The long-term challenge of federal debt

Gene Epstein of Barron’s explains why it won’t be easy to erase the federal government’s debt.

Those who deny that soaring debt can ever be a worry for the U.S. often point out that this debt is denominated in the same U.S. dollars the Fed has the ability to print. Ergo, there needn’t be defaults on that debt. In this case, as [former Federal Reserve Chairman] Greenspan affirms, the debt deniers are quite right—except they should worry more, not less. Funding the debt by running the printing press would be like pouring gasoline on a fire.

For politicians, if a problem is unlikely to assume crisis proportions during their tenure, then it will be left to future politicians to deal with. This après moi le déluge attitude has marked the approach to soaring debt of George W. Bush, Barack Obama, and Donald Trump. There is little reason to believe that Trump’s immediate successors will do things any differently.

That brings us to 2030, by which point yearly deficits of $1.5 trillion-plus will become the norm, as what Greenspan refers to as the “tsunami” of soaring costs hits the federal budget. And when the Treasury Department has more debt than it feels it can handle, it will pressure the government’s first responders—the central bankers—to buy ever-larger portions of that debt with printed money.

Will the resulting monetary expansion bring a jump in the inflation rate? Skeptics might point out that there seems to have been plenty of monetary expansion over the past decade, and yet price inflation didn’t seem to respond. But one key factor that has subtly curbed inflation has been the disinflationary effects of cheap labor from abroad. As Greenspan notes, by 2030, the “post-cold war wage-price disinflation” will have mostly played out. Then, too, the monetary spigots will be gushing at a far faster rate than anything seen so far.

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...

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