Monday, March 21, 2016

Here's To You Debt Phobes


National debt...

Those two words scare people, way too many people, because they needlessly conjure up images of federal bankruptcy, failed government, and bank failure. Even worse, national debt angers many people who are convinced that government spending means big, irresponsible government, massive tax increases, and strangulation of private sector business and freedom.

Here is a quote from one such person:

"The government takes as much as they can, spends it all and then borrows more and blows that too. And now we have a tremendous debt that has to be paid back."

There is so much wrong with that statement, in fact, everything is wrong with that statement, but it is probably how most people think the federal government must operate. Conventional wisdom, sadly all too common, is that "government is just like a household or business". People act like the national debt is their personal debt. This paradigm could not be more wrong. Why? Because the federal government issues US dollars while households and businesses cannot. And by "issue", I mean that the federal government creates US dollars. Households and businesses cannot create dollars. That makes all the difference. The issuer of the US dollar has absolutely no need to take tax money or to borrow dollars from someone else in order to spend. Yet the federal government does take tax money and it does sort of "borrow", which makes it difficult if not impossible to convince people that it does not spend those taxes and "borrowed" dollars.

When the federal government spends, it orders the receiving bank to insert a deposit into the recipient's bank account. At the same time, the Federal Reserve Bank credits the receiving bank with a like amount of dollars called "reserves". Reserves represent actual US dollars while the recipient's deposit amount is a credit against those dollars. At that point in time the federal government has created and issued brand new US dollars. It is that simple. To spend tax dollars and borrowed dollars would be redundant and the government does not spend them. In fact, tax dollars go out of existence altogether and "borrowed" dollars go on the shelf, so to speak. The federal government "borrows" dollars by selling Treasury securities to investors worldwide who seek a safe and secure interest-bearing place for their extra dollars. Both taxing and selling Treasury securities are artificial constraints the Congress has placed on itself along with the "debt ceiling", an artificial limit on the amount of Treasury securities the government can sell.

Now, what about that "debt"? The national debt is merely the sum of unexpired Treasury securities. It is "debt" only in the sense that the federal government holds someone else's money that it must give back at some point in time. The government does not take out loans or use a Chinese credit card to fund its expenditures. Why should it? It issues US dollars. Taxing and "borrowing" are not funding mechanisms; they are mechanisms for draining dollars from the money supply to reduce the likelihood that federal spending will cause inflation. Dollars not in circulation are not inflationary. The fact is private sector lending is far more likely to cause inflationary pressure than is federal spending because private lending adds credit to the economy equal to three times the amount of federal spending.

Because the federal government does not spend Treasury securities and merely holds dollars like a bank holds savings accounts, and because the federal government can always create US dollars by issuing them, there is absolutely no way that the US government can go insolvent or bankrupt, unless the Congress decides to artificially limit or put an end to federal spending. So the threat of federal bankruptcy is a myth, a bogeyman, a bad joke. It will not happen. No taxes will be raised to pay for it. No heavy burdens will be laid on our grandchildren. You can read all about how the US "borrows" by selling Treasury securities in many books and blogs, and one of the best explanations can be found here.

Finally, there are a couple of standard quips that people always utter when confronted with the above revelation. The first is that "only the private sector creates wealth". Well big whoop. Everybody knows that, and what does that have to do with anything anyway? People who like to say that do not seem to realize that "Only the federal government creates US dollars, and only the private sector creates wealth." The two go hand in hand.

The second quip is this "federal spending costs taxpayers money." That too is wrong. Federal spending supplies the US dollars that people spend, save, and give back in taxes. Federal spending is private sector revenue, your revenue directly or indirectly. Federal spending does not cost taxpayers money - federal taxes cost taxpayers money and as we saw earlier, federal spending does not rely on or use taxes.

To summarize, the federal government does not have money issues because the federal government issues money. Federal "debt" is private sector savings. Federal spending creates US dollars. Federal taxes destroy US dollars. We need federal spending. We do not need federal taxation. Taxpayers foot the bill only for taxes, not for spending and not for paying off any federal "debt".


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