Thursday, January 14, 2016

Are US Dollars Really Federal Debt?

Here is how dictionary.com defines debt:

1.       Something that is owed or that one is bound to pay to or perform for another: a debt of $50.
2.       A liability or obligation to pay or render something: My debt to her for advice is not to be discharged easily.
3.       The condition of being under such an obligation: His gambling losses put him deeply in debt.
4.       Theology. An offense requiring reparation; a sin; a trespass.

Because we are not discussing theology, forget about #4. Let us, though, discuss the US dollar and its relation to debt.

The US Dollar is a Federal Debt

Clearly, a US dollar satisfies both definitions 1 and 2. When the federal government spends, it issues US dollars. Each dollar is a federal IOU, that is, an accounting liability to the government and an asset to the holder. That IOU (the dollar itself) signifies that the US government owes something to the holder of that dollar. That something is simply a credit for one US dollar, not 1/35th of an ounce of gold, nor a chunk of silver, but only another US dollar. That is because the US monetary system is a fiat monetary system with a currency not pegged to any commodity or to any other country's currency. It seems evident that the US dollar is, in fact, a debt of the US government and that, consequently, the US government is in debt to the holder of that dollar.

How Ae Debts Discharged?

Paying a debt discharges the debt. Example: I owe you $5.00. If I give you $5.00, the debt is paid. I no longer owe you $5.00. By giving you $5.00, I have transferred my $5.00 asset to you, thus reducing my assets. I also have reduced my liability by $5.00. Even though I may be cash-poor now, I no longer am obligated to pay you. My side of the transaction is in balance because both my liability and asset have been reduced equally. You, on the other hand gained a $5.00 cash asset but you lost a $5.00 loan asset. You are better off cash wise, but you no longer have a loan due you. Your side of the transaction is in balance because you have gained and lost equal amounts of assets. The crux is that the debt is eliminated by paying it back.

How Does the Government Discharge Its Dollar Debts?

Okay, this is going to sound bizarre, but there is no way the federal government can discharge its US dollar debt to you by paying it. Think about it. If you have $5.00 (a $5.00 bill, $5.00 in your checking account, or whatever), it means the federal government owes you $5.00. Remember that US dollars are a form of government debt. If the government then pays you another $5.00, it does not discharge the original debt; it simply means that the government is now in debt to you for $10.00. This is because US dollars are IOUs, that is, federal liabilities. Paying money to you does not reduce the federal liability - it increases it. Consequently, the federal government cannot discharge or reduce its debt by issuing more money. No. The federal government can reduce its debt (at least the debt inherent in the US dollar) only by taking those dollars back! Stop now. Think about that. Only by taking those dollars back can the government pay its debt to you. Stated another way, the federal government can discharge its US dollar debt to you only by your paying it! Got that? The government owes you money and the only way it can stop owing you that money is for YOU to pay that money back.

How does it take money back? It taxes you. By taxing you the government removes your asset, removes its liability, and voila, the liability, the asset, and, thus, the US dollar are all gone. Once back in the hands of the issuer the IOU no longer exists. The debt is gone, accounted out of existence. Taxes can be viewed as the government reneging on its debts. Federal taxes simply remove money from your pocket and from the money supply.

So Are US Dollars Really Debt?


If the person to whom the debt is owed must pay off the debt to the debtor, as with federal taxes, is it really debt to begin with? Is the US dollar, although clearly a federal liability, really a federal debt to you the holder? You can decide that for yourself. If US dollars are not debt, then does the federal government actually accrue any debt by spending? You can decide that also.

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