(Roughly) Daily

As the battle over the debt ceiling continues, Treasury Secretary Janet Yellin warns that the U.S. could run out of (available) money by early June– and that this could have dire consequences.

The estimable economist, investor, government official, and scholar Richard Vague argues that objections to raising the ceiling are rooted in a fundamental misunderstanding of the impact of government debt…

With the pending battle over the debt ceiling, we are once again hearing concerns about the magnitude of our national budget deficit and the seemingly overwhelming size of our national debt. Given those concerns, it is important to have a clear understanding of how deficits and debt impact the U.S. economy. For that, we need to look at the overall financial status of not just the U.S. government, but of U.S. households too.

In 2020, during the darkest hours of the global coronavirus pandemic, the U.S. government spent $3 trillion to help rescue the country’s—and, to some extent, the world’s—economy. This infusion of cash increased government debt and thus reduced government wealth by almost the entirety of that frighteningly large amount—the largest drop in nominal U.S. government wealth since the nation’s founding. Surely something this unfavorable to the government’s financial condition would have broad, adverse financial consequences.

So what happened to household wealth during that same year? It rose. And it grew by not just the $3 trillion injected into the economy by the government, but by a whopping $14.5 trillion—the largest recorded increase in household wealth in history.

Given the pending debate on the debt ceiling, and the perennial debates on spending that dominate the halls of Congress, it is crucial to understand the relationship between government debt and household wealth. Conventional wisdom states that the government is incurring debt that will burden our children and grandchildren, yet the data shows that households already have the funds generated by this debt as part of their current wealth. In 2022, the prestigious Peter G. Peterson Foundation argued: “Federal borrowing…crowd[s] out new investment,” yet household wealth has increased dramatically in the very period that this debt has grown most rapidly. The policy decisions we make on spending should be informed by the data on debt and wealth…

The effects of government debt on households– and industry and inflation– aren’t the catastrophe that many would have us believe; in fact, the opposite: “The Truth About Government Debt,” from @delanceyplace in @DemJournal.

See also: Brad DeLong: “Print the Perpetual (Consol) Bond” and “The US Inflation Reduction Act is already brightening the outlook for energy and industrial firms.”

* Warren Buffett

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As we get our facts straight, we might note that today is Twilight Zone Day, a celebration of Rod Serling’s masterful series, The Twilight Zone (See also here and here).

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