Fairy Tales of the Coming State of the Union: Fairy Tales and Truths

In “All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President will probably deliver in his State of the Union Address next month. I view the coming narrative as very likely to be composed of a number of fairy tales. In previous posts in this series I’ve analyzed and critiqued seven of the fairy tales I expect the President to tell us in his coming State of the Union speech. In this post, I’ll look at all the fairy tales together side-by-side with the truth as I see it.

Table One: Fairy Tales and Truths


Fairy Tale/Link To More Detailed Post

The Truth


The Government is running out of money.

The Government has the Constitutional Authority to create an infinite amount of money provided Congress appropriates the spending, and places no constraints on spending such as a need to issue debt when the Government deficit spends, or debt ceiling limits. So, all constraints on spending appropriations are purely voluntary and are due to Congressional mandates that Congress can repeal at any time.


The Government can only raise money to spend by either taxing or borrowing.

The Government doesn’t raise money to fund spending. Today, it spends mostly by marking up bank accounts in the non-Government sector in accordance with Congressional appropriations. The Government does collect previously created dollars by taxing or borrowing. But this money is not used for spending.


We can’t keep adding debt to the national credit card.

Congress has placed a debt ceiling on the Government, and it has also mandated debt issuance when the Government deficit spends. So, it is only the self-imposed constraint of Congress that prevents the Government from continuing to add “debt to the national credit card.” There is nothing inherent in the international economic system, or our own Constitution that prevents us from adding debt as needed.


We need to cut government spending and make do with no more money.

We don’t need to do that as long as the economy is operating below its full productive capacity and full employment. Since the Government can always create more money, there is no need to make do with less. In fact, the Government must spend more to lift private sector aggregate demand and enable the Economy to get to full employment.


If the Government borrows more money, the bond markets will raise our interest rates.

The bond markets don’t control the interest rates paid to them. The Treasury can flood overnight bank reserves and float short-term debt to meet its targeted interest rates, however low they may be. The Government, if Congress would let it, can even stop issuing debt when it deficit spends, in which case the bond market interest rates would be entirely irrelevant.


If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations.

Our creditors all want export-led economies. This means that they must accumulate dollars, because the US is where the consumption power is, and if they want to keep exporting they must keep the American consumers’ business. Their dollar surpluses can sit idle in their Federal Reserve accounts or be used in a way that makes them money. Buying our debt makes them some money. Buying our goods and services reduces their trade surpluses with us, and goes against their export-led policies. Selling our currency, weakens the value of the USD holdings they retain. In short they have little choice other than to buy our debt.

Even more importantly, we don’t need to raise money by borrowing USD from them. We can simply spend/create it ourselves if Congress repeals its mandate to stop issuing debt. The result of this would be paying off the national debt over time, without austerity.


Our grandchildren must have the heavy burden of repaying our national debt.

No generation except one has ever repaid the national debt. That generation was rewarded with a depression. Moreover, each time the nation ran substantial surpluses for a period of time, the country fell into depression or recession. It’s a bad idea to repay the national debt or even to run surpluses, so our grandchildren won’t do it unless they can do it without discontinuing deficit spending. That’s possible, but only if the Congress repeals the mandate to issue debt when the Government deficit spends, or alternatively, the Government freely uses its coin seigniorage power. In both cases the national debt can be repaid without requiring that tax revenues match or exceed Government spending.

Before you watch the State of the Union, print out this post and note how many of these fairy tales the President tells us. And when he asks for austerity, and tells us that we Americans must all sacrifice, keep in mind how much of his argument is based on one or more of these fairy tales. If any of it is based on these or similar fairy tales, you’ll know that he deserves a big Bronx cheer, and that you need to get busy telling your Congressman and Senators that you were not fooled by the fairy tales, and that you know very well that no deficit reduction plan is necessary or desirable, and that what you want Congress and the President to do is to quit representing Wall Street and the financial oligarchs and to get all Americans who want to work fully employed, and the recession over, before any more American lives and futures go down the drain.

Tell them it’s time for justice, though the heavens fall.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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