Many media outlets present the recent passage of the spending bill as an aversion to a government shutdown. They use the word “avoid” in their breaking news title to emphasize how government, at the eleventh hour, saved the day by passing a last-minute spending bill of $1.2 trillion to “avoid” a shutdown. In reality, however, the passage of this spending bill is the reflection of a fiscally undisciplined government that decided to bail itself out by printing more money rather than taking accountability for its reckless spending.
A government shutdown occurs when the U.S. government runs out of money because Congress fails to pass the “necessary funding legislation.” What caused the potential shutdown was that Congress had to approve yearly spending bills to fund the government’s operations. If they can’t agree on a budget or miss the deadline, then there’s a shutdown.
There is an issue behind the concept of government shutdown. This issue is the way the financial system is designed to support government operations. Today, when government is on the brink of a shutdown, it simply passes a spending bill, and the Federal Reserve provides the funds to the government by simply printing money at-will. This is because we no longer have a commodity-based economy, which restrains government’s ability to spend.
The $1.2 trillion that the U.S. Congress passed is borrowed money. This means that it carries interest and the U.S. government has to make interest payments as part of paying back the loan. Actually, the interest payment of the U.S. government has hit the $1-trillion mark. This additional $1.2 trillion will increase the national debt; a debt that has reached unsustainable levels; and it will even double the interest payments that the U.S. government has to make on top of the previous money borrowed.
This $1.2 trillion spending bill will only create a crowding-out effect, which will make the cost of borrowing more expensive than it already is for the private sector. As a result of higher borrowing costs, businesses may be discouraged from investing in new projects and expanding their operations. This is because the potential returns on investment become less attractive when borrowing is expensive.
Under a commodity-based economy such as the gold standard, government would be compelled to produce surpluses instead of deficits. This is because a surplus enables government to reduce its debt burden and to increase its spending without having to rely on borrowed money, which increases the cost of borrowing for the private sector and triggers inflation pressures. In other words, if the U.S. government was under the gold standard, it would have been more fiscally disciplined, responsible, and parsimonious with its funds. But since have a financial system based on fiat currency instead of a finite asset, government is free to spend as much as it wants without any repercussions because the Federal Reserve is here to bail it out of its fiscal responsibilities. Thus, government accumulates deficits over deficits.
There is nothing to boast about this spending bill, it is not an accomplishment to be proud of. All it does is increasing the cost of living for ordinary people who live in debt to sustain their lives. The more money is borrowed, the more expensive becomes the cost of borrowing, and the more expensive becomes the cost of the goods, services, and assets we use to sustain our lives. Adding another $1.2 trillion to an already unsustainable national debt is only going to worsen the cost of living for everyone.