The Relevance and Feasibility of Eliminating US National Debt
The question of whether the United States could realistically eliminate its national debt, or if getting the national debt to $0 is even possible, is a complex and multifaceted one. Currently, each working family owes approximately $600,000 of the national debt, and this level of debt has raised concerns about financial stability. This article explores the potential consequences of such an action, highlighting the interdependence of the global financial system on the United States' debt and suggesting alternative approaches.
US Debt and Global Reserve Currency
One of the key reasons why the idea of eliminating the US national debt is so significant is the extent of the US dollar's role as a global reserve currency. Approximately 70% of the world's reserve currency comprises US dollars (USD), and a substantial portion of this is in the form of US Treasury Securities (UST) or US government debt. This reliance on US debt is not just an economic detail; it underpins the global financial system and participates in a vast network of financial instruments and derivatives. The sheer magnitude of financial derivatives, valued in quadrillions of dollars, depends on UST as a vital component. The US debt acts as the backbone of the global collateral system, which is the foundation of our credit-based money supply. Consequently, the world is in a state of near-constant demand for US paper money.
Consequences of Eliminating US National Debt
The immediate and significant consequences of eliminating the US national debt would be dramatic. First and foremost, the money supply would either stop growing or contract, as the collateral that forms the basis of global money would become increasingly scarce. This scarcity would make it difficult for businesses to obtain loans, not because of interest rates but because of the lack of available collateral. As a result, interest rates might fall to zero and remain there due to the extreme scarcity of collateral.
However, the attempt to pay down the debt could prove economically detrimental. The contracting money supply would hinder the US economy, making it difficult for the government to provide economic stimulus. In fact, the process might involve the government withdrawing spending, which would exacerbate the worsening economic conditions. Additionally, as the economy deteriorates, tax revenues would likely fall, making it even more challenging to pay off the debt. The trade balance would also be severely affected, as the US dollar would strengthen dramatically, making it more difficult for US businesses to trade and operate. This would result in less tax revenues, higher debt values due to the surging dollar, and further economic contraction as the global trade network collapses. Countries facing difficulties with the currency that global trade is conducted in would find it increasingly challenging to engage in trade.
Bankruptcy and Alternative Currencies
An alternative solution often proposed is for the US to declare bankruptcy. This would also have severe consequences, including the nullification of 70% of the world's reserve paper money. This drastic action would lead to inflation, possibly comparable to or even worse than the 1970s' inflation. The collapse of the US debt would cause global banks to rapidly eliminate their USD holdings, leading to a prolonged period of stagflation and global instability, possibly even war, as the global monetary system collapses.
Another option is to transition away from a debt-based economy to a system based on economic productivity and assets/savings. This could involve concepts such as "positive money" or a triple ledger system currency. However, such a fundamental shift is practically impossible within the current political and economic environment, given the influential role of global financial institutions and the existing debt-based system.
Historical Context
A notable historical example is the elimination of government debt during Andrew Jackson's presidency, which, despite the initial success, led to one of the worst depressions in US history. This suggests that paying off all government debt might not result in long-term economic stability. The interconnectedness of the modern global economy and the reliance on US Treasury Securities (UST) would make the consequences of eliminating US national debt even more catastrophic today.
Given these factors, it appears that the US is destined to continue relying on its debt-based economic system. While the idea of eliminating national debt is intriguing, the practical and potential consequences suggest that it is not a feasible solution under our current economic framework.