Once again, the federal debt is big news, as lawmakers grapple with bumping up against the U.S. debt ceiling. The government has reached its borrowing limit, and House Republicans claim they will not vote to raise the debt ceiling and allow further borrowing without real spending cuts, not reductions in planned increases.

High government debt is a significant problem.  The higher the debt to GDP ratio, the harder it may be for a government to borrow by issuing bonds, and investors will demand a higher interest rate for what they view as a risky investment.

It’s also a political hot potato, but quick fixes come with big downsides.  Slow and steady may be the best solution.

The federal debt held by the public as a share of gross domestic product increased to 98 percent in fiscal 2022. For governments this metric is comparable to the debt-to-income ratio a lender usually wants to know before approving a loan. Think of GDP as the nation’s income.

It is also a key metric investor use to measure just how creditworthy a country is.  When the debt-to-GDP ratio is high, investors begin to question government’s ability to pay back the debt and start demanding higher interest rates.

The Congressional Budget Office forecasts that the federal debt will increase to 185 percent of GDP by 2052.  Spendthrifts have been ramping up deficit spending for a crazy long time – U.S. debt has increased more rapidly than national income for more than half a century.  To be sure, monetary policy has contributed to the debt; providing cheap credit by keeping interest rates artificially low for more than a decade.

Federal government debt increased by $2.5 trillion in the fiscal year that ended on September 30, 2022, from $28,429 trillion to $30,929 trillion.  Since the new millennium, the debt has increased from almost $6 trillion to nearly $31 trillion.

Governments have four tools to retire debt.  One is to generate higher economic growth by focusing on GDP.  Growth increases nominal GDP, driving down the debt to GDP ratio over time and reducing the risk of a debt crisis.

Another option is to reduce deficits by cutting government spending.  This is politically unpopular in the best of times and therefore unpalatable to politicians.  Taking away something the body politic regards as a “right” or an “entitlement” can be a career ender.

Raising taxes is somewhat less unappealing, especially on those the electorate views as “rich.”  The risk here is that raising taxes may reduce the incentive to work, causing tax revenue to fall, which would force government to borrow more and thereby exacerbate the debt problem.

One other option remains: inflating your way out of debt and debasing the currency through inflation.  High inflation reduces the real value of the debt, allowing government to pay it off with money that is worth less than when they originally borrowed it. As prices go up, so does GDP.  It’s a bit like a snake eating its own tail.

Inflation makes old debt easier to pay off, but it also makes new debt more expensive. That means higher inflation can lead to spiraling hyperinflation. Trying to inflate debt away is dicey; it is by no means a silver bullet.

But compared to the other options, such as getting spending under control, slow, chronic inflation as embodied by the Federal Reserve’s 2 percent annual goal may be the most politically palatable way to reduce the debt.

If all goes well, such an approach might produce the much ballyhooed “soft landing,” or getting inflation under control without triggering a recession.

If you asked scholars to name the most important happenings in the last 50 years of American history, they would likely list events ranging from the Vietnam war, the Civil Rights Movement, invention of the computer chip, the Sept. 11 terrorist attacks, the Great Recession that officially lasted from 2007 to 2009, and the COVID-19 pandemic.

Missing from this list would be the so-called Nixon Shock, the 50th anniversary of which is upon us.

In a televised address on Aug. 15, 1971, President Nixon (America’s very own Richard III) announced that he was “closing the gold window,” ending the dollar’s convertibility into gold. Unilaterally ending the last vestiges of the gold standard and eliminating the final link between gold and the dollar was a consequential moment in U.S. financial history.

The Nixon Shock had profound implications for the U.S. and the global economy. The U.S. unleashed an era of floating exchange rates, which created a much less stable world economy, since currency values fluctuated due to the disconnect between them and something that was tangible. Many contend it was the beginning of an inflationist era of fiat money and created decades of turbulence in currency markets.

The president announced the end of the American commitment to redeem other countries’ dollars for gold at $35 an ounce, a bedrock of the Bretton Woods system of mostly fixed exchange rates that had been in place since 1944 and established the dollar as the world’s reserve currency.

Closing the gold window marked the end of a commodity-based monetary system and the beginning of a new world of fiat currencies backed entirely by the full faith and trust in the government that issued it. This gave the government and the Federal Reserve greater control over the economy because they can control how much money is printed.

The president’s main concern in 1971 was avoiding a recession that might cost him the 1972 election. He strong-armed Federal Reserve Chair Arthur Burns into keeping interest rates low in the face of rising consumer prices. President Nixon allegedly told the Burns, “we can take inflation if necessary, but we can’t take unemployment”, setting the stage for the birth of the Great Inflation of the 1970s, the Age of Aquarius.

In fairness to President Nixon, he inherited an economy from President Johnson that was under serious strain.  Federal spending to simultaneously fight the Vietnam War and build the Great Society created budget deficits that fueled inflation along with the growing U.S. trade deficit.

The U.S. had printed more dollars than it could back with gold. Inflation had started to rise in the second half of the 1960s, soaring from a mere 1.4 percent in 1960 to 13.5 percent in 1980.

Put plainly, too many dollars were abroad. By 1971, the pledge that an ounce of gold was worth $35 became void. The feds could not make it happen. So, they severed the link. The value of the dollar in foreign exchange markets suddenly plummeted, which caused increases in import prices as well as in the prices of most commodities priced in dollars.

For sure, the Nixon Shock was not the only reason for the accelerating inflation of the 1970s. For example, the Organization of the Petroleum Exporting Counties announced an oil embargo against the U.S. during the October 1973 Yom Kippur War in Israel. Oil prices surged by 400 percent and U.S. economic activity instantly dropped.  In 1973 the U.S. entered into the deepest recession since the Great Depression, but this time it was coupled with price inflation, not the deflation of the 1930s.

The Nixon Shock was another painful example of the politicization of the economy. Sound familiar? A key lesson for today is that price stability is paramount for a strong and growing economy. Tolerating high inflation in an effort to stimulate the economy is a dangerous game to play.

There is no getting around the fact that the United States’ primary strategic competitor for global leadership is the People’s Republic of China, which continues to extend its diplomatic, economic, and military influence internationally. Quite apart from China becoming the world’s second largest economy and its leading trading nation, policy makers increasingly describe its military buildup as a threat to U.S. and allied interests in the Indo-Pacific.

Put simply, the Pentagon considers China it most serious competition. Taiwan may be the issue with the greatest potential to turn competition into direct confrontation. Many military analysts note that after two decades of counterinsurgency wars, the U.S. can no longer be certain of its ability to uphold a favorable balance of power in the Indo-Pacific.

By contrast, China has the military strength, and in particular the long-range missile capability, to overwhelm the U.S. in the Indo-Pacific region according to the United States Studies Centre at the University of Sydney. China is now an adversary that is also a military peer. It is in the enviable position of being able to use limited force to achieve a fait accompli victory over Taiwan before the U.S. could respond.

This is not unthinkable, since the Chinese Communist Party regards Taiwan as an inalienable part of China.  The U.S. needs to defend Taiwan effectively against a Chinese invasion or blockade, because it is important to frustrating China’s strategy to achieve regional hegemony.  For many countries in the region, it is the canary in the coal mine — a strong indicator of how far the U.S. would go to defend them against China.

The two million strong People’s Liberation Army (PLA) is the primary concern of U.S. defense experts.  According to a 2020 Department of Defense report, the PLA has “already achieved parity with—or even exceeded—the US” in several areas in which it has focused its military modernization efforts in the Indo-Pacific region where China certainly has the home court advantage.

The PLA’s modernization program has been supported by China’s rapidly growing economy and augmented by the purchase and alleged theft of militarily useful technologies. In 1996, China was deeply embarrassed and humiliated in the Taiwan Strait Crisis when the U.S. responded to Chinese missile threats meant to intimidate Taiwan with a massive show of force.

Two U.S. aircraft carrier groups emerged in the strait and exposed the weakness of the PLA’s Navy compared to the U.S. fleet.  In response, China’s defense budget rose by about 900 percent between 1996 and 2018 and is now the world’s second largest behind the U.S.

For context, it should be acknowledged that the threats along China’s vast frontier should not be discounted.  With a 13,743-mile land border, it counts 14 sovereign states as neighbors.  It also shares maritime borders with Brunei, Indonesia, Japan, South Korea, Malaysia, the Philippines, and Taiwan.

It should come as no surprise that among China’s grand ambitions is to extend its influence along its frontiers through means such as building and militarizing islands to gain exclusive control over the South China Sea through which about three $3 trillion of trade, or a third of the world’s cargo transport, flows each year.

Failure to respond to the growing threat China poses to its Indo-Pacific neighbors would raise questions about the U.S.’s willingness and capacity to act as a security guarantor in the region.  Essentially, the U.S. needs support from allies and partners in the region to deter Chinese adventurism, including a potential attack on Taiwan.

The stakes could not be higher in this contest.  As historian Niall Ferguson recently wrote: “Perhaps Taiwan will turn out to be to the American Empire what Suez was to the British Empire in 1956: the moment when the imperial lion is exposed as a paper tiger.  Losing Taiwan would be seen all over Asia as the end of American predominance.”