Economists Radhika Desai and Michael Roberts discuss the US debt ceiling deal reached by President Joe Biden and the Republican opposition, and what it means for the future of the economy.
RADHIKA DESAI: Hi everyone, and welcome to this 11th Geopolitical Economy Hour, the fortnightly show on the political and geopolitical economy of our times. I’m Radhika Desai, and today we are going to be joined by Michael Roberts.
Most of you will know Michael as one of the most acute commentators on the state of the world economy. He has experience working in the financial sector and has also been a labor activist.
So he brings a very unique combination of perspectives on his work and provides us with a very informative perspective on the unraveling of the capitalist world economy in recent decades.
And today he is here with us to discuss the debt ceiling drama that has unfolded in Washington in recent weeks. Welcome Michael.
MICHAEL ROBERTS: Well, it’s good to be here Radhika and I must say that I have enjoyed many of the [Geopolitical] Economy Hours up to now while I’ve been watching, so it’s a real privilege to have an opportunity to discuss with you the debt ceiling and debt in general, I suppose.
RADHIKA DESAI: Well, great Michael and I hope this is only the first of many appearances by you on this show. So let’s dive into this.
So as far as the debt ceiling is concerned, there has been a pattern which has become a classic of sorts, with just days to go before the day that the Treasury Secretary Janet Yellen said the US would run out of cash to meet its obligations, President Biden and House Majority Leader Kevin McCarthy reached a bipartisan deal which is going to permit the government to keep borrowing in return for certain cuts in spending, social spending in particular, that the Republicans insisted on.
The catastrophic disaster predicted by Treasury Secretary Janet Yellen in the weeks leading up to the negotiations and the deadline was again narrowly averted.
But as more and more commentary is recognizing, other more slow-moving sorts of disasters that will affect the US political system, fiscal health, the economy, the financial system and the dollar system have not been averted.
If anything, it seems as though the deal is simply setting the stage for all these different sorts of crises to accumulate and to erupt at a later stage.
So we propose to uncover these unresolved issues in a broader discussion that will range over some very key questions.
So first of all, what is the debt deal? Is the debt ceiling even real?
What’s in the deal that McCarthy and Biden came up with? Is it good for US society, economy, politics and of course, the rest of the world?
Thirdly, now that the US government can borrow more, are its fiscal wars over?
Fourthly, how does this impact on the ability of the Federal Reserve to do its job?
What about the economy?
Sixthly, what about the US financial system?
And finally, given the close relation that has always been insisted on between the US fiscal and current account deficits and the functioning of the dollar system, how does the debt ceiling deal reached affect the dollar system?
So these are some of the questions we hope to cover in what we hope will be a fairly free ranging conversation.
So Michael, why don’t you just start us off with your overall thoughts on what the debt ceiling is, whether you agree with some people who say that it’s not really an actual constraint at all?
MICHAEL ROBERTS: Well, the debt ceiling is almost peculiar to the United States in the constitution legislation. There are one or two other countries that have a debt ceiling, the one I can think of is Denmark.
The idea is that there’s a certain limit on how much a government can run up in debt. And once that ceiling is reached, then there has to be an agreement to extend it.
And so the idea, apparent proposed idea, is this will control public spending and control debt getting out of hand in the public sector.
Of course, this is just nonsense. It doesn’t apply at all. Every time the debt ceiling has been reached, it’s been expanded. And I think at least nearly 80 times have we had a debt ceiling which is then expanded accordingly by agreement of Congress.
Only a few occasions in the US has there actually been an attempt to block and to hold the debt ceiling and to force reductions in spending by the incumbent government.
In just about every case, it’s a Democrat administration that looks to spend and Republican opposition trying to use this debt ceiling as a way of squeezing out concessions.
And then what are those concessions? We should discuss them later, but it’s really a political football and not really anything to do with trying to control the debt.
In the case of the Danish debt ceiling, by the way, the debt ceiling is about three times higher than the Danish debt to GDP. So it never gets there. It’s only the US, which has this weird and wonderful plan in which they claim will control debt, but it doesn’t control debt in any way.
Government debt to GDP or just government debt in general in the US has been increasing every year without any real downturn at all in the overall debt.
And in terms of debt to GDP, that’s a ratio that we can look at as a measure of whether it’s exceeding the growth in the economy. That’s been rising dramatically anyway.
So the ceiling is having no effect in controlling debt to GDP or debt in general. If that is what you want to do.
And the question we could discuss is, should government debt be controlled in this way at all? What is the purpose of government borrowing? Is it playing a useful role?
So what we have here is a completely ridiculous and preposterous measure really designed for political infighting within Congress.
RADHIKA DESAI: I mean, certainly, just just to you, you rightly pointed out that the debt ceiling has been lifted by my calculation 79 times, counting the last one since 1917.
So apparently what has happened is that up until that time, US spending and borrowing were not really very great. But once the war started and the government started to spend more than there was a need for continuing to authorize new borrowing.
So the original idea behind the debt ceiling was not at all actually a constraint so much as an enabling feature that you can borrow up to this limit was the idea.
But of course, over time, what has happened is it has become a political football.
So apparently since 1976, when the issue of spending first began to be made a political issue by the right wing, as you rightly pointed out, there have been 22 government shutdowns.
So this is really the interesting thing. And I also wanted to say that, you’re absolutely right to say that the debt ceiling has actually done nothing to control government debt.
The US debt has continued to rise and it has risen particularly high in the last few years since the pandemic in particular.
But what has happened is that the particular way in which the debt ceiling has been politicized by the Republicans in particular, what this has done is it has controlled the reasons why the debt goes up.
So the debt has gone up not because the government is profligate in spending on Social Security or anything like that. US social spending is among the meanest in the overall OECD country league tables.
So what this has done is, it has essentially created a situation in which US debt has continued to go up, but it has gone up in order to do certain specific things.
Number one, first and foremost, to cut taxes on the rich.
Secondly, to keep spending on defense and so on.
And thirdly, of course, to give generously to essentially turn the US state into a welfare state for corporations, essentially to give big subsidies to these.
But the other question that also emerges is the fact of the matter is that a number of people who are on the left of the Democratic Party and more generally in the left of the political spectrum in the United States have actually pointed out that there are a number of reasons why this drama that is regularly played out in Washington, every time the Republicans want to essentially create a ruckus around the debt ceiling, they get to do so.
But the Democrats play along.
And this is the really shocking thing is that, as far as the public is concerned, most commentary would lead them to believe that President Biden is straining every nerve to increase social spending and he’s only being stopped by the Republicans.
But in reality, there are at least three points that one may make, which show that actually the Biden administration is really kind of looking, essentially looking for a way to have cuts in social spending, but then blame it on the Republicans.
So the first point is that many people have pointed out that the U.S. 14th Amendment, which basically says that U.S. obligations of spending a debt payment, etc., will be sacrosanct. They will not be challenged by anybody.
This simply means that you don’t need to raise the debt ceiling. The government can continue to borrow in order to finance its spending without any problems.
The second is that according to at least one leading expert, maybe actually more, but Cornell University Professor Robert Hockett has argued in a number of writings that that in fact, the budget itself, once it is passed by Congress, if the budget has a shortfall of spending over revenues, then essentially there will be borrowing and the passage of the budget itself authorizes the government to spend.
So there is no need for a debt ceiling. But nevertheless, the Democrats have never taken up these legal points.
And then finally, Tom Ferguson, the very well-known writer who has really done the most yeoman’s work on following the money in the American political system, what he’s pointed out is that Biden could have easily raised the debt ceiling when the Democrats controlled both houses of Congress, but deliberately chose not to.
And why is that? And Ferguson’s answer is very simple. Biden needs to raise money. And this time around, he’s going to need to raise a lot of money in order to overcome his unpopularity to try to become president.
And if he’s going to collect this kind of money, he’s going to have to go to big corporations and they want essentially what the Republicans want. So Biden has found a way of “conceding” to the Republicans in this fashion.
MICHAEL ROBERTS: The other thing is that he’s also conceded that this debt ceiling is going to come back and haunt us again. It’s only been put off till 2025.
And we know why it’s been put off to 2025, so that it doesn’t arise this side of the next presidential election.
That was part of the deal in a way that Biden achieved with the Republican opposition that he avoided after making considerable concessions, which we’ll consider in a moment.
He managed to push this down the road so that it’s after the election, but it’s going to come back again.
Whoever is in administration in 2025, obviously, if it’s a Republican administration, I think we’ll be surprised to see that debt ceiling is an issue.
But if Biden is reelected, assuming he’s going to be the candidate, then it’s going to come right back again and further pressure will be put on by the Republican opposition to reduce the spending in very key areas which have already been conceded by Biden in the debt ceiling agreement.
Viewers should really know exactly just what did happen during that agreement to realize the way in which the Biden administration has gone backwards on its original commitments to meet the needs of the population.
RADHIKA DESAI: As you were talking, I suddenly realized that actually I have not come across any of these debt ceiling standoffs in which it’s the Democrats who say we are not going to allow you to increase the limit on borrowing unless you agree to spend more on social spending. We’ve never seen that.
This is the interesting thing. Yeah, it’s amazing.
So, Michael, you’ve done a lot of work on examining this debt ceiling deal. Why don’t you start us off?
Let’s discuss the question of what’s in this deal. Is it good for the US in what ways, etc.?
MICHAEL ROBERTS: Yeah, well, I think the thing to remember, the viewers should remember that the budget has basically been, as it were, ring-fenced.
So there’s been no cuts asked for by the Republicans and agreed by the Democrats in military spending at all.
Then there is no cuts in social entitlement because that requires legislation because they’re entitlements so that the bulk of Medicare and the bulk of Social Security remains.
So basically, the only bit that can be reduced is what is called discretionary spending, which is all the things of services and education, transport and other things that the federal government is supposed to provide and the employees and services that they provide for the population.
That’s the area that’s being slashed in the agreement. And I think we have a graph. I’d just like to show you that first graph I’ve brought forward for the discussion.
You can see here now in the graph, the blue, big blue block is the military spending, the official military spending, which is about 800 billion dollars a year, which Biden plans to spend.
And on the purple side, you can see what is called the non-defense discretionary spending. But actually, the military spending is even higher than that, because if you look in the purple bit and the top right left part of the purple bit, you can see veterans spending on veterans. So that’s really part of defense spending.
And all the other blocks in there actually have quite a lot of military spending in them as well. You would believe in all different areas.
And really, the total spending that Biden is now committed to on the military front in arms and other defense of the realm, if you want, is one trillion dollars a year, one trillion dollars a year, with no exemptions to cut that back.
So all those purple bits, which are now down to about five or six hundred billion, are going to be reduced not only in real terms over the next few years, but also in cash terms. So it’s even a bigger fall.
So this budget concession, things like, for example, to get food stamps at work if your income is so low in the US, you get food stamps. But now you will not be able to get those until you’ve reached the age of 54. It used to be 50.
So it means that now it’s extended the range of age before you can get food stamp help and various other measures like that for cutbacks in all kinds of areas on the purple side, which Biden has agreed to.
Yes, there’s further spending going ahead because the Biden plan is to increase spending in green investment and in infrastructure. But it will be at the expense of all other areas of basic services which the federal government provides.
So with one hand, you get a little more on the other hand, you get taken away. But one area is not going to be touched, and that’s arms spending.
RADHIKA DESAI: Yeah, this is really interesting. And it seems to me that this deal has essentially done nothing to change the general orientation towards fiscal irresponsibility of a right wing sort.
That is to say, you essentially have unfunded tax cuts and you have lots of military spending.
And then if you cut anything, you are only going to cut spending that’s going to go to some kind of broader social causes.
And of course, these sorts of cuts, they are relatively minor for now, but they will have a slowing effect on the economy. There’s no doubt about it.
And this comes at a time when the US economy already faces a lot of challenges, challenges which I also have to say that, the general trend towards right wing forms of fiscal irresponsibility mean that despite the fact that there has been much fanfare around the post pandemic spending programs and then more recently, the Inflation Reduction Act, and though there has been a substantial amount of spending promise, one wonders whether it’s anywhere near enough to really revive the US economy productively and and actually deal with the real causes why core inflation remains very high, which is that the productive structure of the US economy remains very weak.
So overall, in terms of what’s in this deal, it’s actually quite disappointing, even though most of the press seems to congratulate Biden and McCarthy.
You know, Biden has won this and he has shown that his old skills at congressional negotiations are intact. And McCarthy has proved that he can be a bipartisan person, etc.
It’s said the poor fellow apparently is not going to get to keep his job because most Republicans are not interested in bipartisanship at the moment.
But really, if you think about it, the whole question of who wins and who loses from this deal is really not about whether Biden wins or McCarthy wins or Democrats win or Republicans win.
It’s really about whether it’s really about the fact that the US economy and the US people have lost another opportunity to try to do something about their weakening economy, increasing inequality.
MICHAEL ROBERTS: Well, I would add a couple of things there, Radhika. One of the things that’s missing from even the budget was a reversal of the Trump tax cuts that were made during that administration, which were huge, huge corporate tax cuts and also for higher income groups.
All that has been preserved. There’s been no reversal there.
So the inequality of income that has already expanded dramatically in the US over the last 25 years and was accelerated under Trump is not being reversed by the Biden administration.
So on tax, they’re doing that. If you look at the infrastructure spending budget, it sounds great, but actually it works out as something like half a percent of GDP over the rest of this decade.
Now that sounds to me way short of the requirements that are needed to move us towards a green environmental structure for the industries of transport and energy and so on, which is so vital for us to sort out by the end of this decade.
Because as we now know, and as scientists are telling us, that we are going over the tipping point of 1.5 degrees centigrade above pre-industrial levels on global temperature this decade, almost certainly.
And if we go beyond that level, it’s a tipping point, which means that it’s irreversible damage to the planet in terms of droughts and floods and uninhabitable areas of the continent.
We’re already seeing the level of fires and other things developing in northern Europe and in North America as well. So we know that something’s got to be urgently done on this.
But even the program that was presented to supposedly move towards green investment in the US is way, way inadequate.
And so the main structure, as you say, of the economy, of the rich controlling the vast majority of wealth, earning the most of the money, and the government unable to do or unwilling to do anything about that structure.
And that remains, that hasn’t altered as a result of anything Biden has proposed and is implementing. And it’s now actually been chipped away at by the debt ceiling agreement.
RADHIKA DESAI: Well, this is it. I mean, I just want to respond to your very, very important point. 2023 could be the hottest year on record already. We’ve already had April and May showing unprecedented levels of heat.
So a little climate interlude here, because it seems to me that, very often with the Biden administration taking office, everybody was told that, well, now we will see some movement on the climate agenda.
But the more closely you look at what’s happened, you really realize that essentially the strategy of even the Democrats in the United States, let alone the Republicans who don’t even accept that there is a climate or there is anthropogenic climate change.
Even the Democrats will only implement those aspects of some sort of climate change, some sort of program to address climate change, provided it makes lots of money for the big corporations.
This is the key to understanding it so that in reality, climate is just an excuse to give more subsidies to big corporations. And this is where I think we are going to face the biggest obstacles.
I mean, this is really content for another program, but I just wanted to mention that.
MICHAEL ROBERTS: But as you say, it’s subsidies, the infrastructure program, the Biden is subsidies to big business to carry out green investment and tax exemptions.
Actual direct government investment to do projects, to build environmental projects directly, but through government investment hardly exists at all.
One of the other concessions in the debt ceiling was the agreement to go ahead with an important gas pipeline. In one of the right wing Democrat states, that was one of the agreements that was reached.
So actually, the expansion of fossil fuel investment is taking place as a result of the debt ceiling.
RADHIKA DESAI: And needless to say, the sanction strategy in the current proxy war on Ukraine is also, of course, essentially putting the world on a path which increases its resource footprint and its climate footprint and so on.
MICHAEL ROBERTS: Military activity and arms activity is the biggest carbon dioxide emitter in the world, the biggest consumer and producer of carbon dioxide.
So I’m afraid war is not only bad for people, it’s bad for the planet in general.
RADHIKA DESAI: And putting Europe on a diet of American energy as opposed to Russian gas apparently contributes many times more to global warming than Russian gas anyway.
MICHAEL ROBERTS: And four times more expensive.
RADHIKA DESAI: Yes, exactly. Well, I mean, that’s another story as well. What’s wrong with the Europeans?
But let’s maybe come back to this and go to our next question, which is, OK, so now they’ve got a deal. The US government is free to borrow more, at least for the next two years. So given that, are its fiscal wars over?
That is to say, are there no longer any problems? And what can we see?
I mean, one thing that certainly seems to be right at the top of this list is that, of course, debt servicing.
Not only is the debt going to grow, but it is going to grow in an environment where the Federal Reserve is jacking up interest rates and markets are demanding that they be jacked up even more.
So debt servicing is going to constitute a bigger and bigger part of this. It’s already at one trillion at low interest rates.
It’s estimated to go up to half of government spending if debt continues to rise as expected, and interest rates do not dip below historical averages.
So right now they’re high, maybe a little higher than historical average. Maybe they’ll go down a bit. But provided interest rates do not go back to the ridiculously low interest rates that we’ve had over most of the last two decades. This is going to be the situation.
So, in fact, Americans, the United States fiscal wars are only going to increase. And this is only part of the story, right?
MICHAEL ROBERTS: It is. Well, one of the features, I mean, perhaps we’ll deal with debt in general, apart from the public debt, which is important.
But public debt has shot up, as we discussed earlier, even before Covid. Why? Because during the period of the 2010s, there was a massive bailout of the banks by all the countries around the world.
There was a slowdown in GDP. So growth wasn’t delivered from this huge debt. So the private sector disaster was placed into default into the public sector. They had to deal with it.
So public sector debt rocketed from, say, on an average in the advanced capitalist economies of around 60 percent of GDP to close to 90 to 100 percent of GDP during the 2010s.
It came down a little bit just before Covid. And then we had the pandemic slump, which saw a massive increase in fiscal spending so that people didn’t starve because they were locked down and all the rest of it.
So the result is that we saw, again, a big rise in public debt globally in just about every country in the world, up to about 95, 100 percent of GDP. So it’s nearly double where it was at the beginning of this century.
And as you say, the only reason that this has been not a big problem for the budget up to now has been interest rates have been ridiculously low, if not zero.
In many countries, in government bond prices and so on, the interest on government bonds is right down low to levels really close to zero. And in terms of central bank interest rate levels, they were actually negative in many countries for a period during the 2010s.
So debt servicing hasn’t been an issue. I used to see lots of graphs from economists saying, oh, the debt’s up, but debt servicing is down. So nothing to worry about.
Well, all I can say is that that is dramatically changing, as you point out, in the last 18 months to two years, interest rates have gone up from the Federal Reserve from virtually zero to now five percent, with predictions to go up to five and a half. That’s the Fed’s own prediction.
And if it stays at that level with 100 percent of GDP debt, actually higher if you look at gross debt in the case of the US, then there’s going to be a dramatic increase in debt servicing costs. And that can only eat into real productive use of government money.
You’d be like lots of emerging economies, so-called emerging economies, that have huge interest payments that they have to make on their public sector debt.
The US will be becoming what I call a global south public sector if that continues over the next five to 10 years.
RADHIKA DESAI: I remember many years ago when the 2008 crisis hit, we had invited Giovanni Arrigi, the very noted world systems analyst, and Robert Brenner, the economic historian, to come and talk about what had happened.
And it was a big public meeting. And Giovanni Arrigi raised, he basically said the time has come for the United States to face its own structural adjustment. And there was an absolute uproar of applause when he said that.
And he was not wrong. To some extent, these things did happen. And today, it seems to me that the ability of the United States to keep on borrowing and spending is now in question to an even greater extent, you know.
So at the moment, for example, first of all, the massive borrowing that is now expected. Remember that for the first several months of the year, like five, six months of the year, the government has not been borrowing.
MICHAEL ROBERTS: No.
RADHIKA DESAI: And despite that, you had a drop in the value of US treasuries, which led to these banking collapses and so on, because they had had too much of their assets were in the form of treasuries. And these assets had lost value and blah, blah, and so on.
We know that whole story. We’ve covered that in a different program. So that was already happening.
Now, there’s going to be, according to all accepted estimates, about eight hundred billion dollars of borrowing in the next four months and a trillion dollars of borrowing before the end of the year. All this debt issuance is going to put a huge pressure on the market.
The question is, if the US could not already could not borrow without raising interest rates in the past, this is going to become an even bigger problem. So this is going to keep interest rates high.
And what’s more, all of this is happening when, in fact, there are deep structural reasons why the United States is going to keep needing to borrow more.
Number one, it’s an aging society. Aging societies are going to have to spend more. They’re going to have to borrow more unless, of course, they subject the elderly to a level of neglect, which we have not yet seen in advanced capitalist societies.
Number two, there’s going to be, these constraints on borrowing are going to also constrain government spending.
And without very substantial government spending, you’re not going to turn the US economy around.
And if you’re not going to turn the US economy around, while also refusing to tax the really rich, your revenue side is going to remain very weak
MICHAEL ROBERTS: It’s a vicious circle, really, Radhika. If you don’t carry out government investment big time in order to raise the productivity of the economy in productive sectors, then growth will remain.
I mean, the Fed and the government is predicting growth rates this year of maybe a half a percent, maybe one, but half a percent minimum next year, much the same.
And in fact the Congressional Budget Office predicts that the average growth rate in the US will be in real terms for the GDP about one point eight percent. I don’t think they’ll even achieve that at the current rate.
But even on that basis, that’s not going to be enough to avoid a problem, not only in the public sector debt, but in debt in general.
Because what’s going to happen in order to compensate for that is that companies and others are going to borrow more and the government will be forced to borrow more because it’s not getting the revenues as a result of higher incomes that everybody is getting.
Apart from the inequalities of the taxation system, which is just ludicrously inequality.
I mean, the average worker in the United States is paying something like a total tax effective rate of all sorts of taxes more than the top 0.1 percent and 1 percent.
I mean, that is just a ludicrously unequal and unfair way in which to raise revenue such as it is at the moment. So it is a vicious circle.
We need growth. I just have to say this here. The argument that we’ve got to lengthen the years required before you get your pension and you’ve got to make more contributions each year. You’ve got to have more years of contribution because we can’t afford to pay decent pensions to people when they get old.
This is absolutely nonsense. Just if you had a growth rate, not a three, two percent a year or one percent a year, but three percent a year and you devoted that to increase tax revenues to the government, and they would easily be able to meet the pension requirements that people have as they get older over the next generation.
But of course, US and other capitalist economies cannot grow that level anymore. They’re not achieving that. So we have to pay for that.
RADHIKA DESAI: Absolutely. And, in fact, you rightly pointed out the inequality, of course, is shameful.
It’s morally repugnant, but it’s also economically counterproductive because, on the one hand, the Federal Reserve and other central banks like the Bank of England and so on keep worrying about the wage price spiral. And keep blaming the current inflation on a surge of demand.
But in reality, demand has been so weak that it has actually constrained investment. And by keeping inequality high, you are keeping demand, broad based demand weak.
And therefore you’re creating another obstacle to the productive revival of the economy. This is not going to happen.
So inequality is also economically deeply counterproductive.
And I just wanted to add that, essentially in terms of this question, I mean, basically the US’s fiscal wars are only going to increase.
And as the US’s fiscal wars increase, people forget, the last time we had this debt ceiling drama under President Obama, once again, the deal was reached and everything was fine.
The government could borrow again, etc., etc. after a brief government shutdown. Fine.
But nevertheless, even after the deal was reached, I think one of the big rating agencies, maybe S&P or something, actually downgraded US debt.
I think today we are facing an even worse set of circumstances and a similar type of downgrading, whether it takes place officially or just unofficially that, essentially the rest of the, essentially markets do not want to purchase US debt.
There is going to be further fiscal problems baked into the present scenario.
So maybe now we can go to, unless you have anything to add, we can go to the next question, which is how does this impact the Federal Reserve and its remit to maintain financial stability, to contain inflation?
And its third remit, which is talked about more than it’s ever fulfilled, which is, of course, to keep levels of employment high.
MICHAEL ROBERTS: Well, one of the things that the Federal Reserve does do is actually buy most of this government debt.
We’ve seen over the last 10 years or so that the biggest buyer of government debt has been the Federal Reserve in order to keep bond yields down, interest rates down and make it easy for the government to finance its spending.
Because, part of the reason for that is that, whereas foreign buyers of US government debt were about 25% of the total debt purchases each year, have gradually reduced their share of buying debt.
Their main buyers were the Japanese and the Chinese.
Part of the reason is because they don’t quite have so much money to reinvest into US treasuries, but also they’ve been trying to diversify out of the dollar.
Particularly China doesn’t want to be dependent on having all its assets in dollar assets, which could, we now know, be seized if the US government feels that the Chinese has stepped out of line from its policies.
So there’s been a significant diversification going on amongst the countries that used to hold US government debt.
The Federal Reserve has driven interest rates down and bought a lot of that debt.
Now, as we go into the rest of this decade, that’s going to be much more difficult for the Federal Reserve to do, because it’s supposed to be tightening monetary policy and it’s actually selling this debt back into the market and to reduce its balance sheet.
So we’re seeing a reversal of the policy of the last 10 years as a result of the situation that they’re in now in trying to control inflation.
So the European Central Bank isn’t exactly in this dilemma.
They want to sell back a lot of the debt that they’ve built up over the last 10 years, particularly with countries whose debt is not really very promising in terms of its returns, like Italy and Greece and other countries.
But if they do that, they tighten the interest rates further and squeeze the eurozone economy more.
I heard President Lagarde say at a recent press conference, it’s not a trade off. We can do both. Apparently, we can ensure that we can sell all this debt back into the market and we can avoid inflation, get inflation down without having to raise interest rates too much.
I don’t see how that’s possible. And only this week, she said that there’s no alternative, but we’ll have to continue hiking. So they’re in a dilemma here now, the central banks, for the first time.
The foreigners aren’t around to help them out and the governments are facing significant debt issues, fiscal issues. And yet they also have to control inflation.
So it’s a dilemma that we haven’t seen in the previous two decades.
RADHIKA DESAI: Absolutely. I think the Federal Reserve’s ability to perform any of its major functions is going to be radically reduced. So it’s not going to be able to tackle inflation.
Now, of course, the most fundamental reason it’s not going to be able to tackle inflation is actually, unless you think that it’s a good idea to tackle inflation by creating a recession.
Actually, the Federal Reserve has no way of controlling inflation. The Federal Reserve should essentially keep managing money reasonably prudently.
But the point of tackling inflation is to actually expand productive capacity, which is the function of government and not of the central bank. But let’s just leave it, leave that aside.
Of course, everything the Federal Reserve has done, whether to tackle inflation or to keep employment levels high, has actually been primarily about aiding the financialization of the US economy, aiding asset markets when interest rates are low or simply giving people extremely lucrative assets when interest rates are high.
One way or the other, financialization has occurred, whether in the 80s and 90s, when interest rates were relatively high or in the 2000s and 2010s when they were relatively low.
But and nevertheless, in the process of the last two decades of low interest rates, the Federal Reserve has jacked up a nine trillion dollar balance sheet by buying all sorts of assets, including, as you rightly pointed out, US Treasuries.
The US Federal Reserve is one of the chief buyers of the US Treasuries, chiefly because the rest of the world, rest of the markets do not want treasuries in the volumes in which they are being emitted by the Federal Reserve, by the US government.
So the Federal Reserve has to aid the US government by buying. Otherwise, the prices of treasuries will drop even further and the cost the US will have to pay for borrowing will rise even further.
And also as you rightly say, the federal government was engaged in a certain amount of what’s called quantitative tightening, withdrawing liquidity from the markets, whereas in the last two decades it’s been pouring liquidity into markets.
But this had only gone to financial institutions and aided the speculative activity. It had not gone to real investment in the real economy.
So now this new issuance of Federal Reserve debt is going to in fact, the issuance itself is going to be the opposite. It is going to be more quantitative easing in the sense that they are going to be more bonds.
But on the other hand, of course, rising interest rates are going to actually have the effect of a certain amount of tightening. But none of these processes are under the control of the Federal Reserve.
Meanwhile, and this is my final point on this matter, its ability to maintain financial stability is going down the tube because the big reform that was made after 2008 and the reforms after 2008 were very weak.
But one of the ones that seemed to be functioning was to require banks to hold greater reserves. And a large part of these reserves were constituted by U.S. government debt.
But now that debt is falling in value and that means that the reserves of banks will be increasingly found to be inadequate. And we are bound to witness new episodes of what we saw in March and April this year.
So the ability of the Federal Reserve to guarantee financial stability is going to be even weaker.
MICHAEL ROBERTS: Right. One of the ironies of the recent banking crisis was that the Silicon Valley Bank had all these depositors who were able to take their money out by the press of a button. As we know, we can do that by the internet now.
But so they thought we better be safe about this. So we’ll invest in government bonds so that we are safe. And we’ve got government bonds, which how can bonds not be safe?
So they put a lot of money into long term government bonds. But of course, as you point out, with a huge rise in interest rates, the value of those bonds, for those of you who don’t understand, but then the bond prices fall when the interest rates rise.
So the value of the bonds that they were holding dramatically fell. So when they had to try and sell to cover a bank run by customers, they couldn’t cover those deposits because the value of those assets have fallen.
And currently, according to the Federal Deposit Insurance Corporation, is something like 700 billion dollars in as it were in the red, all the banks in the US because of their assets in government bonds.
And that situation is going to get worse. It’s not going to get better. So if there’s any worry on the part of customers about keeping their deposits in various banks, we could see further runs.
It’s no surprise that it’s JP Morgan that’s benefiting from all this. They swallowed up these small banks. They can appear to be having lots of deposits which they can sustain.
And they’re fleecing actually their customers by not paying them decent deposit rates. And yes, swallowing up the small banks.
So what we’re seeing is the result of this, if you like, the debt crisis in fiscally is gone into the banking sector and is now squeezing and concentrating the banking sector into an ever smaller number of multi large banks.
What could be a better case for public ownership of the banks when we can see how clearly it’s just a small number that control the financial sector we have?
RADHIKA DESAI: I mean, that’s again, that’s what makes me think that’s another whole episode that we could do another another show that we could do on exactly what’s happened, because, of course, every major financial crisis has led to the failures of many banks and therefore the increasing concentration of the banking system.
So in 2008, of course, as a result of the repeal of the Glass-Steagall Act, which had maintained this sort of firewall between investment banking and the commercial banking, essentially, once this firewall was eliminated, the big commercial banks, which have vast quantities of deposits and therefore vast quantities of money to throw into trading, they essentially wiped out the smaller investment banks.
And now we have essentially created a financial structure in the United States in which these exceedingly large banks were essentially licensed because they were covered by the Federal Deposit Insurance Corporation.
They were licensed to engage in speculation and guaranteed and essentially assured that any losses incurred due to this speculation would be covered or any disasters would be covered by the Federal Deposit Insurance Corporation, which, as you saw more recently, has also been now been extended in certain cases to cover deposits higher than the limit that was $250,000 limit, which is already quite high.
But anyway, a topic of concentration of the banking system and the case for public utility banking, I think we should probably definitely put it down on our list.
MICHAEL ROBERTS: It’s a revolving door to the people who work for JPMorgan and Goldman Sachs end up in the administration or in governments of other countries.
For example, the Turkish government has now got a finance minister who is in Goldman Sachs and the central bank governor is the person who used to be at First Republic Bank, one of the banks that’s gone down in the US.
It’s a revolving door. These people are either in government or in banking and vice versa. And the whole thing is totally interconnected.
RADHIKA DESAI: You know, I just wanted to mention before we move on to the next question, I read in The Hill, the congressional newspaper, a rather right wing person called Armstrong Williams, writing that essentially now that the Federal Reserve is sitting on all these treasuries which have declined in value, that the Federal Reserve itself has become insolvent.
Of course, it’s meaningless to say that the central bank is insolvent. But nevertheless, it is interesting that there is a lot of critique of the Federal Reserve out there.
But because so much of it comes from a certain right wing way of thinking, the critique never amounts to what it should really amount to, which is that the Federal Reserve should be essentially run as a public utility, it should be politically controlled, because independent central bank just means a central bank that’s captive of financial interests.
So all these things are completely erased.
MICHAEL ROBERTS: The right wing say that because their alternative is to close the central bank down and just have a free market of banks to issue whatever they like.
They believe that the idea of a central bank means socialism in the state. And we need to wipe out these organizations and let the free market rule in the financial sector.
Just imagine, viewers, what that would mean. If you were to implement that as the solution to the problem that central banks are now facing.
RADHIKA DESAI: Well, I mean, essentially, central banks, even though they have not performed this very well, the central bank, without a central bank, you wouldn’t have a substantial productive economy, because that’s what, levels of employment, levels of investment, etc, would plummet, essentially.
Which maybe brings us to our next question, which is how, how do you assess the effect of this deal on the economy?
We’ve sort of covered a bit of this already, but maybe you might want to say something about that?
MICHAEL ROBERTS: Well, I think one of the things I’d like to say at this point is we’ve discussed the public sector, public sector budgets, and debt.
But remember, that two thirds of debt is not in the public sector. It’s in the private sector.
And one of the big issues that we people ignore, because every paper talks about all governments running a deficit, or the government’s borrowing too much money.
But we never talk about the huge debt that’s been built up in the corporate sector, particularly amongst small companies, many of whom are so drowned in debt, make no profit, they’re just crawling along. We call them zombie companies, because they don’t make a profit, hardly can service their debt.
And yet you could say they clog the capitalist system up because they don’t are not productive. They hold back, block the way forward for more energetic companies, you might argue that’s one argument.
But also, a huge amount of debt means these companies are in danger of going bust. And we’re seeing a sharp increase in bankruptcies, both in Europe and the US over the last 12 months.
It’s still nowhere near where it was in 2008-9, when we saw the banking financial crash.
But it’s an indication that people should be aware that higher interest rates also damage what we might call the real economy, or at least the economy, which is supposedly producing the things and services that we need.
And the jobs that people have, are not talking about the banking sector or the government sector here. And that is a huge problem.
Where if you added up the total global debt, including the public sector, and this, the rest of it, the private sector debt, we’re talking about something like 250 to 300% of GDP in most of the advanced economies, which is just about 50 to 60% higher than it was 10 years ago.
That’s a tremendous deadweight upon the ability of the capitalist economy to produce things and services that we need.
It’s driving down productivity. It’s also making sure that profitability doesn’t rise, our profitability has been declining.
And it raises real frailties, as you pointed out, Radhika, in the financial system itself, because if a whole layer of companies go bust, banks are going to be in deep trouble, because they’ve been lending to these people.
And what’s called non performing loans will be rocketing and banks will go under. Not only are they losing money on the assets that they’ve taken on, but they also could lose money on the loans that they’ve handed out to this layer of companies.
I think the impact of debt in general, which we’ve seen build up dramatically in the last 10 years, in particular, but even longer than that, is an indication of how poor and how weak the capitalist economy is now in progressing the things that we need and the services that we require, not just in the big countries, but even worse, for the poor countries of the world, where debt is leading to outright defaults, and the collapse of the economy entirely.
RADHIKA DESAI: No, and you know, I just want to add one more point, this is so true.
Debt can actually be very productive, you can have banks that are lending to companies that are engaging in long term investment, creating jobs, expanding productive capacity, improving the quality of them, and quantity of economic production.
But the kind of debt that we’ve had over the last couple of many decades has been of the absolutely opposite type, because, first of all, as far as working people are concerned, our economies have been run in such a way as to as to put downward pressure on wages, either keep them stagnant or even declining in real terms.
And therefore, their debt in that case has been a replacement for income, and you can never really sustainably replace income with debt.
And as far as companies are concerned, essentially, debt has been used in a way that these kinds of economic raiders have essentially bought up companies, laden them down with debt, not in order to expand their productive capacity, but essentially to extract as much money out of them as possible.
And they have essentially constrained these companies from expanding in any way. And of course, with those levels of debt, of course, they are zombie companies, because they can barely produce enough to service the debt.
So the whole nature of the debt has been the big issue as well.
MICHAEL ROBERTS: It’s not productive debt anymore. It’s speculative debt, as far as the banks and the financial institutions are. And it’s a complete deadweight for a whole layer of particularly smaller companies.
Not just small ones, now, we’re beginning to see in the latest data across the board over the last 10 years, it’s a real indication of how unproductive capitalism has become.
And the solution for capitalism keeping going is to keep pumping in more debt, and if there’s a crash for the public sector to pick up the bill, and then the government has to expand that and increase our taxes and reduce our government spending accordingly.
This is a process which has been going on for the last two decades in particular, and it’s worse, it’s going to be worse this decade.
RADHIKA DESAI: Exactly. So overall, I think, Michael, what we are ending up seeing about the economy is essentially that the debt deal and what we can expect going forward is actually only going to make things worse, it’s going to make productive investment that much more difficult in a high interest rate environment.
Meanwhile, governments will continue borrowing in order to finance, particularly the military industrial complex, and all sorts of other inputs into the economy, which might help economically, are going to be curtailed. So we’re not looking at a good scenario at all.
If we go to our penultimate question, what do we think is going to happen? What this debt deal and what it generally indicates is going to do to the American financial system?
MICHAEL ROBERTS: Well, I think we’ve discussed the problems that the banks have got, you might want to look at it internationally, because I think we could say, as this is geopolitical discussion in a way, that it adds to the likelihood that the US dollar is losing its hegemony, its position of strength in the world economy.
As the debt builds up in the US, as the US economy doesn’t grow anywhere near as fast enough in order to fund a lot of the things it wants to do to control and police the world, the dollar is going to suffer.
Also, we’re beginning to see a number of countries that are prepared to go along with the former, if you like, Bretton Woods, Washington consensus of controlling everything through the US dollar, looking for alternatives.
The US dollar is beginning to lose its strength in the world, or its dominant strength. I’m not saying it’s disappeared.
Clearly, it hasn’t because trade is still a huge amount of trade is still in the dollar, huge amount of financial activity and capital flows is in the dollar, and reserves are still so much in the dollar, so that it’s still the international reserve currency.
But that situation is changing, and that’s beginning to deteriorate. And over the rest of this decade, I think we’ll see a significant change.
If we look at the data, the share that US dollar has in reserves has declined from around about 60% to 55 or 54, depending on what you put in that, and it’s going to go further down.
So we could be in a position, I think, as we get to the end of this decade, that less than half of all international reserves held by governments, that is to maintain their current account and their capital flows, less than half will be in dollars.
And that is a change, a big change, which is a result of the inability of the US economy to grow without expanding its debt, both private and public.
RADHIKA DESAI: No, I think that’s a really great, great point. And we’ve actually also segwayed into our final question, which is also, what will this do to the dollar system, and so on.
And that’s perfectly fine. So let me just add a couple of points.
I mean, as far as the financial system is concerned, we’ve already said that, of course, the declining value of American treasury securities of various maturities is going to impact the resilience of the banking system.
And we are going to see more bank failures. Very likely this will be contributing to more bank failures.
And at the same time, I think inflation is probably going to remain stubborn, because we have not solved the underlying problems domestically and internationally, everything the United States is doing is only going to increase the difficulty of accessing products that are sufficiently cheap that they help with inflation, whether they are commodities or manufactured products or what have you.
So in that sense, I think that inflation will remain stubborn, which then means that the Federal Reserve, pursuing as it does this policy where you have to increase interest rates to tackle inflation, it’s going to keep inflation higher for longer, which will, as we’ve noted in a number of previous programs, which is going to essentially exacerbate the dilemma of preserving financial stability or preserving monetary stability.
These two have been pitted against one another since the beginning of this current episode of inflation, and the dilemma will only get more acute.
And then as far as the US dollar system is concerned, the US dollar system really, that one of the, the bedrock of the US dollar system is a robust market for US treasuries.
And as we’ve noted already, the market for US treasuries has been troubled for a long time now. The attractiveness of US treasuries is declining.
So as a consequence, the market is becoming, as they say, less liquid, that is to say, the volumes that are traded every day have been going down quite consistently.
And this matters, because if the volume is very high, then there is no problem for those who wish to buy treasuries and no problem for those who wish to sell them.
But with the volumes going down, it’s actually going to be more difficult to be able to sell treasuries.
Domestic and foreign buyers each have their own reason for not being particularly enthusiastic about buying treasuries.
And if they do buy them, they will demand higher interest rates, which then further compounds the problems, because it will lead to an even greater issuance of treasuries in order to meet the interest payments.
So you can see that the United States is going to, and the United States dollar is going as a consequence to have a really tough time.
The Federal Reserve is already one of the biggest buyers of treasuries. And if anything, if this trend continues, it will have to become the main buyer, raising a very serious question about whether US debt really can be called a sort of a debt generated by markets.
If there is such a big buyer, your own central bank is buying the debt. So yeah, and this may also affect the ratings, as we’ve already said. So Michael, any last thoughts, perhaps?
MICHAEL ROBERTS: No, I think the discussion we’ve had has demonstrated, I hope, for those who will watch this, that when we look at the question of the debt ceiling, which is where we started, we can see that’s just a small piece of the general puzzle of global debt, particularly US debt, both public and private, but also globally.
And how the rising level of interest rates that we’ve seen over the recent period, supposedly to control inflation, you and I know that it doesn’t do any such thing, but that is the aim of it in order to keep wages down and also to keep profits up is what’s really behind it, is actually creating a problem not only in financing this debt and servicing this debt over the next period in the US and elsewhere, but also causing terrible damage to the government finances of the poorer countries of the world who have so much dollar debt, and they’re seeing sharp interest rate rises.
So viewers should bear in mind that when we talk about the debt ceiling in the US, this is just a small part of the disaster that’s going on for debt in many poor countries of the world, in Egypt, in Pakistan, in Ghana, in Sri Lanka, a whole range of other ones too, that are facing basically meltdown in terms of their government finances and their ability to help the impoverished populations that they do have.
RADHIKA DESAI: No, that’s really a great note to end on, and maybe I’ll just add that, this also puts in question this whole idea that, somehow the United States has the exorbitant privilege of borrowing cheaply from the world.
The United States is not borrowing cheaply at all, and I think this also puts another nail in the coffin of the idea of dollar hegemony.
But there are so many more things to discuss, Michael, and I hope that we’ll have you back.
I should say to our viewers that this installment, this 11th Geopolitical Economy Hour, is a bit late because I’ve been traveling, and Michael Hudson, who also often joins us, has been busy with other things.
But hopefully, Michael Roberts, we will have you back, perhaps with Michael, without Michael Hudson, without.
But it’s wonderful that we’ve already touched on three or four further things that we could profitably discuss in a Geopolitical Economy Hour.
So thank you very much for joining me today, and looking forward to having you back.
MICHAEL ROBERTS: Thank you, Radhika, it’s been great.
RADHIKA DESAI: Thank you. Bye.