Observations of an Expat: Too Big to Fail

The US Treasury is too big to fail. Failure, however, is a real possibility. In fact, Federal Reserve Bank Chairperson Janet Yellen warned earlier this week that the government would be forced to default on its loans on 18 October unless the self-imposed cap of $28 trillion was raised.

Reluctantly, the Senate voted 48-51 to push up the ceiling by $458 million and postponed decision day to 3 December when battle will be recommenced.

There is a string of dire warnings if the cap is not raised by trillions in the run-up to Christmas. Forty percent of financial aid would be affected which would possibly mean no housing benefits, child benefits, social security, Medicare or Medicaid payments. Federal employees pay would be jeopardised. America’s credit rating would be downgraded. Interest rates would rise affecting mortgages, business loans and credit card payments. Inflation would go up with the obvious impact on prices and pensioners on fixed incomes.

The stock market is already teetering and could plummet. The dollar’s position as the world’s only reserve currency would be jeopardised, and because America is the globe’s biggest economy, the rest of the world will suffer.

The public debt ceiling has been raised more than 100 times since it was first imposed in 1917. Many of those occasions involved a bitter time-wasting partisan battle on Capitol Hill. And still the ceiling goes up and up. In 2007—just before the banking crisis– Congress was worried because the debt stood at $5.035 trillion. They raised the cap. Just 11 years after the 2008-2009 banking disaster public debt was $21.019 trillion and the country still had covid-19 to come.

The coronavirus pandemic has cost $2.95 trillion, a big slice of which was simply added to the debt mountain. President Biden wants an additional $3.5 trillion budget this year. Roughly $2.5 trillion would be spent on physical infrastructure and another trillion for what is being called “social infrastructure.”

Republicans and Democrats agree that big money needs to be spent on repairing America’s neglected and crumbling roads, dams, bridges, airports, railways, water, electricity, schools, hospitals… Donald Trump earmarked a similar amount in his budget plans. But the Republicans are less keen on Biden’s plans to spend a trillion on projects such as improving racial equality, in-home care and affordable housing. Nor do they like his proposal to reverse Trump’s tax policies and raise a trillion dollars over 15 years by increasing corporation tax from 21 to 28 percent.

It is America’s proud boast that it has never defaulted on a loan. It came close in the aftermath of the Revolution but managed to scrape by. For most of its history it has dispensed with caps and political control of the public debt. There was a brief period during the Panic of 1837-38 when a cap was imposed, but it was not restored until 1917 when the US was faced with the staggering cost of World War I.

The 1917 Second Liberty Bond Act gave the Treasury discretion to raise money by the sale of bonds and other limited loan arrangements as long as the amount raised remained below a level set by Congress. In 1939—at the tail end of the Great Depression—Congress passed the US Public Debt Act which forms the legal structure for the current debate.

Very few developed countries have an equivalent to the Public Debt Act. In Europe, the only other country with a similar system is Denmark. Various alternatives have been suggested as alternative debt mechanisms. They include everything from national crowd funding to crypto currencies.

The International Monetary Fund (IMF) has for many years suggested that the US adopt a “Sovereign Debt Restructuring Mechanism.” This was used in the 1980s and 1990s reasonably successfully to help developing countries out of their debt crisis. Sovereign Debt Restructuring is basically a national version of America’s Chapter 11.

One thing is clear, an American default would, as Ms Yellen, said “permanently damage the US economy”. And if the US economy is damaged, so is the world’s.

* Tom Arms is foreign editor of Liberal Democrat Voice and the author of “The Encyclopedia of the Cold War” and the recently published “America Made in Britain” that has sold out in the US after six weeks but is still available in the UK.

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This entry was posted in Op-eds.


  • Peter Martin 9th Oct '21 - 9:44am

    If the Americans are worried about their National Debt there is a simple enough solution. Issue 27 trillion dollar coins. Apparently the issuing of coins doesn’t count as National Debt although I would struggle to explain why not.

    If they issued a couple of extra ones they could have a National Asset instead of a national debt. Actually the US already does in the form of land , oil reserves, even ownership of the spectrum which more than offsets any debt.

    The US has a GDP of about $21 trillion or a GDP to debt ratio of 130%. So in conventional term this would equate to someone with an income of $100k having a debt of $130k on a property which was worth ten times that. So nothing to lose any sleep over especially as most of that debt is owed to other Americans or owned by Americans and that the interest payable is ultra low.

    I appreciate that we shouldn’t equate National finances to household finances but it sometimes helps to get a perspective. In realty what matters in the level of spending in the USA, public plus private, the level of inflation and the amount of slack in the economy.


  • John Marriott 9th Oct '21 - 10:07am

    Do we really want to see the Orange Man or his surrogate back in the White House in 2024? More importantly, do the US voters? Equally, do the Democrats want to lose control of Congress after the 2022 Midterm elections? If you ask me, Joe and Co are going the right way for this to happen. Putting aside the Afghan embarrassment, what ARE the so called ‘progressive’ democrats playing at in insisting on policies that will just alienate those swing voters, who may have a big rôle to play next year and in three years time?

    While Peter Martin is probably right about the US indebtedness (he usually is on most things, or at least that’s what he would have you believe), it’s the ‘optics’ that worry me. The thought of Johnson winning another term over here whenever the GE is called is bad enough; but couple that with another ‘America First’ Republican President of whatever colour and you have the perfect storm!

  • The US debt ceiling has never made much sense other than as a political tool that the Republican party can wield to stall the agendas of Democrat presidents. The economist had a article last week referencing a couple of recent papers by authoritative US economists. Peter Orszag, Robert Rubin and Joseph Stiglitz argue for “a new fiscal architecture. An important part would be to index long-term spending to underlying drivers. For example, social-security benefits could automatically be made less generous to take into account increasing life expectancy. This can be thought of as a fiscal rule that would commit governments to sensible budgetary decisions, rather than specifying debt targets with spurious precision”.
    In another paper this year Olivier Blanchard and others proposed general fiscal standards for the eu, such as “requiring governments to ensure that their debts are sustainable, but leaving it to them to choose their policy mixes. Independent fiscal councils could then use detailed debt-sustainability criteria to assess their budgets. If done methodically, this would be more scientific than the fiscal rules now seen in America and Europe”.
    Corporations have similarly altered their financial strategies in recent decades in response to long-term declines in interest rates and have loaded up on low cost debt while buying back equity that is typically more expensive to service. Private equity acquisitions like the Morrisons takeover will often use sale and leaseback of stores and share buybacks to restructure the financing of groups with tax deductible debt interest to lower tax bills and pay greater returns on a reduced level of equity.
    Firms use debt to asset ratios or revenues and interest cover as the metrics for debt sustainability. It is unclear why government does not apply these tried and tested methods as Oliver Blanchard argues with the important caveat that “the confidence that economic growth can surpass interest rates stems from the belief that rates will remain subdued well into the future as the population ages. But America’s ongoing bout of inflation has shown just how uncertain that is. Should central banks need to jack up interest rates to quell price pressures, debts would quickly spiral higher”.

  • Brad Barrows 9th Oct '21 - 11:28am

    @Peter Martin
    As I recall, Germany tried to pay off its First World War reparations debt by printing more paper money – and we all know how that played out. Most governments seek to debase or devalue their currencies to reduce their debt burdens rather than actually pay off those debts by running budget surpluses. Gordon Brown briefly had a period where the UK had a surplus so that national debt was actually reduced, but this is highly unusual. Voters tend to vote for politicians promising extra public spending or reduced taxes rather than those who promise to not spend more or not to tax less so as to reduce that Debt burden passed to future generations.

  • Peter Martin 9th Oct '21 - 11:52am

    “Firms use debt to asset ratios or revenues and interest cover as the metrics for debt sustainability. It is unclear why government does not apply these tried and tested methods….”

    It’s perfectly clear.

    A firm isn’t a currency issuer. It’s only concern is in the profitability of its own operation. It doesn’t care about the wider economy. The management might be somewhat concerned over the voting of their shareholders in an annual general meeting but they won’t to be thrown out if their workers are unhappy or if too many of them have been dispensed with.

    On the other hand a Government does have wider concerns. It has to manage the national economy in the interests of all. It’s own financial position isn’t relevant except insofar as it affects everyone else. It’s not the Government’s debt that is the problem. Why would it be? But, the assets that it creates in the process for everyone else might be. They could cause the economy to overheat and create higher than desirable inflation.

    On the other hand the economy could be stagnating with high levels of unemployment. Getting it wrong either way will lead to electoral difficulties. No-one votes the Government out because they haven’t made a profit! It’s a meaningless concept for a currency issuer.

  • Peter Martin 9th Oct '21 - 12:10pm

    @ Brad Barrows,

    All money is either printed or created in a computer. No country in the world operates on a gold standard. If it ever did work the way you think it does, it certainly doesn’t any longer.

    Government issues the currency when it spends and gets most of it back in taxes. In boom years, ie when credit fuelled private spending is excessive, there might even be a surplus but it simply isn’t possible for a Government to regularly recoup more in taxes than it spends into the economy to begin with? Where would those continued surpluses come from?

    “reduce that Debt burden passed to future generations.”

    Future generations will consume what they produce. No more no less. They won’t be able to send anything back in time to ‘repay’ anything on our behalf. The post war generation is generally reckoned to have done alright! The repayment of debt wasn’t an issue. No politician ever said we couldn’t buy that house or that car because the money was needed to repay war debts! If houses and cars were available we could buy them. The house builders and car manufacturers needed us to buy them.

  • Peter Martin.

    money is a financial instrument defined as any contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another party. Currency issued by states, bank lending and share issues by corporations all share the characteristics of financial instruments. Listed corporations issue stock or bonds based on expected revenues to finance their activities in the same way as states can issue currency or bonds to finance public spending based on expected future tax receipts. Firms do indeed care about the wider economy and adjust their strategies accordingly.
    Oliver Blanchard sets out the types of constraints nation states face in his article https://voxeu.org/article/ditch-eu-s-fiscal-rules-develop-fiscal-standards-instead
    “The problem with not just past and current EU fiscal rules, but any set of fiscal rules built around country-invariant debt and deficit ceilings is that they are an extremely poor proxy for debt sustainability, for at least four reasons. First, sustainability does not just depend on debt levels – or even debt and deficit levels – but also on future primary balances, interest rates, and growth. Second, there is significant uncertainty around the difference between future interest and growth rates: while this relationship is currently expected to be negative far into the future, implying that even high debt is consistent with a primary deficit, this could change. Third, the primary balance that a country can achieve depends on many additional factors. These include its starting level, the starting level of taxes, the type of government, and the willingness of the population to support fiscal adjustment. Fourth, investor confidence matters. While the ECB may be able to rule out extreme ‘bad equilibria’ in which lack of investor confidence becomes self-fulfilling – as very high interest rates feed into higher debt – it cannot eliminate cross-country differences in the credibility of fiscal policy. This makes it harder for some countries to adjust even if they want to, and consequently lowers the debt level that might be considered sustainable”.

  • Jenny Barnes 9th Oct '21 - 1:42pm

    @ Peter Martin “a Government does have wider concerns. It has to manage the national economy in the interests of all.”

    Not this one. It’s managing the economy in the interests of its class backers, which is why it’s quite prepared to immisserate the working poor and unemployed in a period of rising living costs and general economic mayhem by, in particular, removing the UC uplift. This is likely to lead to lower economic growth, not to mention the effects on the people concerned, but its more important to keep the poor desperate so they are willing to work rubbish jobs for poverty pay.

    As to Boris and his “high wage economy” – lump of labour fallacy is what that is.

  • Peter Martin 9th Oct '21 - 5:09pm

    @ Jenny Barnes,

    “Not this one. It’s managing the economy in the interests of its class backers..”

    We could have said the same thing about all previous Tory governments and some others too! But none of them, apart from in very exceptional circumstances, can get away without submitting themselves to the electorate every 5 years or less.

    So to this extent they often start off doing the wrong thing but are forced by a natural sense of self interest to mend their ways. We saw that with the Cameron – Osborne govt of 2010-15. It wasn’t quite so bad in the last couple of years. I would never underestimate the power of democracy.

    The lump of labour isn’t a fallacy. Agreed. However it doesn’t always mean that fewer available workers won’t create an upwards pressure on wages.

    @ Joe,

    I really don’t follow what you are trying to say! Can’t we have shorter quotes and more explanations in your own words?

    However, to pick out one sentence which I do understand:

    “Firms do indeed care about the wider economy and adjust their strategies accordingly”

    Maybe but only insofar as it affects their own finances. This isn’t a criticism necessarily. That’s the way the system is. The job of the directors is to manage their company to best effect.

  • Peter Martin 9th Oct '21 - 5:16pm

    @ Jenny,

    I meant “The lump of labour” IS a fallacy. Agreed. However this doesn’t always mean that fewer available workers won’t create an upwards pressure on wages.

  • Brad Barrows 9th Oct '21 - 6:31pm

    @Peter Martin
    I think you understand that the phrase “debt burden passed to future generations” is referring to future generations of taxpayers who will find themselves pay higher taxes than would otherwise be the case to service or pay off the debt the government has incurred. Of course, since those individuals who own the government’s debt will receive a greater share of the wealth produced in the future than would otherwise be the case, you are correct that all wealth produced by future generations will be consumed by those future generations. It is just that the distribution of the consumption will be different with the vast majority losing but the wealthy minority benefitting.

  • Peter Martin,

    The world’s six largest companies – Apple, Microsoft, Saudi Aramco, Amazon, Alphabet and Facebook have a market capitalisation equivalent to the entire wealth of the UK. They have the capacity to issue debt or equity instruments to the extent that they can reasonably service the obligations from their continuing revenue streams without depressing their stock prices. UK governments are in a similar position. They can issue currency or bonds to the extent that those obligations can be serviced by future tax receipts without debasing the purchasing power of the currency.

  • Peter Martin 9th Oct '21 - 7:17pm

    @ Brad,

    “It is just that the distribution of the consumption will be different with the vast majority losing but the wealthy minority benefitting.”

    It’s possible that wealth differentials will increase. Equally its possible they will go the other way. We’ve not done too well in this respect since the rise of neoliberalism in the late 70s. Lets hope the next generation will do better. It’s really down to them how the available production is shared out once we are no longer around.

    @ Joe,

    With the possible exception of Saudi Aramco which is effectively an integral part of the Saudi State, the other companies like Apple and Facebook are not able to set their own laws. They don’t have a police force and they don’t have an army! Ultimately they can be stripped of any near monopoly power by being compulsorily broken up into smaller companies by the legislative power of Government.

    In 1911 the US Supreme court ruled that Standard Oil was an illegal monopoly and ordered it to be split into competitive units. It’s a not a new problem.

    “If the nation state is dead why does Wall Street spend billions of US dollars trying to influence who wins government and once government is decided on influencing the outcome of specific legislation.”


  • Peter Martin,

    each of those companies as well as ExxonMobil (the successor business of Standard oil) operate across the globe. They can command considerably greater resources and correspondingly greater spending and borrowing capacity than at least half of nation states.
    As to armies and police forces – In 1937, Iraq Petroleum Company (IPC), 23.75 percent owned by ExxonMobil), signed an oil concession agreement with the Sultan of Muscat. IPC offered financial support to raise an armed force that would assist the Sultan in occupying the interior region of Oman. This led to the 1954 outbreak of Jebel Akhdar War in Oman that lasted for more than 5 years.
    More recently ExxonMobil was embroiled in a lawsuit alleging that ExxonMobil knowingly assisted human rights violations, including torture, murder and rape, by employing and providing material support to Indonesian military forces, who committed the alleged offenses during civil unrest in Aceh https://www.reuters.com/article/us-exxonmobil-indonesia-idUSTRE7676I120110708
    Steve Coll’s book, Private Empire: ExxonMobil and American Power https://www.economist.com/books-and-arts/2012/08/11/oozing-success, says that he thinks that ExxonMobil is “able to determine American foreign policy and the fate of entire nations”.
    Protecting its commercial interests in the USA and across the globe is why Wall Street spends billions of US dollars trying to influence who wins government and once government is decided on influencing the outcome of specific legislation.

  • Peter Martin 9th Oct '21 - 9:11pm


    No-one is saying that large companies don’t try to protect their own interest or break the rules. Just the opposite in fact. However those rules, ie laws, are still set by National governments. Even very small ones like Iceland can thwart the desires of large US hedge funds to reclaim lost money if they are sufficiently determined. Whether that’s justified is a matter of opinion. That’s not really the point in qustion.

    We shouldn’t blithely go along with the fashionable notion that it’s only supranational entities like the EU which have the capability to stand up to the big corporations. On the one hand Lib Dems want to hand over considerable powers of central government to the EU and devolve most of what’s what’s left to local councils. It’s just what the mega-corporations would wish for.


  • Nonconformistradical 10th Oct '21 - 8:51am

    @Peter Martin
    “No-one is saying that large companies don’t try to protect their own interest or break the rules. Just the opposite in fact. However those rules, ie laws, are still set by National governments. Even very small ones like Iceland can thwart the desires of large US hedge funds to reclaim lost money if they are sufficiently determined. ”

    Could it be that Icelandic politicians might be less influenced by vested foreign commercial interests than some in other supposedly democratic countries where regulation of political donations is lax and hence potentially skewed by contributions from vested interests?


  • Jenny Barnes 10th Oct '21 - 9:21am

    @Peter Martin “The lump of labour isn’t a fallacy. Agreed. However it doesn’t always mean that fewer available workers won’t create an upwards pressure on wages.”

    Having disentangled the double negative, I disagree if we are talking about real wages in general. Mr Johnson was suggesting that by cutting immigration we can have a high wage economy, not a high wage sector. For sure, the shortage of HGV drivers will have the effect of putting their wages up. But absent productivity (self driving lorries anyone?) all that does is put costs and prices up, creating inflation and depressing the real wages of everyone else. I notice that the government are not putting up NHS health workers wages, despite the huge shortage. Still, that’s in line with forcing everyone to go private.

  • Peter Martin 10th Oct '21 - 10:47am

    @ Jenny,

    But we aren’t talking about real wages in general, but the wages, both real and nominal, of particular categories of workers, especially at the lower end of the income scale. The lump of labour is a fallacy because it assumes there is only a fixed amount of work to be done. So having more workers doesn’t have to mean that we have less work to be shared out. But the government has to play its part in expanding the economy by using its monetary and fiscal powers.

    If it is applying contractionary policies, or austerity based policies, at the same time as we are having more workers then lower end wages will fall and standards of living too. Jobs will become less secure and also less productive. We’ll see, for example, the return of servants into the homes of the better off after years of them having to do without.

    So, yes, those who have since been able to afford, say, the cheaper nannies will have higher real wages but they don’t generally describe their income as wages in any case.

    @ Nonconformistradical,

    Possibly Icelandic politicians are less susceptible than others to high pressure financial lobbying. I’m not sure. We see it all the time here. A political party gets a huge donation and then the government makes a favourable spending decision in return. High ranking politicians are told by a Government contractor they’ll be given a lucrative consultancy after they retire. It’s a form of corruption which does need to be stamped on much harder than it is.

  • Nonconformistradical 10th Oct '21 - 2:46pm

    @Peter Martin
    “Possibly Icelandic politicians are less susceptible than others to high pressure financial lobbying. I’m not sure. We see it all the time here. ”

    Could it be that the bank crash in Iceland which hit the country so hard is a factor?
    “But unlike other Western economies, the Icelandic government let its three major banks – Kaupthing, Glitnir and Landsbankinn – fail and went after reckless bankers. Many senior executives have been jailed and the country’s ex-prime minister Geir Haarde was also put on trial, becoming the first world leader to face criminal prosecution arising from the turmoil. although he was subsequently cleared of negligence.”

  • Peter Martin 11th Oct '21 - 10:41am

    @ Nonconformistradical,

    The banks in question weren’t allowed to fail completely. I’ve just Googled the last one and this is stlll functioning

    The Icelandic Government did however have a discriminatory policy between between domestic and overseas account holders. The former largely kept their money, the latter largely didn’t! Naturally this didn’t go down well internationally and legal moves were made against the Icelandic government.

    There’s always going to be a problem for a small country like Iceland, with banks offering overseas accounts in a foreign currency. They don’t have the backing of the central banks in charge of those currencies and so there’s no effective insurance against a bank failure.

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