US Public Debt Destroying Middle Class

“The “US public debt destroying the middle class” argument has been around for 40 years plus,” tweeted a brilliant investor and financial expert recently. How the proponents of this narrative never stop to wonder, “Why has it been viable for so long?” is what amazes me completely.

Many people believe that a world reserve currency issuer would go bankrupt like Argentina due to their budget deficits. On the other hand, Argentina’s display of unsustainable practices was far less severe.

Look, Argentina is still around, or is it not?

When the national debt becomes too high and slows down economic growth, it causes tax rates to rise steadily and slows down productivity and real wage growth.

This is an unsustainable situation. The state’s imposition of public debt on banks’ balance sheets and its insistence that the financial sector treats all of its debt as the “lowest risk asset” pose challenges to the sustainability of the current pace of debt creation.

But the rule of law and regulations have only served to impose and coerce this structure. Increasing national debt reduces economic development and productivity by making the government larger than it needs to be.

A lot of people with diabetes and obesity keep eating junk food since they do not see any change. Their eating habits are not sustainable, though.

People who choose to turn a blind eye to the growing national debt often do so because they believe that nothing has changed. An irresponsible approach to the economy, like saying “We have not destroyed ourselves yet; let us accelerate,” describes this philosophy.

Debt levels are unsustainable due to a weakening private sector, stagnant real wages, slowing productivity growth, and a currency with less buying power.

Families and small companies are finding it harder and harder to pay for necessities, while the well-off and the government sector enjoy life to the fullest.

Why?

For the simple reason that running up a national debt is the same as creating money. The unadulterated reason the US public debt is destroying the middle class.

Monetary creation

A process of money production and wealth building occurs when the private sector utilizes the financial system to create money. Projects with a real potential for economic gain are the ones that the financial system backs.

Not everyone succeeds. That is the way the economy develops and grows constructively. To skew this process, the central bank must raise the money supply to monetize wasteful deficit spending, manipulate interest rates to hide the cost of risk, and so on.

With private banks printing money to speed up development and interest rates allowed to float freely, an open economy may avoid the buildup of wasteful and risky debt.

A destructive process of money creation, contrary to the saving-investment function of banking, the central bank uses interest rate manipulation to mask the worsening solvency of fiscally irresponsible governments by making their borrowing cheaper and by artificially increasing the amount of currency in circulation, a practice known as monetizing public debt.

In times of fiscal crisis, the use of force and repression is the only option for the state to collect its debt, which is effectively newly printed money.

When the private sector recognizes the solvency of a state’s debt and sets it aside as a reserve, then the debt becomes an asset.

The devaluation of money due to inflation and a decline in the buying power of real wages are the results of a state’s bankruptcy that it imposes on the economy.

Sluggish economic development and the eroding middle class—the captives of the currency issuer—are the results of the state’s gradual default on the economy, which it does through increasing taxes and devaluing the currency.

As one would expect from a currency issuer, the state conveniently brushes off its imbalances while laying the blame for inflation and slow growth at the feet of businesses, exporters, foreign countries, and markets.

To stop a government from ruining the actual economy, autonomous organizations must enforce fiscal restraint.

Businesses and consumers will always pay the price for the state’s structural inequalities because of the monopoly on money supply and the imposition of regulations and laws, which the state rationalizes as being in their best interests.

US public debt destroying the middle class

Although a lot has transpired, today’s story suggests that nothing has occurred. A growing bureaucracy that spends more money on taxes yet still racks up deficits and debt is destroying the middle class and ruining small and medium-sized businesses.

The story does come to a disappointing conclusion. And the same thing happens at the end of every empire: everyone assumes nothing will happen. 

The value of the currency as a reserve asset will eventually decline. Someone is ready to turn a blind eye to the warning signs, including the steadily dwindling purchasing power and dwindling faith in the legally mandated “lowest risk asset.”

This could be because they profit from the devaluation of the currency due to asset inflation or because they survive off the taxes of others. Regardless, it is extremely damaging and anti-social, even if it detonates slowly.

Government fiscal irresponsibility poses a serious threat to the middle class, the purchasing power of the currency, and productivity and solvency. The fact that there are knowledgeable and astute investors who choose to disregard these warning signs is evidence of this danger. 

Government money creation is concerning because it allows the government to exert more control over its citizens while simultaneously blaming them for the issues caused by its policies and posing as the answer.

Will debt levels eventually peak? Sure thing. When the state can control the money and put its debt into your pension through regulation and law, serfdom and gradual poverty are more bearable. Interesting times I tell you.