Borrowing from Tomorrow

Borrowing from Tomorrow Debt, Dollar Power, and America’s Choices Debt is at the heart of one of the biggest questions facing America: How long can we keep borrowing from tomorrow to pay for today? Debt itself isn’t necessarily bad. A family might borrow money to buy a house. A business might borrow to build a new factory. And a country may need to borrow during a war, depression, pandemic, or other national emergency. Used wisely, debt can get us through difficult times. The problem begins when an emergency tool becomes part of everyday life. That is increasingly where America finds itself. The federal government can borrow enormous amounts of money. The Federal Reserve can step in when financial markets are in trouble. The dollar is used around the world, and U.S. government bonds are considered among the world’s safest places to keep money. These advantages have helped America survive wars, recessions, banking crises, and pandemics. But they have also made it easier for Washington to postpone difficult choices. We can spend today and send part of the bill into the future. That brings us to the real question of this paper: Has America’s economic system become so good at avoiding immediate pain that we are creating a much bigger problem for the future? How Did We Get Here? Our present economic system wasn’t created by one person or one political party. It developed piece by piece. Usually there was a real crisis. Government responded to that crisis with a new program, institution, or power. Sometimes it worked extremely well. Then the emergency ended. The institution remained. Its responsibilities grew. That pattern is important to understanding everything that followed. Why We Created the Federal Reserve America did not always have the Federal Reserve. During the 1800s and early 1900s, banking panics occurred repeatedly. One of the worst came in 1907. Banks were failing. People were frightened about their money. There wasn’t a central institution capable of quickly supplying money to banks when the financial system began freezing up. Private bankers, especially J.P. Morgan, helped organize a rescue. The experience convinced many Americans that the country needed a permanent institution capable of responding when the banking system was in danger. Congress created the Federal Reserve in 1913. That happened before Keynesian economics became influential. This corrects something I implied in an earlier version of this article. The Federal Reserve wasn’t created because of John Maynard Keynes. It was created largely because America had experienced repeated financial panics and needed a better way to respond to them. But this introduces a pattern we will see repeatedly: A real problem creates a new government power. The new power helps solve the problem. The power remains after the crisis. Eventually we begin using it for things its creators never imagined. Then Came the Great Depression The Great Depression presented America with a different kind of disaster. Businesses failed. Factories closed. Millions of people couldn’t find work. People without jobs spent less money. Businesses with fewer customers cut production and employment. Those newly unemployed workers then spent even less. The downward spiral fed itself. British economist John Maynard Keynes argued that government could interrupt this cycle. When families and businesses stopped spending during a terrible recession, government could temporarily spend more—even borrowing money if necessary—to get economic activity moving again. There’s something sensible about that idea. If the economic engine stalls, government can give it a push. But there was supposed to be another part of the idea. When good times returned, government was supposed to pull back. And here we encounter human nature and politics. Politicians receive praise for spending money. They don’t receive nearly as much praise for taking programs away, raising taxes, or paying yesterday’s bills. So we became very good at remembering: Spend during the bad times. And increasingly bad at remembering: Pay it back during the good times. That may be one of the great weaknesses of the system. The problem isn’t necessarily Keynes’s original idea. The problem is what happens to that idea when it meets politics. The Dollar Becomes King After World War II, America was in an extraordinarily powerful position. Much of Europe and Asia had been devastated by war. America’s factories were booming. The United States held enormous gold reserves. In 1944, representatives from 44 countries met in Bretton Woods, New Hampshire, to design a new international money system. The dollar became its centerpiece. Other countries tied their currencies to the dollar, and the United States promised that foreign governments could exchange dollars for gold at a fixed price. This gave America tremendous financial power. But there was still a limit. America couldn’t create unlimited dollars while promising to exchange those dollars for a limited amount of gold. Eventually there were simply too many dollars overseas compared with the amount of gold America was willing and able to exchange for them. Something had to give. 1971 Changed the Rules In August 1971, President Richard Nixon stopped foreign governments from exchanging their dollars for American gold at the old fixed price. The old Bretton Woods system eventually came apart. From then on, the dollar increasingly rested not on a promise to hand over gold, but on something much larger: confidence in the United States itself. Our economy. Our government. Our ability to collect taxes. Our financial system. Our military and political stability. And, perhaps most importantly, the belief that America would honor its debts. This gave America much more freedom. But freedom always raises another question: What keeps that freedom from being abused? Every System Eventually Hits a Wall Leaving gold behind didn’t mean America had discovered unlimited money. There is no unlimited money. The consequences simply show up differently. Sometimes they appear as inflation. Sometimes as high interest rates. Sometimes as unemployment. Sometimes as falling currency values. Sometimes as financial crises. The painful inflation of the 1970s demonstrated this. Eventually Federal Reserve Chairman Paul Volcker pushed interest rates extraordinarily high to bring inflation under control. It worked. But Americans paid dearly through recession, unemployment, and expensive borrowing. There is a lesson here: Government can change where economic pain appears. It cannot make economic reality disappear. When “Too Big to Fail” Really Means Too Big to Fail Then came 2008. Major financial institutions were collapsing. Government faced a terrible choice. Let them fail and possibly allow the entire financial system to collapse with them—or use public resources to stop the disaster. This is where capitalism encounters a serious problem. Normally, people who take risks receive the profits when they’re right and suffer the losses when they’re wrong. But what happens when a company becomes so enormous that allowing it to fail could hurt millions of innocent people? Government may sometimes have to save the system. But that doesn’t mean government should save everyone who created the disaster. My principle would be: Save the system when absolutely necessary—not necessarily the people who endangered it. If taxpayers rescue a corporation, the people who own and run that corporation should not simply walk away as winners. Emergency help should come with consequences, oversight, transparency, and an expiration date. Otherwise capitalism becomes something very different: Private profits when things go well. Public losses when things go badly. America’s Great Advantage America can borrow money more easily than almost any country in history. Why? Because the world uses our money. Foreign governments hold dollars. International businesses conduct transactions in dollars. Investors around the world buy U.S. government bonds. That is an enormous advantage. But it may also contain a trap. Because America can borrow extraordinarily well, America is tempted to borrow extraordinarily much. Another country might be forced to confront its financial problems much sooner. America can keep going. That doesn’t mean there is no limit. It means we may not see the limit coming as quickly. Then Comes BRICS America is no longer operating in the world of 1995. Countries including China, India, Russia, Brazil, South Africa, and other BRICS members are exploring ways to conduct more business without depending entirely upon dollars. This doesn’t mean the dollar is about to disappear. It doesn’t mean BRICS has a replacement ready to take over. The danger is much simpler. What if the world just needs slightly fewer dollars? What if more countries trade directly using their own currencies? What if they hold more gold? What if new digital payment systems allow countries to move money without relying as heavily upon the existing dollar-based system? America could still possess the world’s leading currency while gradually losing some of the enormous advantage that comes with it. And that matters when Washington needs the world to keep buying enormous amounts of American debt. So What Should America Do? There are three very different ideas we should separate. 1. Pay Off Everything Tomorrow Bad idea. Trying to eliminate tens of trillions of dollars of federal debt immediately would require enormous tax increases, enormous spending cuts, massive government asset sales, or some combination of all three. It could devastate the economy. We don’t need to eliminate every U.S. government bond. 2. Slowly Reduce Our Debt Burden This is much more realistic. Instead of asking whether America owes more dollars this year than last year, we should also ask whether our economy is growing faster than our debt. Over decades, we could gradually reduce the size of the debt compared with the size of the American economy. We wouldn’t be slamming on the brakes. We would slowly change direction. 3. Make a Balanced Budget the Normal Rule This is the idea I find most interesting. Government should normally spend approximately what it collects. But emergencies are real. Wars happen. Pandemics happen. Financial systems can collapse. Natural disasters happen. A constitutional balanced-budget requirement could therefore contain an emergency escape hatch. But using it should be difficult. Perhaps emergency borrowing would require a large majority in Congress rather than a simple majority. Congress would have to explain why the emergency justified borrowing, how much could be borrowed, when the emergency authority ended, and how the country would eventually return toward balance. The principle would be: Balance is normal. Borrowing is extraordinary. Could We Also Rethink the Dollar? This brings us to a much bigger thought experiment. Going back completely to the old gold standard probably isn’t the answer. The modern American economy needs money that can expand and contract as economic conditions change. But perhaps we threw away something valuable when we abandoned gold: a visible limit. What if we could combine that old idea with modern technology? Imagine a future digital dollar partly supported by gold and other extremely safe assets. Not necessarily a dollar that everyone could immediately exchange for a fixed amount of gold. Something different. Think of gold as an anchor, rather than a chain. America already possesses enormous gold reserves. A future digital dollar could be connected to a publicly visible pool of reserves containing gold and other highly secure assets. And digital technology could make something possible that wasn’t possible in 1971. Everyone could see the numbers. How many digital dollars exist? How much gold supports the system? What other reserves are there? Did the government create more money? Why? Under what emergency authority? When does that authority expire? Instead of simply saying: Trust us. Government could say: Here are the books. Look for yourself. But Digital Money Has a Dark Side This is where we have to be extremely careful. Digital money could make our financial system faster and more transparent. It could also give government frightening power over ordinary people. Imagine money that government could turn off. Money that could expire. Money programmed so you couldn’t buy certain legal products. Money that allowed government to examine everything you purchased without a warrant. That would not represent the constitutional system I am arguing for. Any American digital dollar would therefore need extremely strong protections for privacy and property. The principle should be: Digitize the dollar without digitizing government control over the citizen. America Could Build Rather Than Defend This brings us back to BRICS. Perhaps America’s response to international competition shouldn’t simply be: Please keep using our dollar. Perhaps America should build a better dollar. Imagine combining: a modern digital payment system; some gold supporting the currency; other extremely safe reserves; publicly visible accounting; strong privacy protections; a balanced federal budget; lower debt; and the enormous productive power of the American economy. America could then say to the world: Here is our currency. You don’t have to trust it simply because America is powerful. You can examine the system supporting it. That could be a powerful answer to a changing world. But We Shouldn’t Pretend This Is Easy A gold-supported digital dollar could create new problems. Tie money too tightly to gold and there may not be enough money available when the economy desperately needs it. Allow too much flexibility and the gold backing becomes little more than decoration. Promise people too much gold and they might rush to exchange their dollars during a crisis. Make the digital system too centralized and government gains dangerous power. Restrict emergency government action too much and America could be unable to respond to war or financial collapse. Allow too many emergency exceptions and politicians will eventually discover that everything is an emergency. There is no perfect economic system. There are only different systems with different strengths, weaknesses, and temptations. That is precisely why these questions deserve serious discussion. The Choice America has several possible paths. We can continue largely as we are. Perhaps the dollar remains dominant for generations and our enormous economy continues carrying increasingly large debts. Perhaps we gradually balance the budget and reduce our debt while leaving the dollar essentially as it is. Perhaps we go further and rethink both government borrowing and the monetary system itself. Or perhaps we do nothing until circumstances make the decision for us. I prefer that America make these decisions while we still have choices. The United States should not wait for foreign governments, bond markets, inflation, or some future financial crisis to impose discipline upon us. A self-governing nation should be capable of governing itself. Conclusion: Borrowing from Tomorrow America’s current economic system wasn’t created by fools. The Federal Reserve answered real banking crises. Keynes answered real questions raised by the Great Depression. Bretton Woods answered the monetary chaos surrounding two world wars. Leaving gold gave modern governments valuable flexibility. Government intervention has sometimes prevented economic catastrophe. Debt has helped America survive wars, recessions, and pandemics. The mistake is believing that because these tools have been useful, they can never become dangerous. Perhaps the question isn’t whether we should return to the economic system of 1944 or 1971. Perhaps the question is what we can learn from them. America needs flexibility. America also needs limits. We need the ability to respond when catastrophe strikes without treating every year like a catastrophe. We need enough government power to protect the economic system without creating a government powerful enough to control every economic decision of its citizens. And we need a dollar strong enough to remain the currency people around the world choose to use—not one they use simply because there is currently no better alternative. That may require something new. A balanced budget. Manageable debt. Emergency borrowing when truly necessary. A modern dollar possibly supported in part by gold and other secure assets. Transparent accounting. Strong protection of financial privacy. And, above all, rules that apply to government even when breaking those rules would be politically convenient. Because debt isn’t only about money. Debt is a claim that the present makes against the future. Used wisely, it can save a nation during catastrophe. Used carelessly, it can slowly take choices away from generations that had no voice in creating it. America still has choices. The greatest danger may be waiting until we don’t. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit brandonfreywald.substack.com/subscribe