The U.S. federal government is increasingly dependent on debt for short-term economic growth, a situation exacerbated by its decision to relinquish control over the money supply to the Federal Reserve, a private entity comprised of 12 banks. This separation between the government and the power to regulate the money supply has created a system in which the U.S. economy is tethered to debt, contributing to a cycle that hampers long-term economic stability. While certain elements of free-market capitalism play a role in this system, the decision to place monetary control in the hands of the Federal Reserve is a primary factor that keeps the country trapped in its debt-dependent condition.

As of now, the U.S. is nearly $30 trillion in debt. This figure, while debated among economists, is undeniably substantial, and the impact of such debt is far-reaching. Paying off this debt is akin to playing a game of catch-up, as the government must allocate resources to servicing debt rather than reinvesting in the economy. Some economists argue that large federal debt has serious negative implications, such as raising interest rates and stifling private investment, which in turn slows economic growth. Mervyn King, for example, suggested that the 2008 financial crash was, in part, due to China’s efforts to save and reduce its debt. Saving, investing, and paying off debt are essential for individual financial stability and overall well-being, but the financial system incentivizes those in control, such as politicians, to favor debt in the short term. This prioritization of debt comes at the cost of individual financial security and economic stability, making debt a systemic issue.

The problem is exacerbated by the Federal Reserve’s role. By separating the regulation of the money supply from the federal government, the U.S. government has become reliant on loans from the Federal Reserve every time it needs money. Since the government requires substantial capital to achieve its goals, and tax revenue is limited, a growing portion of federal debt—currently approximately $8 trillion—is owed to the Federal Reserve. In the short term, this situation may not seem immediately problematic. However, as the government begins to pay off this debt, the rising interest rates will likely slow down economic growth, as private investments will be deterred by the increasing cost of borrowing.

The Federal Reserve Act of 1913 was enacted to stabilize the economy and prevent the U.S. from resorting to short-term economic policies that could be harmful in the long run. One example of such harmful policies is the short-term goal of reducing unemployment, which, though politically advantageous, often leads to higher inflation and, ironically, more unemployment. Economists argue that the Federal Reserve’s independence is essential for keeping these dangerous short-term incentives in check. However, this separation comes at a significant cost. Because the federal government depends on the Federal Reserve to finance its operations through loans, it faces the inevitable trade-off between addressing short-term economic goals and the long-term consequences of rising debt.

One potential solution to this issue would be merging the Federal Reserve with the U.S. government, allowing for more ethical, long-term economic decision-making. Currently, the growing national debt and the resulting economic stagnation are symptoms of the Federal Reserve’s independence. While low inflation could stimulate economic growth by encouraging spending, the accumulation of debt and resulting slowdowns in growth pose a much greater threat to long-term economic stability. Merging the Federal Reserve with the federal government could help create a more balanced system, where both short-term and long-term stability are achievable.

“Socialism for the Rich”: The Ideological Implications of the 2008 Bailout

The 2008 financial bailout exemplified a stark contradiction in the capitalist system—what many have described as “socialism for the rich.” While the government used taxpayer money to stabilize the financial sector and prevent the collapse of major institutions, it did so at the expense of ordinary citizens. Large financial institutions such as Goldman Sachs, Bank of America, and AIG were bailed out with billions in federal funds, yet the relief these funds provided was not equally distributed. Executives from these banks continued to collect large bonuses, and stock prices quickly rebounded, reflecting their immediate recovery. On the other hand, millions of working-class Americans faced foreclosure, job losses, and rising debt. The benefits of the bailout were concentrated in the hands of large corporations, while the financial struggles of everyday citizens continued.

This disparity reflects a broader ideological pattern in capitalist systems: the socialization of losses for the wealthy, while the risks and burdens of economic collapse are passed down to the public. The idea that large corporations are “too big to fail” stems from a belief that their collapse would have catastrophic consequences for the entire economy, and thus, they are seen as deserving of public support. However, the reality is that these institutions are able to take on significant risks and make risky investments with the understanding that if they fail, they will be bailed out. The social costs of their failures—job losses, foreclosures, and the erosion of savings—are largely borne by ordinary citizens.

The bailout exposed a fundamental flaw in the capitalist system: while it claims to operate on the principles of competition and individual responsibility, it selectively applies these values based on class and power. When corporations fail, the government is more than willing to shield them from the consequences, while those who are not part of the elite have little recourse. This “socialism for the rich” is a stark example of how capitalist systems prioritize the interests of corporations over those of ordinary people, even in times of crisis.

The bailout also raised questions about the role of the state in the economy. If the government is willing to intervene to save the wealthiest players in the system, why does it not offer the same protections to individuals who are struggling to make ends meet? The answer lies in the way capitalism privileges capital over labor, where profits are privatized, but losses are socialized. This dynamic reinforces a cycle of wealth concentration at the top while perpetuating inequality and financial insecurity for the majority of the population.

Conclusion: The Path Forward

The U.S. economy’s debt dependency is a critical issue that cannot be ignored. The 2008 financial bailout demonstrated how the system of debt, particularly in its current form, disproportionately benefits the wealthy while leaving ordinary citizens to bear the consequences. The separation between the Federal Reserve and the federal government has perpetuated this cycle, as the government’s dependence on loans from the Fed has led to a situation where long-term economic stability is sacrificed for short-term growth.

To create a more sustainable economic future, the U.S. must reimagine its financial system. Merging the Federal Reserve with the federal government could help ensure that economic decisions are made with both short-term and long-term stability in mind, allowing for greater financial security for citizens and a more equitable distribution of wealth. The current system of debt dependency is not only unsustainable but also inherently unfair, favoring those who control the system at the expense of those who are most vulnerable. The 2008 bailout serves as a powerful reminder of the need for systemic reform that prioritizes the well-being of all Americans, not just the wealthiest few.

Sources:

https://www.magnifymoney.com/blog/banking/bank-failures

https://www.latimes.com/opinion/op-ed/la-oe-baker-bailout-20180914-story.html

Financial Parasites

The Great Deformation

https://www.fdic.gov/about/what-we-do/

https://www.federalreserve.gov/boarddocs/speeches/2002/20021108/

How Did Economists Get It So Wrong? Paul Krugman