Tuesday, March 17, 2015

Why the Federal Debt Is a Backward Issue

Chew on this if you truly think there is a problem with having a federal debt of $18.5 trillion.

The danger of a large debt is that the debtor could go insolvent, that is, unable to pay the debt.

Well that problem was resolved for the federal government in 1971 when the US went completely to a fiat monetary system. That means that the US can create as much money as it wants without fear of running short (as long as it maintains a floating exchange rate and all its debts are in US dollars). Or to put it another way, the US is free to create any amount of money to repay any debt, no matter how large - it can never come up short of money.

But a closer look reveals something else about the nature of the federal debt that should make us welcome it rather than fear it. Here is what you are probably not going to understand unless you really think hard about it - the federal debt is actually money itself. When we talk about federal "debt", we are actually talking about the net amount of money the federal government has spent. Think about this: a US dollar is a federal "debt" to the holder of that dollar. When you and I have debt, it refers to dollars we have borrowed, either physically or on credit. We actually owe those dollars. When the federal government has debt, it refers to the net dollars it has spent. Big difference!

Let me reiterate: your debt is dollars you owe. Federal debt is dollars it has spent. You repay debt by giving up dollars. The federal government repays its debt by taking back dollars. Because US dollars are federal debt and federal debt is US dollars, eliminating or reducing the federal debt means reducing or eliminating the number of dollars in circulation. Could you get along with a lot less money? Not likely. But the US government can because it can create money at will. Therefore, it never has to reduce its "debt". So don't hate the federal debt. Be glad of it.

That leads to one more thought. Federal taxes - you know, those horrible obligations that take money from us - are the federal government's way of reneging on its debt to us.    

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