There are hundreds of headlines all over the news warning of the negative impact of a government shutdown.
The negative impact on GDP, according to Bloomberg, is estimated at 0.5% of the quarterly annualized rate if the shutdown lasts for two weeks. Obviously, that is an annualized rate, not the overall hit. The last government shutdown lasted between December 22nd, 2018, and January 20th, 2019, and the United States economy still grew at a 2.2 percent rate.
The Biden administration has signed a stopgap bill to prevent a government shutdown and fund the expenditures for up to 45 days if there is no agreement. However, the entire debate is created around the monumental crisis that a shutdown would generate instead of focusing on the cause: excessive deficit spending and soaring public debt.
Government shutdowns, like debt ceiling negotiations, are seen in some countries as an anomaly and even an anachronism. The narrative seems to be that governments and the public sector should never have to implement responsible budget decisions, and spending must continue indefinitely. However, the problem in the United States is not the government shutdown but the irresponsible and reckless deficit spending that administrations continue to impose regardless of economic conditions. When the economy grows and there is almost full employment, governments announce more spending because it is “time to borrow,” as Krugman wrote. When the economy is in recession, governments say that they need to spend even more to save the economy. In the process, government size in the economy increases, and record tax receipts are fully consumed in no time because expenditures always exceed revenues.
Those who defend the science fiction fallacy of MMT say that if the government cuts the deficit, then the world will run out of US dollars and there will be a global monetary meltdown. It is so ludicrous that it should not even have to be discussed. The world does not run out of dollars if the United States government cuts its imbalances. Global dollar liquidity is a result of central bank swaps between monetary institutions. There is no such thing as a global dollar liquidity crisis because of a United States surplus, as we saw when it happened in 2001. Furthermore, the idea that the dollar supply is created only by government deficit spending is insane. This distorted view of the economy places government debt at the center of growth instead of private investment. It tries to convince you that a deficit is always positive and that the only creation of currency must come from unproductive spending, not from productive investment credit growth. Obviously, it is wrong.
In the Biden administration’s own projections, the accumulated deficit between 2023 and 2032 would be over 14 trillion US dollars, assuming that there would be no recession or employment decline. Public debt has risen above 33 trillion US dollars, and the budget deficit in a period of growth and strong job creation is over 1.7 trillion US dollars. As of August 2023, it costs $808 billion to maintain the debt, which is 15% of the total federal spending, according to the U.S. Treasury. Interest rates are rising at the same time as the government rejects all budget constraints. This is a monetary timebomb.
All empires believe that their currency will be eternally demanded, until it stops. Global demand for U.S. dollars remains elevated, and the dollar index (DXY) is rising because the monetary imbalances of other nations are larger than the United States’ challenges, and it still maintains freedom of capital and independent institutions with high investor security. But this does not mean that the government can do what it wants. When confidence in the currency collapses, the impact is sudden and unsurmountable. Global citizens may start to accept other independent currencies or gold-backed securities, and the myth of eternal U.S. debt demand vanishes. Unfortunately, governments are always willing to push the limits of fiscal responsibility because another administration will face the problem. The United States’ rising debt and deficit irresponsibility means more taxes, less growth, and more inflation in the future. Government debt is not a gift of reserves for the private sector; it is a burden of economic problems for future generations. Sound money can only come from fiscal responsibility. Currently, we have none.
Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBC, World Economic Forum, Epoch Times, Mises Institute, Hedgeye, Zero Hedge, Focus Economics, Seeking Alpha, El Español, The Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).