The enormous, and sometimes underrated, value of faith and credit in the US financial instruments and institutions.
To hear the chaos caucus in congress put it, the country can go to hell, because their pet peeves- abortion, culture war, gay rights, gun rights ... have already gone to hell, so how much worse can it really get? Well, it could get a lot worse. We are a rich country for many reasons, but an important one is good management at the federal level of our financial and monetary affairs. It is this stability that undergirds not only the currency, but also economic expectations of the future, as expressed in inflation, and markets such as the commodities, bond, and stock markets, not to mention political stability, such as it is.
Every dollar is a credit instrument, staked on the faith and credit of the United States. Without that faith, it is worthless. Even with that faith, it is a debt of the government, counted under the vast rubric of "the federal debt". The more money we have (or that is out in the wild somewhere), the more that debt is. And that money has proliferated remarkably. Quite a few small countries have formally dollarized their economies, such as Ecuador, Zimbabwe, Palau, and Panama. Many more countries use dollars as a defacto currency or black market currency, including much of the criminal world. Most countries hold large reserves of dollars to anchor their international trade and financial stability. So we should not be surprised that our federal debt is very large. Does anyone (maybe our children!?) have to "pay it back"? Not really, since all those dollars can keep floating around forever. That is, until some other country's currency becomes the reserve currency of the world, and those dollars become either worth less, or we buy them back with that new currency. Forestalling that day should be one of our major foreign policy and economic goals.
Another dimension of the credit of the US is the formal debt, in bonds that the Treasury department issues to account for spending that was not matched by incoming taxes. The Federal Reserve accumulates Treasury bonds as it issues new dollars, but these bonds come with the obligation to keep paying interest. While this makes it convenient and profitable for other countries and rich people to hold bonds instead of dollar bills, (and earns the Fed itself plenty of notional money), it puts us on the hook for endless payments (of newly minted dollars) to support those interest payments. This is a rather dangerous situation, since the level of interest is not always under tight control. Depending on your view of financial affairs, the interest rate is dictated by the market, or by the Fed, or by the general level of inflation, which in turn influences the actions of both the market and the Fed. In any case, the interest on thirty trillion dollars is a heck of a lot more at higher rates than at low ones. This strongly motivates the Fed to use all its tools to curtail inflation and keep long term interest rates under control.
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| A graph of the price/earnings ratio of the SP500 collection of stocks, over the long term. This ratio indicates the length of time holders of stock are willing to wait for their returns to come in, in years. Notice how in the last few decades, the P/E ratio has persisted at significantly higher-than-historical levels, indicating, despite ups and downs, increased faith in the long-term stability of the economic and financial system. There may be other reasons- better regulation, technological innovation, 401K rules, lowered taxes, etc. But financial markets like the stock market are sensitive indicators of the credit given to our institutions. |
All this comes back to the sound management of our financial affairs. We have a lot of room to maneuver due to economic expansion, both at home and abroad, which makes ongoing federal debts a built-in necessity. But we do not have endless room, and taxation plays an important role in making up the difference between money we can freely spend/issue to satisfy growth without inflation, and the rest of the money needed for government operations. What that gap is, is difficult to say, in the same way that the causes and time course of inflation are hard to pin down, but there is a gap, which taxes cover. Incidentally, in the MMT view of things, taxes reduce the level of private spending and consumption to make room for government spending, vs actually "funding" the government, which issues the money in the first place. But either way, taxes are an essential part of the financial cycle, and haphazardly forgiving tax obligations (or hobbling enforcement) is just as bad management as profligate spending or lax control of interest rates and inflation.
All these factors are part of the credit of the United States, and have been under fire from the right wing for several decades. When they are not cutting taxes of the rich or spending mindlessly on the military, they are shutting the government down or muttering about the deep state, the evils of the civil service, and how we should get back on the gold standard. Meanwhile the whole stability of our position as a rich economy and leader among nations hangs in the balance when thoughtless policy and extreme politics encroach from the fringes. Can the US run things better? Absolutely. Are there tradeoffs between humane and cultural virtues and financial / economic success? Absolutely. But from our founding era, when the Treasury Department under Alexander Hamilton established the US debt as a powerful instrument of union and stability, the credit of the US has been an underappreciated pillar of our position both domestically and internationally. Toying with it, via artificial crises and bad policy, is correspondingly an under-appreciated danger to our way of life.
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