The Fonzie-Ponzi Theory Of Government Debt

This post is excerpted from my book Economics for Independent Thinkers, although with some updating. It seems relevant after the CBO’s latest long-term budget outlook, which in its optimistic “baseline scenario” called for America’s net federal debt to double over the next 30 years, rising from 76% of GDP in 2017 to 152% in 2048.

Before reaching this chapter or even picking up this book, I imagine many of you were already loosely divided into the two major camps of the public debt debate.

The first camp is already concerned and doesn’t need my research to form an opinion. These people stress the math involved in borrowing—the idea that you get do extra stuff today, but you have to somehow pay for it in the future.

Meanwhile, those in the other camp ask, “So what?” They might argue that America will make good on its debt because “it always does.” Or they’ll point confidently to America’s unique advantages as a military superpower, paragon of political stability, and steward of the world’s predominant reserve currency. Confronted with the lessons of history, they’ll say, “This time is different.”

But what exactly is it that may or may not be different? It’s important to draw a distinction between two types of debt limits:

  • The Fonzie–Ponzi transition. At what point does it become virtually certain that a debt problem won’t be resolved without a credit event?
  • The Keynesian endgame. At what point does the ability to bear more debt break down completely and actually trigger the credit event or hyperinflationary money printing?

I’ll explain Fonzie–Ponzi first. Charles Ponzi was the perpetrator of a pyramid scheme, soon to be called Ponzi scheme, that the Boston Post exposed in 1920. It’s fair to say that Ponzi, who lived extravagantly while his scheme was underway, knew how to manipulate people. He shared that particular skill with Fonzie, although he was a scoundrel, whereas Fonzie was a well-liked sitcom character. If you watched enough Happy Days back in the day, you know that “The Fonz” had a keen understanding of human nature. You also know that impressing friends and foes with his unbounded confidence was a huge part of his alpha-maleness.

I still remember watching the “Richie Fights Back” episode and puzzling over the revelation that Fonzie’s tough-guy image was a confidence trick. Fonzie asks Richie, “In the entire time you’ve known me, have you ever seen me in a fight?” Richie’s answer: “Well no, but that’s just because the other guy always backs down first.” In other words, it was no George Foreman–like string of knockouts that made Fonzie fearsome. It was attitude, reputation, and a commanding voice, along with a self-described “majestic bearing.”

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