I wrote a few articles on the subject matter of debts, whether it is about consumer debt or public debt. Today, I aim to discuss the problem of our reliance on the national debt, and why I argue that debt as a financial instrument is a dangerous tool that decreases the value of real wealth, thus decreasing the real value of the national economy.
Today, government bureaucrats would say that we shall not worry about the national debt, that it serves a purpose and its purpose is to create more wealth with the money borrowed. Debt is a financial instrument whose value is based on the claim against future goods, thus against future wealth produced, by extension.
It means that every time a new good is created, its real value declines because a portion of its nominal value is extracted to pay back obligations. Hence, the real value of the goods and services at the national level is lower than the real value they would have had if there was no debt to pay back. This means that if the current gross domestic product of the United States is around $24 trillion, then the real value of gross domestic product excluding the national debt would have been three or four times its current real value. This suggests then that the U.S. real GDP would have been close to $100 trillion. This shows how truly wealthy the United States of America is as a country.
What’s important to clearly understand here is that the benefits of using debt are short-termed. While taking a loan provides the capital needed to maintain or expand operations, the good or service produced out of that expansion or maintenance loses its value incrementally because a portion of that value is extracted to pay back obligations. In the long run, the real value of the goods and services produced will then be lower than what they truly ought to be. Thus, while debt helps us produce goods and services, it decreases their real value in the long run, making them worth less than their original real value.
The current national debt is more than 100% of the GDP-to-debt ratio. This explicitly reveals that the level of the national debt outpaces the level of total output. This, then, means that the U.S. economy is currently overleveraged. Being overleveraged indicates that the indebted entity has difficulty in paying its interests and principal payments and is often unable to pay its operating expenses because of excessive costs due to its debt burden. The U.S. government was on the brink of defaulting on its obligations about two months ago because it was overleveraged, and is still overleveraged.
To then pay back any previous obligation, the U.S. government incurs more debt. Let us not forget that any debt incurred is a decrease in the real value of total output. So anytime the government incurs a new debt to pay back an old debt, the American taxpayer is robbed of the value s/he contributed to total output. So anytime the government decides to apply expansionary fiscal policy, it subsequently borrows billions, if not trillions of dollars to expand its operations. These trillions of dollars borrowed deepen the decline of the real value of the national economy.
If debt is meant to reduce the real value of the goods and services produced, then why do governments continue to accumulate so much debt? Simply because governments are not driven by the profit motive. Governments are motivated by maintaining the satisfaction of public opinion. And this satisfaction is maintained by constant political action to increase electoral bases. Governments accumulate deficits because making profits is not beneficial to them. Prioritizing profits will, therefore, mean that governments are forced to limit their spending. If governments limit their spending, they can’t pursue their political actions, thus, they cannot increase their electoral bases. Since maintaining the satisfaction of public opinion is their priority, then debt is the financial instrument that allows them to spend without ever worrying about producing surpluses.
As a result, the accumulation of the national debt is used as an instrument to legitimize political action at the expense of maintaining the real value of the national economy. Dr. Thomas Sowell was right when he once said: “The government is not the personification of the national interest. It has its own agenda and own set of goals to achieve.”