$37 trillion in total debt is a loud, bullish sign that the U.S. is the world’s richest country…by far. But don’t misread what you’ve just read.
The total debt run up by the U.S. Treasury isn’t powering economic growth, rather it’s a consequence of it. This is a crucial distinction. Government debt is an effect, not an instigator of prosperity.
To suggest that government borrowing boosts economic growth is to believe that growth is a function of politicians taxing or borrowing wealth from productive hands, after which they dole out the taxed or borrowed funds in politicized fashion. Which isn’t a serious view.
For one, there’s no growth to speak of. Instead, politicians are taxing and borrowing away the effects of growth, only for them to lay a wet blanket on growth through the centralized and politicized allocation of the resources that were taxed and borrowed away.
Which is a reminder of what can’t be said enough: government spending always and everywhere saps productivity. It either suffocates it a little or a lot, and there’s no exception to the previous truth. To suggest otherwise is to believe central planning that always fails when imposed in total fashion works when imposed in limited fashion. Never.
That’s why distinctions about government spending are so important. Take, for instance, the popular view on the right that government debt isn’t an effect of too little tax revenue, rather it’s too much government spending. What a wrongheaded, market-insulting viewpoint.
It implies that if any government spends more than it collects, that it can simply borrow the difference. Which is foolish. Just as no individual or business can simply borrow, neither can just any government borrow.
If this is doubted, consider Russia. As noted in The Deficit Delusion, Russia can claim $300 billion in total debt. The number is obviously microscopic relative to how much debt the U.S. has. Does this signal that Russia’s future is brighter because it has less debt, or does it signal that Vladimir Putin is quietly a classical, limited government thinker? No to both.
Russia has very little debt precisely because investors don’t trust its future, and they don’t feel Russia will have the incomings necessary to pay off lots of debt. Which means Russia couldn’t overspend even if it wanted to. No doubt Putin would very much like to have a greater ability to borrow to fund a successful outcome in Ukraine, but the global lending window for Russia is plainly closed.
It's all a reminder of what’s true about governments, but that so few grasp: a little debt can frequently signal a troubled present and future, while a lot of debt can signal a brilliant one. What’s important once again is to distinguish between what comes first, the debt or the prosperity.
Here it must be said once again that the debt is what follows the prosperity. What’s prospering is seen in the marketplace as a safe loan. Think about this as deficit hawks claim that soaring government borrowing signals a “dismal fiscal future” for governments. Like the popular and false view that government borrowing is an effect of overspending, so is this view flawed and insulting to markets. See the U.S. How could its fiscal future be “dismal” if it has so much debt? Get it?
More realistically, the surest sign the U.S. Treasury has a remarkable fiscal future is all the debt. Just don’t confuse cause and effect. $37 trillion in debt isn’t the source of the prosperity, but it’s an overwhelming sign of it.
