Thursday, January 16, 2020

Ah, That Old Federal Debt Crisis

Ah, the old false "debt crisis" story arises again. The American people should know by now that the US government has no "debt" in the sense that you and I have debt.

The only type of debt the federal government has is its promise to us that it will accept US dollars to satisfy our tax obligations. It does not owe money -- it owes just that promise. You see, the US dollar is simply a federal tax credit that the government issues each time it spends. When the federal government spends, it creates US dollars in our banks and in our bank accounts. And those dollars are useful to the US government because in return for its promise that we can use those dollars to satisfy our tax obligations, we provision the US government with the labor and materials it needs to continue to serve us. You and I have learned to use those dollars as a medium of exchange here in the private sector as we swap dollars back and forth as we sell stuff (like labor) and get stuff. Those dollars come in very handy for that. But we only have them because the government issued them.

So what happens to our dollars when pay them to satisfy our tax obligations? Nothing "happens" to them. They simply cease to any longer exist. The promise of the dollar will have been fulfilled, all the accounting for the dollar will have been reversed, and the dollar, the promise of the government to accept them in payment of taxes, having been fulfilled, is rescinded. In short, the federal government creates dollars by spending and it destroys dollars by taxing. Until dollars are taxed back, we get to use them.

So you see, the federal debt is simply not an issue. That $23 trillion in so-called "debt" is nothing more than dollars that have not been taxed back. They are sitting in treasury securities accounts at the Federal Reserve, savings accounts if you will, owned by people, businesses, and counties that happen to have accumulated extra US dollars to tuck away in a very safe savings account. So, the so-called "debt" is really a very large and important private sector asset, one that will benefit, not burden, our children and grandchildren. It is not a crisis. It is simply a number.

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