Steve Gardes
The national debt has more than doubled over the last 10 years to $22 trillion. The Trump Administration just released it’s 2020 Budget that projects a budget deficit of $1.1 trillion (if Congress agrees to a $2.7 trillion cut in entitlement spending over 10 years), and that the national debt will increase another $4.8 trillion over the next five years to $27 trillion if all goes well. Republicans, who screamed over the Obama trillion dollar deficits, are now silent. Democrats are now the ones screaming, but screaming over the proposed $2.7 trillion cuts to entitlements. Democratic presidential candidates are proposing massive additional spending on “A Green New Deal”, Medicare-for-all, Free college for the young, and increased social security for the old.” Have our political leaders lost their minds?
They tell us to fear not, for our concern about debt has been based on false monetary theory - - the world has changed, and today we must use “Modern Monetary Theory”, or “MMT”.
When pressed further, they tell us that MMT is based on theory that for a government that controls its own currency (like the U.S.) deficits don’t matter since the government is borrowing its own currency. WOW!! Better yet, that isn’t just Alexandria Ocasio-Cortez, D-N.Y. (who was a bartender last year) telling us that; remember, even former Republican Vice President Dick Cheney said that “Deficits don’t matter.” So MMT must be the real deal – right?
With that being said, it may be prudent to take a look at history of how exactly we got to this point and do our own “sanity check”;
— After WW II and the Bretton Woods conference the U.S. dollar became the Reserve Currency of the World (since everyone else was bankrupt after the war) and with that came substantial benefits including the ability to print money;
— In 1971 President Nixon took the U.S. off of the gold standard, meaning the dollar was no longer backed by gold; translation, the world was now converting to a “fiat monetary system” backed only by the “full faith and credit of the U.S. government”;
— In the “80’s under President Reagan the U.S. only had $2.5 trillion of debt which was 49 percent of GDP;
— By 2008 the debt had climbed to $10 trillion as America had gone to war after the 9/11 attacks, but still only about 68 percent of GDP;
— However, by 2012 the U.S. was running trillion dollar deficits and the debt had climbed to $16 trillion (99 percent of GDP) - - not because of wars, but because of the “Great Recession” and entitlement spending (both self-inflicted);
— In 2012 Standard & Poor’s downgrades U.S. debt for the first time in history;
— From 2013 to today foreign countries, such as China and Russia, greatly reduced — and then stopped buying U.S. Debt;
— From 2013 to 2015 the Federal Reserve started buying $4.5 trillion of U.S. debt and securities under their QE programs;
— In 2017 the debt hits $20 trillion, or 103 percent of GDP, and there starts surfacing various reports of the global elite attempting to develop a new currency to replace the U.S. dollar as the World Reserve Currency.
— Today the national debt sits at $22 trillion, close to 106 percent of GDP, with trillion dollar deficits projected well into the future.
These facts beg a few questions: what happens when people (either citizens or foreign nations) lose confidence in the faith and credit of the U.S. Government? Have they started losing confidence already? What happens if the global monetary community led by China and Russia are successful in replacing the U.S. dollar as the world reserve currency? Is it possible that deficits will matter once again, and if so, what then?
Steve Gardes is a certified public accountant (CPA) and certified valuation analyst (CVA) with over 40 years of public accounting experience.