Federal Debt? No, Not Really.

With Treasury spending approaching the debt limit, I will wager that most of you think the federal debt, now $18+ trillion, is a very dangerous thing because:

1) that much borrowing is unsustainable,

2) it represents uncontrolled federal spending,

3) it will take  higher taxes to pay it down

4) our grandchildren will bear the burden of paying it off

5) it will lead to the collapse of the US dollar

6) it will cause our credit rating to be downgraded

All six of these presumptions are tragically wrong, of course, but how could you know that with the press, many economists, and especially the lunatics in Congress and on the campaign trail pounding these threats into you?

The $18+ trillion "debt" is not a credit card bill run up by a free-spending Congress, it is nothing more than the sum of dollars that people, companies, and countries currently own in Treasury security investments housed in the Federal Reserve. The US has not "borrowed" this money, at least not in the consumer sense. Investors have saved it by having bought Treasury securities which are a virtually risk-free investment offered by the US Treasury. You may even have some US Savings Bonds of your own.

The Treasury has not spent that money - it creates new money whenever it spends. Rather, the Treasury simply parks investors' dollars until the securities expire then it transfers the balances from the depositors' securities accounts back to their checking accounts and adds a little interest. Often it rolls the amounts into new securities because the depositors do not want to cash in their securities. The Treasury rolls over some $70 trillion per year, four times the current balance. Thus, the federal "debt" can be described more accurately as private sector savings.

The Treasury sells securities in an amount up to what it has spent above its tax collections or up to the so-called "debt limit" whichever comes first. Why? Not because it needs the money (it doesn't even spend tax dollars - those are destroyed), but because Congress back in 1917 decreed that it must. The mandate to sell Treasury securities is a remnant of the by-gone gold standard days when the US had to make sure it did not create more money than it had gold to back it up. Those days disappeared in 1971, freeing the US to create as much money as Congress wants to authorize, not just up to the amount of gold it can buy.

Because the federal debt (more aptly called "federal savings") is nothing but Treasury security balances, it is sustainable to whatever amount dollar investors want it to be. There is never a   reason to "pay off" the federal debt. The investors who own that debt do not want it paid off. They would have to find other, less safe, investment vehicles if the US paid off and quit selling Treasury securities. Because the Treasury rolls over T-securities, or redeems them via accounting transfers, taxes do not pay for them. Our grandchildren will suffer only if we eliminate the private sector investment. The dollar remains strong partially because there is a virtually risk free place to park private sector dollar surpluses. If Congress were to cap the amount of Treasury security savings with a hard and fast debt limit, then the private sector would lose one of its best investment opportunities.

So, don't be afraid of the misnamed federal debt. It is one of private sector America's chief assets regardless of what President Obama, Rand Paul, or Paul Ryan tell you.