. Author Peter Warburton has summarized this problem:

Periodic bouts of price inflation, the tell‐tale signs of a long‐standing debt addiction, have all but vanished. The central banks, as financial physicians, seem to have effected a cure… . Few have bothered to ask how the central banks have accomplished this feat, one which has proven elusive for more than 20 years. As long as inflation is absent, who really cares exactly what the central banks have been up to?²⁴

It is naive to believe—or to act upon the assumption—that prices of goods will naturally or automatically change based on the supply of money in circulation. (In other words, today's goods cost $1 to produce and sell for $2 retail; so if currency in circulation increases, costs rise to $2 and the retail price goes up to $4.) In fact, this is not how inflation works. Even so, it would seem that the US government and the Federal Reserve believe this to be the case. A weak dollar diminishes the economic impact of the national debt and trade surplus, so that is a good thing, is it not?

Even if we were to accept the flawed premise dictating that changes in the money supply can, by association, affect prices, it makes no sense that this presumption also makes it acceptable to grow trade deficits and the national debt to higher and higher levels. The belief requires us to accept another premise: that we can solve all economic problems and shortfalls by continuing to print more and more money.

Many economists have had the uncomfortable suspicion for some time now that the US government is playing the game of interest rate arbitrage, a practice begun under the Clinton administration and a cornerstone of Rubinomics. This “carry trade” involves selling low‐yielding, short‐term Treasury bills and using the money to buy much higher‐yielding, longer‐term notes and bonds. In other words, the concept involves using US debt to profit from the differences between the debt tiers. Even if this worked, it would not justify the endless printing of more currency.

So the two practices—operating on the assumption that currency in circulation controls prices, and promoting interest rate arbitrage—are part of US economic policy. The Achilles' heel of such a plan (even if we accept the underlying premises of each side) is that as long as the United States continues to accumulate annual deficits (as well as trade surpluses and other economic bubbles), the US dollar will continue to weaken. This real inflation may not have an immediate impact on consumer prices across the board, but its ramifications are certainly felt in both equity and debt investment markets. Lower yields reflect not only historically low interest rates, but a growing recognition in the markets that the dollar's purchasing power is falling. In a very real sense, a decline in investment values reflects the inflationary spiral. Our modern variety of inflation is seen not in prices and wages directly as in the Nixon years, but in stock and bond prices.

During the ill‐fated 1972 campaign of George McGovern—double‐digit points behind Nixon in the weeks before election day—the candidate made an attempt to swing the mood in his favor. He promised $1,000 to every American man, woman, and child. But failing to articulate how he would pay for this, how much it would cost, or what it was meant to accomplish, the idea only increased Nixon's lead. Voters instinctively recognized that the proposal was a lame one. Were we to increase everyone's bank account by $1,000, we would inevitably see inflation as an offset, either in higher prices or in reduced purchasing power of the dollar. The electorate didn't buy McGovern's plan then, but, ironically, a similar approach to the economy permeates government and Federal Reserve policy today. The unlimited printing of fiat money enabled us to think that we would expand and grow forever, in a credit and debt bubble without end.

“Household net worth may not continue to rise relative to income,” Alan Greenspan admitted on a book tour early in 2005, “and some reversal in that ratio is not out of the question. If that were to occur, households would probably perceive the need to save more out of current income; the personal savings rate would accordingly rise, and consumer spending would slow.”²⁵

Was he ever wrong. The exact opposite happened: Personal savings fell below zero, while consumer spending increased. The impact took the air out of the subprime mortgage and credit bubbles.

In the third quarter of 2007, the Mortgage Bankers Association reported that the number of Americans who fell behind on their mortgage payments rose to a 20‐year high. An incredible 5.59% of all home loans in the United States were at least 30 days late on one or more monthly payments—the worst delinquency rate since 1986—and one in every five subprime adjustable‐rate mortgages suffered a late payment.

Does the Fed have a solution? Sure—but it's only for a chosen few: about 145,000 to 240,000 borrowers who began facing rate resets beginning in the third quarter of 2007. Bernanke estimated that 450,000 borrowers will face the music every month, so we're talking 2.3 million by the end of 2008. Meanwhile, the ratings agencies keep lowering the boom on the mortgage‐backed assets or securities that funded these mortgages. The count is now somewhere in the neighborhood of a thousand bonds and securities that have been downgraded—and we're not done yet.

Like Greenspan, Bernanke also bemoans the possibility of slower production and profits among American companies as though that trend were separate from the Fed's monetary policies. In November 2007, the Institute for Supply Management (ISM) reported that US manufacturing grew at its slowest pace in 10 months, 50.8 (once that measure falls to 50, ISM considers the sector to be in “contraction”). The service sector—where ISM considers 80% of the economy to lie, by the way—didn't do well, either: The index fell to 54.1 from October's 55.8, making November the worst month since March. (Until, that is, January of 2008, when it fell to 41.) In fact, a corporate trend toward soft or falling profits accompanied a business trend—starting in the 1980s—away from investment in tangible assets and more toward speculation. We know now that much of the reportedly spectacular corporate growth of the 1990s was the result not of profitable growth, but of accounting manipulation.

DEBT ON STEROIDS

The ill‐conceived concept that executive compensation should be based on reported profits only invited the kind of abuses everyone saw in corporations like Enron and Tyco, and even among accounting firms like Arthur Andersen. They also opened the door to strange episodes of fraud like the FTX crypto exchange, which declared bankruptcy on November 11, 2022, after having achieved a market cap of $35 billion. Do these episodes simply elicit the mood, both corporate and economic? Or was the phony growth created out of pure greed? In the case of the FTX, there was little corporate governance. And they were colluding with another firm also founded by the CEO Sam Bankman‐Fried to trade in FTX's own crypto currency, FTT.²⁶

These are troubling questions. Without any doubt, the corporate deceptions that took place throughout the 1990s, during the mortgage‐backed securities scam that brought down Lehman Brothers in 2008 and the cryptocurrency crisis in 2022, all created a “phony recovery” that only papers over the truth. Of course, a lot of greed was involved. But on a larger scale, this corporate deception went hand in hand with the Fed policies Greenspan, Bernanke, and Yellen promoted throughout their tenures at the helm of the Federal Reserve. The 1990s asset bubble had a huge impact on the economy of the time, and consumers paid the price. We did not have a strong economy during that period, but government and corporate America went to great pains to make it look as though we did. That trend continued through the tech bubble in the early 2000s, through the bailout period that followed the financial panic of 2008, and all the way up to the lockdowns of the pandemic.

To appreciate the impact of this fake economic strength, we have to consider four distinct features: changes in the trend moving away from investment and toward consumption, profitability, the trade balance, and growth of debt.

One day we hear about consumer debt, and on another we're told that savings rates are falling. But most people don't know how this affects them or the purchasing power of their dollar. With ever‐expanding consumption, savings rates are down below zero of disposable income. And for all the money Americans accumulate on credit cards and higher mortgage debt, the federal government budget deficit is expanding at an even greater rate.

The warnings given out in the 1990s pale in comparison to the bigger bubbles we face now. A large portion of newly created credit flows into the financial markets, you know, lenders who, through mortgages, credit cards, and lines of credit—all those solicitations you get in the mail—collect interest on this rising consumer debt. On one side, as the debt rises, so do the revenues from interest within those financial markets. On the other, when debts default, revenues evaporate, as we saw from massive write‐downs being taken by banks in the wake of the subprime mortgage mess and we're seeing again in the wake of the historic inflation of the 2020s.

Our basic economics instructor would remind us that recovery requires business confidence in the economy and that confidence takes the form of investment in plant, equipment, and inventory. This is the key to increasing American standards of living and to sustained productivity (translation: higher‐wage jobs, competitive industry, reduction of the trade deficit).

How do we move from today's poor economic situation characterized by a pillaged business infrastructure and return to the days of American dominance over world manufacturing? American corporations do not generally accumulate productive capital today; they, like the consumer, acquire debt to hold their ratios steady. Look at Motorola, for example. This company was a leader in affordable electronics for many years, before market share began to slip and move overseas. The solution? Motorola increased its long‐term debt. This enabled the company to keep a strong working capital ratio (because current cash balances rose as long‐term debt obligations were taken on), meaning that current assets and liabilities maintained the equilibrium of more profitable days. But in fact, the stockholders are stuck with long‐term obligations to pay interest on those debt levels, in an environment where the company's revenues and profits are falling. In spite of what our Fed chairman says, increasing debt is not productivity. It is a disastrous policy.

If corporations depend too heavily on debt capitalization at the expense of equity, it eventually spells doom for them. The Fed is more aggressive than this lesson in basic economics. “Pushing on a string” the old timers called it. Meaning, you can get away with your strategy until the string breaks.

What the Fed has termed “wealth creation”—from Greenspan, Bernanke and Yellen through Jerome Powell—is nothing more than that infamous series of bubbles. Granted, Jay Powell has been putting on a grim face. But clearly, growth in housing values leading to refinancing, higher transactions, and inflation in housing values did not lead to wealth creation; it was credit expansion. If we spend more in consumption than in production, we do not get richer; we give more money to bankers. The same is true for a nation in our global position and trade relationships.

Rising stock values or housing values add to equity and immediate net worth. The opposite is also true. As an individual, if your home doubles in value, then your capital appears to be worth twice as much. The wealth creation is real in a sense because you invested money in real estate. If the same profitability occurred in the stock market, it would be because you invested money in stocks. If either real estate or stocks decline in value then so does your investment portfolio. So does your wealth.

When there is “inflation,” the dollar you use to buy things buys less. Your wealth, your future, is in peril.

“The first panacea for a mismanaged nation is inflation of the currency,” Ernest Hemingway famously wrote. “The second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”²⁷