This article on the BBC News website tells us that the US Treasury expects to reach the “debt ceiling” sometime in October. The debt ceiling is an arbitrary amount of federal government borrowing that Congress has decided cannot be exceeded. It’s a bit like an overdraft limit for the nation.
The limit has been imposed because of a general prejudice against big government. The ideology says that big government is wasteful and wicked, stifling individual enterprise and responsibility. Giving it more money to spend will only make it more wasteful and wicked, so taxes must be cut and borrowing restricted.
Ideology is all very well but does it make economic sense? To find out, let’s follow the money.
Rich people who have more money than they can spend hoard it away in financial institutions (banks, pension funds, etc.). These institutions lend money to government, which spends some of the money into the economy and pays some back to the lenders as interest on the loans.
Everyone in the US wants GDP to rise. GDP is a measure of how much buying and selling is happening in the economy. So more money being used for buying and selling is a good thing. So government spending must be good for the economy.
If the ideology says that government isn’t allowed to tax or borrow and spend, the hoarded money must find an alternative route into the economy. Rich people will have to make their spare cash available for buying and selling by spending or investing it directly into the productive economy.
The problem with this option is that rich people love being rich. They hate the idea of having less money tomorrow than they do today, which means that extravagant or philanthropic spending are taboo, and so is investing in anything too risky.
So what’s the safest thing to do with all that spare money? Stick it into Treasury bonds, of course.
I wonder how many people who invest in government debt, directly or indirectly, are the same people who rail against the iniquities of big government and are clamouring for the debt ceiling to be lowered rather than raised.
Hatred of government spending is incompatible with the love of hoarding money. If you want the economy to prosper the money has to come from somewhere.