The Day of Reckoning

 The Bezos-ified Washington Post ran a big scary editorial the other day warning about looming fiscal catastrophe, due to the inexorable rise of government spending and public debt. 

On the one hand, I'm tempted to dismiss this as ideologically-motivated alarmism. (One notices the essay points the finger at entitlement spending but does not mention Trump's tax cuts for the wealthy and corporations, e.g.) Besides, people have been saying for years that we are headed for a debt crisis, yet it never actually seems to arrive. 

On the other hand, there are reasons to think this time might actually be different. Not only has the public debt ballooned to epochal proportions, relative to GDP. More importantly, we have actual signs in the bond market that foreign investors are starting to question the belief that U.S. Treasury debt is the ultimate safe-haven asset. 

Yields on 30-year government bonds shot up yesterday to a multi-decade high. This means people are starting to demand high rates of interest in order to agree to hold long-term U.S. debt. This in turn increases the costs the government must pay every year to service its debt—driving the Treasury even further into the red. 

In a related warning sign, the Treasury Secretary just staged an unprecedented intervention in Japan's currency markets in order to save that country's central bank from having to sell off U.S. Treasuries in order to strengthen the yen. The purpose of such a move was not wholly altruistic: a flood of U.S. bonds on the market would have driven up yields on our government debt even further. 

The fundamental axiom on which the entire global financial system rests is that U.S. government debt is sound. In a world without a gold reserve, the ultimate backstop for our entire financial order is simply people's faith in U.S. promises of future payment. 

If people start to question that article of faith—as bond investors globally now appear to be doing—it becomes a big problem. 

This tends to give one a cartoonish sense of walking off a cliff onto thin air and simply hoping no one thinks to look down. As Thomas Love Peacock satirized the seeming alchemy and magical thinking of modern debt-financed growth in The Misfortunes of Elphin: 

"The advantage of growing rich by getting into debt and paying interest was then altogether unknown: the safe and economical currency, which is produced by a man writing his name on a bit of paper, for which other men give him their property, and which he is always ready to exchange for another bit of paper, of an equally safe and economical manufacture[.]" 

The proponents of indefinite deficit spending of the "Modern Monetary Theory" (MMT) variety used to argue that this is all a fake problem, though, because the U.S. Treasury can never actually default on its obligations. 

And this is true. U.S. government bonds are indeed "safe" in that sense. Bond investors never should fear then that the U.S. will somehow prove incapable of paying the nominal rate of interest. 

But what they might have to fear is that the U.S. government will just start to tolerate higher and higher rates of inflation in order to bring down the real costs of its debt. 

The MMT people never had a good answer to this difficulty; and they have gone noticeably quiet after inflation came back into the headlines as a major problem following the pandemic. 

This inflation fear lay behind the market's recent (albeit short-lived) freak-out following the new Fed Reserve chair's decision to hold interest rates steady. The concern was that a Fed captive to Trump's whims might just never take meaningful action to bring down inflation. 

So, foreign investors started demanding higher yields on long-term debt, since they fear the real value of these bonds will otherwise be erased over time by currency inflation; which makes debt more expensive to service; and thus the vicious circle continues. 

That's how a debt crisis really can happen, even in a country that will never officially default on its debt obligations. That's why we do actually have to worry about this problem of excess public debt at some point. 

As a character puts it in Thomas Love Peacock's Crotchet Castle (you can see that this topic of public debt was a frequent satirical target for the inestimable Peacock): "you would turn the whole nation into a great paper-money shop, and take no thought of the day of reckoning. [...] The day of reckoning [...] is the point which your paper-money science always leaves out of view."

Okay, but why not simply inflate away the debt? This was the question Keynes set himself to answer in his Tract on Monetary Reform. And he does actually come away with the conclusion that a certain amount of inflation is actually a good thing, because it lightens the burdens of debt over time and thereby transfers value from the passive to the active parts of the economy. 

This is doubtless part of the reason central bankers now aim for a 2% annual inflation rate, rather than no inflation at all (which would be practically incompatible with economic growth). 

But Keynes also suggests in the same book that there must be limits to this "inflation is good" principle. And modern Americans of both parties will not need any reminding from him that recklessly increasing prices year after year is not actually a good or pleasant thing. 

Of course, if all of our incomes and all of our prices really did predictably increase in lock-step with one another, then there would never be any change in the real value or any loss of purchasing power, so inflation would not be a problem. But, Keynes notes, what actually happens is quite different: 

"[W]hen the value of money changes, it does not change equally for all persons or for all purposes. A man’s receipts and his outgoings are not all modified in one uniform proportion. Thus a change in prices and rewards, as measured in money, generally affects different classes unequally, transfers wealth from one to another, bestows affluence here and embarrassment there, and redistributes Fortune’s favours so as to frustrate design and disappoint expectation."

Keynes's generation was particularly worried about the fate of the investor in government bonds. After all, those who had tied up their savings in ultra-safe government debt—known as "consols" at the time—had done so on the assumption that they were avoiding all speculation or risk and making the ultimate prudent choice. To inflate away the value of their investments entirely therefore seemed like a particularly cruel means of "frustrat[ing] design and disappoint[ing] expectation." 

Plus, if we really did try to get rid of the public debt by inflating it away, we would have the vicious circle problem again. Foreign investors would get wise to what we were doing, and they would demand ever-higher rates of interest in exchange for holding long-term debt (as they are already doing—as we've seen above). So bond yields would just increase in proportion to the expected rate of future inflation, and we'd never actually get out of the debt trap. 

Of course, some of the MAGA right would actually like nothing better than to bring the global financial system to its knees. They don't actually want the U.S. dollar to be the world's reserve currency, and they would like the whole pageant of backstopping the world economy with U.S. Treasury debt to end. 

So, maybe the long term goal for some Trump-aligned people is actually to deliberately bring about the debt crisis we all fear, and that Bezos's paper is warning against, so that other countries will stop buying U.S. Treasuries and trade imbalances will all tip back in the other direction again? (A great Ezra Klein Ken Rogoff interview from last year suggested that something like this scheme may indeed be afoot.)

As mentioned yesterday, I recently finished reading Arthur Koestler's The Gladiators, and I was struck by Marcus Crassus's description in the novel of the structure of the Roman global financial order in the twilight of the Republican period. It sounds very reminiscent of our own—at least as filtered through right-wing MAGA critiques of our current balance of trade: 

"On the one hand, we import goods from all over the world," says Crassus, "from corn to labour power—slaves—[....] How, do you think, does Rome pay for this colossal import-surplus? [...] The sublime trick of the Roman State is its receiving goods from its colonies without paying for them. [... E]verything our deplorable Asiatic subjects export to Rome is merely credited to the account of taxes to be rendered."

"In other words," Crassus continues, "we get everything for nothing—and, strangely enough, that is just what we are dying of. For it is no longer worth the Roman burgess's while to produce things: farmers can't compete with the cheap imported wheat, artisans can't compete with cheap slave labour. That is why there are twice as many slaves as burgesses in Italy. Rome has literally become a parasite state—the 'Vampire of the World.'"

He goes on: "As work has lost the capacity of tempting anyone in Italy, our productive powers don't develop either; the Gallic Barbarians' agricultural equipment is technically far superior to ours, and in most of our provinces industry has reached a far higher stage of development than here; all we ever invent are war- and gambling-machines."

You couldn't ask for a clearer summation of everything the populist Right sees as wrong with the pre-Trump neoliberal financial order. This is the essence of their critique of the trade imbalances, free migration flows, and use of the dollar as the world's reserve currency that have undergirded the U.S..-dominated global system up to now. As they see it: 1) underpaid and exploited undocumented labor drives wages down and removes the incentive for native-born people to work; and:

2) We import our manufactured goods from China (whose "equipment" is getting "technically far superior to our own") and pay for it with U.S. Treasuries—that is, mere empty promises of future payments, i.e., debt, i.e., "accounts of taxes to be rendered"; and this in turn removes yet another incentive for our own citizens to labor and produce, because we can get everything from abroad for nothing, so our manufacturing sector also withers and dies. 

And so—instead of our status as the world's reserve currency playing to our advantage, "strangely enough, that is just what we are dying of," as Crassus puts it—our ability to get something for nothing from other countries actually harms our citizens, as MAGA sees it, because it eliminates any market for our exports. 

And so, the U.S. has replaced Rome in the modern age as the latest "Vampire of the World," which sucks things of real value from abroad while permitting our own citizens a merely zombified, idle, workless existence, parasitically devouring the produce of others while creating nothing of value ourselves—other than "war- and gambling-machines" (and, in this context, our debt-financed AI buildout, crypto bubbles, prediction market platforms, etc. can all be seen as just new iterations of the "gambling-machine"). 

It's easy to see that there are some elements of truth to this critique. The populist Left has pointed them out as often as the populist Right has. There has been a lot to dislike about neoliberalism from both ends of the political spectrum since its inception. 

But a couple things could be said in response to this critique. One is to point out that Trump is a very strange avatar for this critique—since he is busy producing nothing but "war- and gambling-machines" himself. What is the Trump crypto meme coin, after all—or his latest venture to try to monetize advance access to market-moving government information by charging people a fee for early notice of Truth Social postings— but a series of "gambling-machines" on an enormous scale?

Plus, Trump himself has repeatedly contradicted his own economic messaging. While he rails against trade imbalances and seems to want to have a robust U.S. manufacturing sector, his indiscriminate tariffs are actually hampering U.S. industry and eliminating manufacturing jobs. Plus, he says he supports a "strong dollar"—most likely because he is enamored with the word "strong" no matter where it appears—even though a strong dollar means lower U.S. exports and bigger trade imbalances of the kind Trump otherwise claims to deplore. 

Here as so often, then, the MAGA ideology that has sprung up around Trump seems to have little to do with the man himself—who appears incapable of pursuing any consistent or coherent worldview for long. 

Moreover, if the long-term MAGA goal really is to trigger a debt crisis deliberately, in order to end the global system's reliance on U.S. Treasuries and demote the dollar from its current position as the world's reserve currency, we can well ask: what is supposed to replace it? 

The modern populist right's proposed alternative to neoliberalism is obviously something infinitely worse: it is a closed, nativist, quasi-fascist state practicing something akin to economic autarky—hostile and suspicious of all outsiders while subjecting its own citizens to mental and moral enslavement. 

In other words, it is the alternative order of the Roman dictator Sulla, which Koestler in his novel contrasts with the fraying debt-financed global capitalist economy that Crassus describes: 

"The last one to try saving this putrid order had been Sulla. He saw the abyss towards which the State was driving [...] And so he presumed to turn back the wheel of history: the legendary order of far-back times, the age of patriarchs, was to be resurrected, an age that knew not world commerce nor the Rights of Man; whose vision was narrow and devoutly limited; an age of evil, bloodthirsty gods ruling the mind of mankind. Only those who could prove that the blood in their veins was that of the superior She-Wolf-Race were to be the Lords and Masters in this State[.]"

This sounds like a straightforward description of J.D. Vance's program for the United States—and, given the choice between them, I would prefer neoliberalism a thousand times over. 

Plus, it's worth remembering that, in Koestler's telling, Sulla didn't even succeed in installing his own stern vision of an alternative reactionary order: "[W]hen he went forth seeking to re-erect the heroic past," Koestler writes, "his conjuring call [...] was answered by the thousand tongues of informers, blackmailers, adventurers and spies. Like merry sharks they splashed about in the sea of spilt blood and grew fat on the victims's corpses, clung to the cliffs of favouritism. And the country's best men went into exile."

This sounds like what is already happening under the second Trump presidency. Some people on the populist right may have convinced themselves that Trump was seriously committed to restoring the so-called "strong gods," and that his obsession with tariffs, etc. was going to upend the neoliberal economic order, end foreign countries' reliance on the U.S. dollar, and restore U.S. manufacturing. 

Instead, Trump's carnival of blood and mayhem and persecution seems only to have conjured an army of grifters hoping to profit off the chaos. 

And I have zero doubt that if a future J.D. Vance regime tried to complete this project—replacing our current neoliberal order with an autarkic, nativist, and culturally reactionary right-wing authoritarian state—it would yield the same result—in addition to being an undesirable vision of the future in its own right, even if it were to succeed, for those of us who still believe in the ideals of the open society. 

As Crassus says of the right-wing populist project, in Koestler's novel: "Following all this to its logical conclusion, you should demand that [...] world commerce is stopped, the earth contracted to its old size, and all progress cancelled." And while some MAGA influencers and theorists, as well as some de-growth leftists, might be ready to sign up for that project—most American voters will not actually tolerate it. 

Is it possible to have the advantages of liberal democracy, free movement of human beings, and general openness without the downsides of the neoliberal order as we have known it up to now? I think so. We could combine free migration flows with changes to trading policies that reduced the pressures forcing people involuntarily from their homes, for one thing. 

We could also combine open migration with a program of legalizing the entire workforce and enforcing equivalent standards of wages and conditions across borders, through a project of international labor solidarity, rather than criminalizing people who are forced to migrate to seek work for reasons beyond their control, and trapping them even further in the shadows where they are bound to be exploited and reduced to near-slavery—harming both their interests and those of everyone else on the labor market. 

We could avoid a debt crisis, instead of deliberately triggering one, and we could do so not by slashing embattled social programs but by stopping our pointless foreign wars, like our brazenly unlawful attack on Iran, and eliminating tax subsidies for the rich. 

Instead of either the globalization of capital that neoliberalism represents—or the nativism of right-wing populism—we could have an alternative globalization of labor rights and social justice. 

But this will require a certain amount of patience, good faith, and aversion to zero-sum thinking that I fear our current political mood lacks. 

The great danger is that we will simply muddle ahead in our current direction: racking up ever more debt through fighting needless and illegal foreign wars, putting ever more people out of work through rampant AI development (which the Trump administration and J.D. Vance, for all their pseudo-populism, support—by the way), putting peasants out of work and land throughout the Global South, and then—when this mass of humanity is reduced to relying on public charity or trying to migrate in order to survive, cutting away even that final lifeline (as the Trump administration has done with its attacks on USAID, its closure of humanitarian migration pathways, and its cuts to safety net programs even for U.S. citizens, like food stamps and Medicaid). 

This is what Sulla did too, in Koestler's telling: after the farmers of the Latin countryside had first been reduced to beggary because they could not compete on a global market, and came to Rome in hopes of receiving a portion of the guaranteed public grain dispensation (shades of UBI proposals here) as the only means to survive, Sulla then "abolished the corn-benefit because the State needed all its money for the wars," as a character in Koestler's novel puts it. 

(Likewise, how long do you think it would take a right-wing government and the tech billionaires to eliminate UBI for an American workforce that really was reduced to surviving on public coffers in a post-work future, which many AI boosters still envision as a utopia of abundance?)

That seems to be the same one-two punch that our own political leaders are preparing for the world's poor—as well as the poor of our own country. First, the neoliberal economic order made traditional subsistence lifestyles unsustainable for many ordinary people—on the promise that this ruinous competition would open up better opportunities elsewhere. 

Now, having pauperized and proletarianized the global population on this vague promise, our political leaders attack the victim: saying "how dare you try to migrate across borders?"—when that was the whole premise of the package we sold to them. 

We are inflicting the same Catch-22 even on U.S. citizens. The promise of economic growth and globalization—as well as of the current AI revolution—has always been that the short-term displacement these things seem to cause will eventually be compensated by better jobs elsewhere. 

Instead, having deprived people of their original livelihoods, the administration now seeks to cut the food stamps and Medicaid payments they need to survive—while simultaneously requesting $1.5 trillion from Congress in funding for the Pentagon, so that it can continue the Iran war. They've "abolished the corn-benefit because the State needed all its money for the wars," that is to say.

As Thomas Carlyle once put it—why is it that the government always seems to find money to "shoot the French," but none at all to "keep the English living"?

And meanwhile, our public debt just keeps growing and getting more expensive to service—even as the U.S. government cries poverty when it comes to funding food assistance for the poor. 

Watching the spectacle, it's hard not to feel that there is some truth to Crassus's dire prophecy: "As long as no one comes along and invents a new god that declares the Barbarian peoples to be on equal footing with us and forces them to produce at the same price as we [see my proposals above about trade and migration reforms that would enforce equivalently high wage rates and labor conditions across borders ...] one day the inflated belly of our State will burst asunder, and the devil get us all." 

In other words, the choices before us are clear: chaos and fiscal catastrophe, reactionary authoritarianism and the retreat into a closed society, with all the horror and suffering that would entail—or a new globalization—but one based not on a diffusion of exploitation across borders, but on an equivalence of high wages and high living standards regardless of nationality—a new god, as Crassus puts it, that puts the workers of all countries "on an equal footing" for a change.