That thing out there that’s at $18 trillion and rising; that thing that will be a future burden on our grandchildren; that thing that will bring the US government to financial collapse; that thing we are told to fear by the media, politicians and Occupy Democrats memes; that thing that liberals and conservatives accuse each others’ presidents of increasing; that thing, much like the monster hiding under your bed at night, doesn’t exist. I am going to state the following for the umpteenth time:
The US National Debt is not a real debt and so, it does not exist.
There. I said it and I’d say it again if I had to. Further, I will state the following for the umpteenth time as well:
The national debt of the UK, Japan, Canada, Australia, New Zealand, or any country that issues its own currency that floats on an exchange and is non-convertible, is not a real debt and so, does not exist.
There. I said it and I’d say it again if I had to. Now, at this point, many of you who are uninitiated in macroeconomics, specifically, macroeconomics that is reality-based, either assume that I’m crazy or, more preferably, are wondering how such a thing is possible. I prefer those of the latter persuasion, because at least there is a genuine interest in learning. Therefore, let’s look at why such a thing is, in fact, true. Those who think I’m crazy will, in turn, find out that I actually make sense compared to Ted Cruz or Hillary Clinton.
We begin by asking a simple, straightforward question, “Did the US dollar exist in the year 1601?”
The answer, clearly, is no. Now, another simple, straightforward question, “When then, was the US dollar first issued?”
The answer is at the founding of the federal government of the United States of America when the US Constitution was ratified, Article 1 Section 8. Quoting relevant passages from that section of the constitution, organized in such an order for the purposes of our discussion here:
“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;”
“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”
“To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;”
“To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;”
“To borrow Money on the credit of the United States;”
Interesting, isn’t it? You don’t hear much in the media and from politicians on this part of the US Constitution. Speaking of which, you know those congressmen who claim to carry a copy of the constitution in their front pocket? I’ve often wondered if those copies contain only the First and Second Amendments?
Food for thought.
So, some things become very clear at this point:
1. All US dollars come from the US government, not Wall Street.
2. The US government has the power to impose a tax.
3. The US government has the power to punish the counterfeiting of its currency.
4. The US government has the power to regulate the market and the US economy.
The fifth item, (To borrow Money on the credit of the United States) we will make nice and sparkling clear before the end of the discussion. There is politics and then there is macroeconomic reality. Here is where the politics end and macroeconomic reality begins. In order for a government to issue a currency and then get that currency accepted, it must have the power to do the four things mentioned above. Regardless of your political feelings about the federal government, when it comes to how currency operates, who issues it and the regulation of the market, the following statement is the reality and you’re just going to have to come to terms with it:
The US Constitution declares the US government to be the currency issuing and regulatory authority and as such, the US government sets the price and therefore, commands the market and the US economy.
The US Government Issues the US Dollar
“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”
The US dollar is not a commodity. It is not a tangible object found lying hidden beneath the Earth, panned out of the streams and rivers of Colorado, California or Alaska, nor is it just a bunch of printed paper floating around. All US dollars are issued by the US government. They do not come from Walmart, or Wall Street, or anywhere in the private sector or the world. The US dollar exists, because the US government creates it out of thin air and then spends it. Furthermore, the US dollar is just a number with a “$” symbol in front of the number and it is totally worthless. That’s right. It is worthless. And in its total worthlessness, the US dollar comes in three forms:
1. Cash – Notes and coin
2. Numbers in reserve accounts at the Federal Reserve
3. Numbers in securities accounts at the Federal Reserve (Treasury Bonds)
But if the US dollar is totally worthless, then why do we even use it? Taxation.
The US Government Has The Power To Impose a Tax
“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises…”
You’ve heard it said that “taxation is theft”, “the US government has no right to take my money”, etc. Pure political drivel. All this focus on the 16th Amendment, but ignoring the reality of Article 1 Section 8. See that? Even if we repealed the 16th Amendment, the US government would still continue to tax you in some form, because the founding fathers gave it the authority to do so. Why?
Taxation is a sufficient condition that creates a demand for the US government’s currency.
The US Government Is The Monopoly Issuer of US Dollars and Regulates the Market
“To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;”
We can clearly understand from the above constitutional directive that Governor Kasich of Ohio is wrong when he says, “Washington has no money. It’s our money!” No, Mr. Kasich; it’s the US government’s currency and you would have no US dollars if the US government didn’t give them to you. You are, therefore, a mere user of the US government’s currency. There is to be no counterfeiting of the US government’s currency; paper notes, coins, bonds or otherwise. If you try it, there’s a thing called the Secret Service which will appear at your door and say to you, “Hey, good artwork. I like what you’ve done with Franklin’s hair. Try these handcuffs on. You’ll need to wear them until we get you to your new home at a federal prison.” And furthermore, since Governor Kasich’s Ohio is just a bunch of users of the US government’s currency, the US government has the power to regulate any business or trade inside Ohio and any business or trade Ohio conducts with other states:
“To regulate Commerce… among the several States…”
There is no “free market” in a modern monetary economy where the national government issues the currency. The US government regulates the market and the US economy. Why? Because if it did not, the economy would malfunction. Look around you today. Do you see a malfunctioning economy? Indeed you do. That’s because we’re busy deregulating it and preventing the US government from spending to meet the needs of the economy.
The economy and market depends on the US government injecting US dollars into it so that business can be transacted. If you deregulate, then the actual purpose of the US government issuing currency, which is done for the benefit of the public purpose (the national interest), is cast aside and poverty, unemployment and infrastructure collapse occur. If you then further remove the US government’s ability to lay taxes, or seek to make it impossible for it to enforce tax collection, you will destroy the market, the US economy and in turn, the nation itself. There is no “free market” and there are no “free market ideas” or solutions that will work. We are free to do what we wish, provided that what we do, business or otherwise, does not undermine the US government’s currency and the US economy.
Take a moment and let that just burn into your mind.
So then, what about tax collections? Does the US government collect taxes to fund its spending? Not these days. There is no gold nor anything else attached to the US dollar. It is a non-convertible, free-floating fiat currency. Just numbers with a “$” symbol and the supply of US dollars available to the US government is always equal to infinity. Why then, do politicians, the media and mainstream economists rant about the US government funding spending with taxes?
The Gold Standard and Bretton-Woods
I’ve detailed this subject in many articles. Nevertheless, it’s worth repeating for those who’ve never read them. So, let’s review some important details once more. I will place the information from another article of mine in brackets.[Bretton-Woods, the last vestiges of a useless and impossible to maintain gold standard ended in 1971. That failed system was replaced by a non-convertible, free-floating exchange regime, where currency is influenced by market forces through the supply of and demand for currencies. And yes, this does matter quite a great deal. When governments leave a fixed change regime, no longer agreeing to convert their currency to gold and allow their currencies to float, they have the power to issue limitless amounts of currency and their fiscal space then becomes expansive. What does this mean?
Under a fixed exchange regime such as Bretton-Woods, a nation’s fiscal policy is hampered, because it requires the central bank, through the use of monetary policy, to target exchange parities. The Bretton-Woods agreement bound the several nations to target the exchange parity, so there wasn’t a choice in the matter. Within the Bretton-Woods system, governments could obtain needed US dollars by selling gold to the US government in exchange for US dollars at a fixed exchange rate. A problem occurred if an excess supply of a nation’s currency was present in exchange markets which then affects the exchange rate of that currency to that of the US dollar. After all, if an exchange rate is fixed, you have to maintain that rate. To accomplish this, the central bank of the particular nation would have to use its US dollar reserves to buy up its own currency. The result of this intervention would be a drop in that nation’s money supply and therefore, a contraction in demand, unemployment would rise and the economy would experience a downturn.
So, the problems with Bretton-Woods became clear to all involved. Weaker nations that ran trade deficits were perpetually at a disadvantage, forced to throw their economies into recession to maintain the exchange rate. In layman’s terms, being in such a situation really sucks. Nixon officially ended Bretton-Woods in 1971 and the US dollar began to float freely on the exchange. The end result of his actions changed the monetary system completely. It no longer functioned as it did under a gold standard and Bretton-Woods. Because the US government no longer agreed to convert US dollars to gold, there were no gold reserves to defend any longer to maintain a fixed exchange parity. Because the dollar floated on an exchange, market forces determined the exchange rate, thus leaving the US government with no constraints on spending, except for inflation. The US dollar, or indeed the British pound, the Yen, the Canadian and Australian dollars are all the same today. All freely float and are non-convertible currencies issued by their respective governments.]
Two things are apparent if we think about this for a moment. The first is that gold is finite. There’s only so much of it around. The US dollar, however, is just a number with a “$” symbol and numbers are infinite. If you are pegging the US dollar to gold, you are making the US dollar finite, because now you must defend your gold reserves. If you run out of gold, you cannot maintain the fixed exchange and thus, you cannot issue more dollars without causing massive economic problems. In short, you either go broke or abandon the fixed exchange regime. There are two ways relevant to our discussion that can prevent this catastrophic event from occurring while on a fixed exchange regime:
1. Collecting taxes
The first method, taxes, allows the US government in a fixed exchange regime to defend its gold reserves by removing tax dollars from the economy and then spending them again. Hence, it would appear that in a fixed exchange regime, federal taxes are helping to fund federal spending. The second method, borrowing, allows the US government in a fixed exchange regime to defend its gold reserves by removing dollars through bond sales. You buy a treasury bond and the US government takes your US dollars. It can then spend or park the dollars in an account, thus defending its gold reserves. Hence, it would appear that bonds are helping to fund federal spending. Now then, deficit spending.
Deficit spending occurs when the US government spends more US dollars than it takes out of the economy in taxation. In a fixed exchange regime like the gold standard, if the US government wanted to spend above and beyond what it took in from taxation and/or bond sales, it would have to.. Wait for it..
Huzzah! Three false claims that politicians, the media and mainstream economists make about federal spending all shot down in a few short paragraphs. Thus, as we can now see, under a gold standard, there were three ways that the US government could fund spending, because it had gold reserves to defend:
1. Federal taxes
3. Printing money
Happily, I wish to inform the populace that the gold standard no longer exists. Since 1971, the US dollar has been floating on an exchange, its value determined by market forces. It is non-convertible. The US government will not exchange your US dollars for gold. It promises only to give you $10 for every $10 you give it. If you go to the US Treasury and hand them a $10 bill, the US government will give you two $5 bills, ten $1 bills, or one $5 bill, four $1 bills and four quarters, or any combination of cash and coin equal to $10. That’s it. No gold.
And as far as this “printing money” nonsense goes, printing money is a gold standard function that was used to fund spending. Today, the US government does not “print money”. When it deficit spends, it isn’t “printing money”. When the Federal Reserve buys or sells bonds, it is not “printing money”.
Printing cash is not the same as the term “printing money” and it is used by politicians, the media and mainstream economists in a misleading, disingenuous way. When the US government deficit spends, it simply spends like it always does: it increases numbers in a bank account somewhere. In other words, it credits bank accounts with its IOU. That is not “printing money”.
So, the US government doesn’t “print money”, federal taxes today do not fund federal spending. And treasury bonds aren’t loans to the US government.
The Function of Treasury Bonds In a Modern Fiat Monetary System
Treasury bonds today are totally unnecessary to federal spending. They serve no financial necessity. The US Treasury continues to issue bonds, simply because Congress demands it. That demand makes for a wonderful political drama worthy of a reality TV show called, “The Debt Ceiling”. In this political equivalent of a pro wrestling match, the GOP and the Democrats get to fear monger and argue over spending cuts and you get all excited thinking that it’s real. “The federal government is on the edge of a fiscal cliff! My God! The US government could go bankrupt at any moment unless we agree to raise the ceiling! How can we accomplish such a feat?” “Well, we need to find cuts to pay for…” And that is the debt ceiling in a nutshell: To cut necessary social and public services that the nation depends on. The debt ceiling today is a political tool to strong arm the opposition into agreeing to spending cuts and in the process, they threaten to shut down the federal government, holding you, me and the nation hostage until they get their way. Childish. Immature in the extreme. Esentially, we are paying politicians huge salaries to threaten us with running away from home or destroying their bedrooms if they don’t get what they want.
You will notice that in the end, more debt is issued and the US government never goes broke. And this is because, it can’t. The US government cannot become involuntarily bankrupt. To achieve that requires politicians who are willing to prevent the US government from doing its job as a currency issuer: to spend. And to spend, the US government doesn’t need bonds. It uses treasury bonds today for two distinct purposes, neither of which have anything at all to do with funding federal spending.
The Federal Reserve and Target Interest Rates
Since Congress and the White House is full of nitwits, we rely on monetary policy to manage the economy, rather than fiscal policy. One aspect of monetary policy is where the Federal Reserve sets a target interest rate and then tries to defend that target, if that target rate is not zero. Now then, throughout the course of day-to-day business, commercial banks might find themselves short of reserves or with an excess. The banks who have an excess will lend those reserves to those banks who are deficient on what is called the interbank market. Banks who are short of reserves would rather obtain reserves this way than use the Federal Reserve’s discount window, as it is expensive. Here’s where the problem starts.
The interbank competition has the effect of driving the overnight rate (FFR) towards the floor, which is zero. If the Federal Reserve does nothing when it has set a target interest rate above zero, then it will lose control of its target interest rate. In other words, it’ll lose control of monetary policy. So what can the Federal Reserve do?
Use bonds to drain off the excess reserves.
Simply put, the Federal Reserve will exchange a treasury bond for the excess reserves, thus halting the overnight rate fall to the floor and maintaining control of its target interest rate. That is one of two uses the US government has for issuing bonds: To drain excess reserves from the banking system. The second use is the one you always hear about on TV. You know, the one where China is loaning the US government money.
Bonds Provide Risk-Free, Interest-Bearing Investments
A treasury bond is a US dollar that pays interest. The sale of bonds to non-government entities doesn’t fund federal spending. What happens is very simple.
You buy a treasury bond from the US government. The Federal Reserve then shifts your numbers (dollars) from a reserve account to a securities account. This is absolutely no different than your checking and savings account at your bank. When you move $100 from checking to savings, are you $100 in debt to someone? No. Similarly, the Federal Reserve moves numbers from reserve accounts (checking) to securities accounts (savings). Bond purchases/sales are nothing more than the shifting of numbers around between savings and checking accounts, all held at the Federal Reserve. You buy a bond and the dollars shift to savings. At maturity, the dollars then shift back to a checking account. $100 was here, now it is there. Then, $100 that was there, moves back over here again. All of the time that those dollars sit in the savings account, they are earning interest. It’s what we call an interest-bearing savings account.
China and The “Loaning Money To The Broke US Government” Nonsense
Unlike the US government, China does not issue US dollars. Therefore, like you and I, China must find a way to earn US dollars if it wishes to net save in US dollars. How does it do this? Well, drive to a Walmart, head down the Asian food isle and check the shelves for Chinese goods. Next, wander over to the toys, electronics, housewares and various other departments, check the shelves and look for the label “Made in China”.
A stunning revelation for all politicians: China sells stuff to the United States in exchange for US dollars. Well now, that certainly is frightening, isn’t it? When US companies sell stuff to US consumers, it is called business. When China or Japan do it, it’s called financial armageddon looming on the horizon. Get real. And it gets even more interesting, making these “loaning money to the broke US government” claims absolutely ridiculous.
Next, China sticks its money in a bank account at the Federal Reserve. But, the bank account doesn’t pay interest. So, China buys some treasury bonds and earns some interest on its hard earned US dollars. So does the UK. So does Canada. So does any nation that sells its goods to the United States. China, the UK, Japan, Germany, et al., simply wish to exchange their production for US dollars and we happily accommodate them. Why? Because it raises our standard of living.
You like BMWs? Great. There are a bunch here to choose from. You prefer Honda? No problem. In fact, with all those US dollars that Japan earned, it went and opened factories here providing Americans with decent jobs. The US market is awash in goods from all over the globe, from clothes to cars, furniture, housewares, tools, food, spices, toys, electronics – on and on. US consumers have many choices on what to buy. The standard of living just goes up, up and up. And what do these nations get in return for selling us their production that they could be consuming themselves?
A paper bank statement.
Wow, ok? Just, wow. An all-around bad deal for them and a really good deal for the United States. That paper bank statement isn’t even denominated in a currency that most of these nations can spend in their own country. They have to either spend those dollars here in the US, thus creating jobs in the US, or where someone will accept US dollars as payment for something, leave those earned US dollars in savings, or they can covert their earned US dollars into another currency at their own expense on the market. But then, the next question on everyone’s mind is “how on Earth does the US government pay the interest on these bonds”?
When the time comes, the Federal Reserve will move their hard earned US numbers (dollars) from their savings account back to checking. Then, it will simply go into that checking account, raise up the number a bit and the interest is paid out of thin air. The US government will declare, “Behold! Let the right amount of dollars appear in China’s account to reflect the interest owed.” The Federal Reserve says, “Ok”, types the correct number and China’s interest is paid.
Yeah, really frightening. You earn interest on your hard earned savings from Chase and that’s just awesome. China does it and we’re all going to die.
Spare me the drama, ok?
The US National Debt Is Not a Real Debt
As the title of this concluding section says, the US National Debt is not a real debt at all and you should be able to understand why at this point. If not, then politics and ideology won’t allow you to accept reality and you will still call me and other economists like me, “crazy”.
If you say so.
Anyway, for those of you willing to accept reality, here is what the US National Debt actually is:
The National Debt of the United States Government is all US dollars ever issued by the US government, from the founding of the United States until this moment, that have never been taxed away by the US government. In other words, it is the National Savings. From around the 1790’s until today, 2016, the US government has issued, after taxes, $18 trillion dollars for everyone in the non-government sector to use. In fact, the national debt has been around for over 170 years now, so at some point, you’re going to have to start understanding that it’s not an actual problem. Further, you need to start understanding that when you accuse Obama or Bush of adding to the national debt, you’re actually accusing them of adding US dollars to the US economy. Or, more precisely, you’re accusing them of adding US dollars to our national savings.
Stop that. It’s silly.
This so-called “debt” is nothing more than an accounting record that lets us know that the US government has been doing its job. As we can see, regardless of whether or not it has done its job to the extent necessary to operate the US economy properly over the years, it has mostly been doing its job as a currency issuer when politicians allow it to do so.
And that job is spending for the public purpose.