General Semantics of the Federal Debt

Written March 1996 by Steven Lewis

Nearly all my sentient life I have been exposed to scare stories about the impact of the U.S. Federal government's chronic deficit spending. The usual scenarios involve skyrocketing interest rates, dramatically-reduced real standards of living, stock market collapse and, as if we needed more, national bankruptcy for our children. These national fears extend back to before my lifetime. Franklin Roosevelt's attempt to use deficit spending to create jobs in the depression of the 1930s triggered so much alarm throughout the nation ("President Fraudulent Deficit Russiavelt" they called him) that soon, and prematurely, the Roosevelt administration backed away from its deficit spending and the economy took another turn for the worse. It wasn't until the massive deficit spending of World War II and the accompanying boom in employment in the production and distribution of war materials that enough Americans were put back to work to end the depression.

Not only did the United States survive the massive deficit spending of World War II, we entered an era of unprecedented economic growth. The warnings about the effects of massive deficit spending did not come true. Nevertheless, the terrorists who make their living by agitating the public over hypothetical risks kept right on spinning their tales of woe, much like a rabid fundamentalist preacher who shows up for the next sermon unrepentant after again wrongly predicting the demise of the world.

One of the ironies of Ronald Reagan's presidency was that Reagan had been elected in part because of the fears he had stoked regarding the growing national debt and his promises to do something about the deficit. The irony is that the national debt grew far more during his 8 years in office than it had in the 8 years of his predecessors, and continued to do so after he left office.

Who would have thought in 1981 that in 15 years the Federal debt would grow from $1 trillion to almost $5 trillion! Little doubt that if this scenario had been suggested to the Reaganites back in 1981 they almost surely would have predicted economic catastrophe for U.S. Incredibly, what we found in 1996 was just the opposite. Unemployment, inflation and interest rates were low, the stock market was at record highs, and community colleges were begging for students.

One hardly needs to be a general semanticist to see that the deficit/debt catastrophists have been sorely lacking in their predictability. The question for us is "Why?" It seems only common sense that if you chronically spend more than you take in you will eventually have to meet your creditors in court, to be stripped of your worldly goods and left homeless on the street. What many have not realized is that the scenario that applies to an individual or individual business need not apply to a nation.

If I borrow money to throw a lavish party and cannot repay my debt, my creditors can indeed come after me and confiscate what goods I have. I may try to protect what I have by declaring "bankruptcy," allowing me to discharge some of my debts without necessarily paying them.

The United States, on the other hand, has some advantages that individual Americans do not have. Most of the Federal debt is held internally -- by banks, pension programs, foundations and individual Americans. If the Federal government can't meet its obligations to its investors, it can raise their taxes to do so. Try doing this to your mortgage company.

In addition, the Federal government can "borrow" from the Federal Open Market Committee of the Federal Reserve System. The FOMC routinely purchases U.S. government obligations on the "open market" (not directly from the U.S. Treasury). Although this procedure is usually labeled "borrowing," in reality the Federal Reserve System creates money and expands the money supply through this type of activity. Moreover, most of the interest earned by the Federal Reserve from its holdings of U.S. government obligations is returned to the U.S. Treasury. Individuals, states and businesses do not enjoy this luxury.

The expansion of the money supply through the purchase of U.S. government obligations by the banking system can make more funds available throughout the economy for increasing production of goods and services, and for the public to purchase those goods and services and pay taxes. Too rapid money creation that creates more demand than production will lead to inflation.

Occasionally one hears quaint stories of school children sending their allowances or earnings from a bake sale to the Federal government to help it pay off its debts. An individual may free up income for other uses once he has paid off his debts. However, any serious attempt to "pay off the Federal debt" would involve loss of stable assets (U.S. government obligations) for many Americans, higher taxes and shrinkage of our money supply.

The reason our catastrophic expectations regarding the Federal debt have not materialized is that we have tried to apply the economics of the individual to the economics of the nation. This is a confusion of the levels of organization as well as a confusion of the orders of abstraction. The Federal government is more than just a big version of Mom and Pop's Bakery. In Korzbyskian terms, we are dealing here with intensional evaluations of "business," "deficit," "debt," "borrowing," "bankruptcy" .... We project our generalizations from areas of personal and business finance to an area where they do not apply. We do not properly evaluate the differences, and so we have little predictability.

If this application of general semantics interests you I recommend you read:
"How Real is the Federal Deficit" by Robert Eisner.
"The Debt and the Deficit" by Robert Heilbroner and Peter Bernstein
"The Truth about the National Debt" by Francis X. Cavanaugh
"Money to Grow On" by Stuart Chase. In this book Chase addresses concerns regarding the interest on the Federal debt by suggesting the establishment of an independent Federal agency to issue non-interest bearing and non-maturing "Growth Certificates" to be sold to commercial banks, who could use them as reserves to make loans to the public. The money created from sale of the "Growth Certificates" would be used to pay for capital improvements in the public sector.

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