As we approach a Congressional deadline about raising the “debt ceiling”, we are going to hear all the usual dire warnings about the “national debt”. That we are “going broke” or “running out of money”, and that we are “leaving this massive debt for future generations to have to pay off”. That we need to “borrow money from China”. That the richest country in the history of the world just can’t afford to provide it’s citizenry with nice things, or even essential services.
All of which is nonsense.
All of those worries stem from some basic misunderstandings about how our monetary and fiscal systems actually function in this modern era. These misunderstandings arise from a combination of stories, metaphors, false comparisons, and even the words that we use to describe the elements of our federal government’s operations.
We hear these “myths” from economists, politicians, media pundits, and our fellow citizens. And every time these myths and misunderstood terms are used, it reinforces and perpetuates that misunderstanding. It further boxes us into a corner, with no seeming means of escape.
So, what is the ”national debt”, and why would we need to place a limit on that “debt”?
Quite simply, the “national debt” is the sum total of all of the federal government’s deficit spending since the country’s founding and the creation of the US Dollar. It is all of the money that the government has spent into the economy, and which it has not yet taxed back out of the economy.
So, what is “deficit spending”? It’s just the difference between two numbers — how much money the federal government spends into the economy in a given fiscal year, and how much money the federal government collects back in taxes, fees, tariffs, lease payments and other forms of “revenue” during that year.
So, for instance, if the government spends $100 into the economy, and then taxes back $80, the remaining $20 is called a “deficit”.
The thing is that someone, somewhere, gets that $20. It might be the $20 bill in your wallet, or it might be $20 deposited in your bank account. Maybe it is $20 of the money that you have in the form of a US Treasury bond. The “national debt” is the private sector’s money supply. Our money.
So the federal government’s “deficit” is someone else’s “surplus”. Every dollar of the government’s deficit spending, and hence its “debt”, helps to increase the wealth of someone in the private sector. How that wealth is distributed in the private sector is worthy of discussion, but not relevant to the processes involved. The point here is that the deficit is good for somebody.
This is a good thing. A very good thing. Having money in our pockets, and especially having monetary savings, makes us more secure. We should all be happy that the government has this so-called ”debt”.
This money is not debt in the way that we typically define that word, and use it in our personal and business financial dealings. Most people would define “debt” as when “one person or entity owes something to another person or entity”.
The federal government does not “owe” anyone who has that money anything. It is already money, and they don’t need to pay more money to “pay off” existing money.
It you took that $20 bill to the US Treasury and demanded “payment”, they might make change for you, say give you two $10 bills in exchange, but that is all that they would do.
If you happen to have some of that money in the form of Treasury securities (Treasury bonds, notes, or bills), the government might owe you some interest on it, but the securities themselves are really just the same money in a different form. You buy a $1000 Treasury bond with $1000 of money that you have saved. That $1000 is part of the money that the government had created and spent into the economy at some time in the past, and you were able to save it because they did not demand it back in payment of taxes.
When that security reaches it’s maturity date, you can swap it out for the form of money that you started with. The process is just an asset swap. You swap your $1000 Treasury bond for $1000 in Federal Reserve Notes. The ones with Ben Franklin’s image on it, like in the image above. It’s the same $1000 either way. The government isn’t “paying off” the bond. It is merely swapping one asset for another, essentially just altering the specific instruments in your investment portfolio.
We also hear that the government has to “borrow ” money or “find the money” in order to fund the deficit spending. But since the federal government is the currency issuer, the only entity who has the legal authority to create US Dollars, it never has the need to borrow its own currency. Nor does it need to have any money in “savings”. It can always create whatever money it needs, whenever it needs it, to do whatever Congress approves of doing.
All federal government spending is done with newly created money. The federal government does not need to collect tax money first in order to fund expenditures (In fact, taxation is the last step in the process, not the first). It does not need to “borrow” money by “selling” Treasury securities in order to finance expenditures (taxation and creation of government bonds have other purposes which I won’t go into here).
And it doesn’t need to “borrow” US Dollars from China or any other foreign country. China can’t create US Dollars. Only the US government can do that. China currently holds about $1T in Treasury securities. They have those dollars because we buy a lot of stuff from them, and they choose to hold onto those dollars in the form of Treasuries instead of cash because Treasuries pay interest and cash doesn’t. We don’t “owe” China money. They already have it. As Warren Mosler (retired investment banker) says, the only thing that we owe them is a bank statement, and any interest due on their account at the Fed.
The “national debt” is not at all like personal debt that you and I might have. It is not money ”owed”. it is money held by the private (non-government) sector. It does not need to be “paid back” by us or our kids. It is not money that our kids and grandkids will owe, it is the money that they will inherit.
So...why do we need any “ceiling” at all? Since Congress already approved whatever spending it has approved, and the “debt” is just money created by the government (which it can produce in infinite quantity) what purpose does a “debt ceiling” have?
Back before 1971, when Nixon took us off of the Gold Standard, having a debt ceiling had a purpose. Since the US Dollar was convertible to gold, at a predetermined exchange rate, we had to be careful to balance the amount of our money supply with the level of our gold stocks. But now that we have a fully “fiat” currency, with a floating exchange rate, we have no such monetary constraint, and having a “debt ceiling” no longer fills any purpose (other than for political grandstanding).
Congress should just eliminate the need to hold a vote on a “debt ceiling”, as it’s has no current function.
The “national debt” should really be called the “national savings”. Instead of hand-wringing over it, it should be celebrated.
I love the national debt, and so should you!
(This in no way means that because the federal government can create an infinite amount of dollars, that it should, or that it can without consequences. While the government is not constrained in the amount of dollars it can create, there certainly are real constraints on the amount of real resources that can be purchased with those dollars. Consumption desires exceeding the capacity of the economy to create enough real goods and services for purchase can cause inflation.)