Can The US Government Default on the National Debt?

Today, I’m going to take a different tact to address this question. Let’s assume that there is a rich guy who buys $1 million in US Treasury bonds. Hey, fantastic. I’m sure that you’re thrilled that he can afford such a purchase while millions struggle. No biggie. That’s just life in America, right? Some people have loads of money to loan the federal government and others, well, they’re just lazy or something. I guess this guy is just more productive and responsible than most people. You see, he’s a “go-getter”; a real visionary that worked hard, played by the rules and went out and made something of himself while others slept in, played video games and now ask for hand outs. You too could have what he has if only you’d pull yourself up by your bootstraps and get some responsibility in your life. Stop being lazy. Hey, that’s life in America.

Here’s the problem: Nobody asks where this rich guy got the US dollars to buy the treasury bonds. Now if asked, people would say, “Well, he started a business and worked hard”, or perhaps he “saved his money”. It’s an answer, but it doesn’t answer the question. True, through certain private sector activities he began amassing a nice collection of US currency, but the question is where did that US currency come from?

From the US Government. That’s where. The reality, is that all US dollars used to buy US Treasury bonds first come from federal deficit spending. Further, a US Treasury bond is a US dollar that pays interest. Confused? No problem. Nearly everyone in America is confused, because they’re fed dump trucks full of economic nonsense. That nonsense is designed to divide the nation, make you hate your neighbor and then vote to move national income away from you to the guy who just bought the US Treasury bond. So let’s see how this rich guy got ahold of the US dollars to buy the bonds.

One day, the US Government ran a deficit and when it did, it created some US dollars to buy toothpicks from the United Toothpick Company of Walla Walla Washington. The United Toothpick Company paid their workers for making the toothpicks that the US Government bought and those workers went home happy. Some bought gas with the US dollars they were given. Some bought food, some clothing, hairspray, toothpaste, etc. One of these workers, Carrie Elwood, saved her US dollars and drove to Bunkwater Oklahoma to visit her mother and while there, spent $3 for some heavy cream at Walmart to make Tuscan soup. Walmart paid one of its workers, Jack Blit and Jack obtained the $3. Jack was so happy that he took his $3 and bought an ink pen from Pens R Us, Inc., which is owned by the rich guy who is the subject of our discussion.

For years, the US Government has been deficit spending. This means that the US Government issues a certain amount of US dollars, then taxes some away. What’s left over remains in the US economy for everyone to use. For years, these US dollars that were created by the US Government have been circulating around and for years, people have been obtaining them and buying ink pens from Pens R Us, Inc. Today, the rich guy is rich and he wants to invest to become even more rich without working for the US dollars. He’s looking for a risk-free investment. He wants to buy some US Treasury bonds. Now, before he does this, let’s look at where his US dollars are and at his portfolio composition. We will assume that he has $2 million in a checking account at Chase.
Chase maintains a thing called a reserve account at the Federal Reserve. It is filled with actual US dollars. In this rich guy’s checking account at Chase sits the number 2,000,000. That’s right, just the number 2,000,000. His checking account statement is just a record of how many US dollars he has on deposit. The actual US dollars sit in Chase’s reserve account at the Federal Reserve. His portfolio shows two million in liquid US dollars and zero dollars in bonds. Now, he buys $1 million in treasury bonds. His portfolio composition is 1 million in liquid US dollars and $1 million in bonds.

The Federal Reserve moves $1 million from Chase’s reserve account held at the Federal Reserve to a securities account held at the Federal Reserve. So then, what has happened thus far? Nothing really, except the rich guy’s portfolio composition has changed from all liquid US dollars to some held in bonds and some held in liquid US dollars.
$1 million liquid + $1 million in US Treasury bonds = $2 million US dollars.

Oh, and one other thing…

By purchasing the US Treasury bonds, he’s given back $1 million to the US Government that at one time the US Government created and spent. He hasn’t loaned the US Government anything. He’s simply returned $1 million of the US Government’s “money” to the US Government for safe keeping.

Safe keeping?

Yes, US Treasury bonds are savings accounts that pay interest and are maintained by the US Government. What’s more, is that these US dollars just sit there. After a time, maturity arrives and it’s time for the US Government to “pay back” this “enormous debt burden” to the rich guy. Let’s assume the US Government owes the rich guy $10,000 in interest. Does the US Government need to go out and raise taxes to “pay back this enormous debt burden” that is going to “kill our grandchildren”?

Not at all. Here’s what happens.

The Federal Reserve moves the rich guy’s original $1 million from the securities account held at the Federal Reserve back to Chase’s reserve account held at the Federal Reserve and while they’re at it, from a keyboard, they type the number 10,000, $10,000 suddenly comes into existence and Mr. Rich Guy is paid in full. So, what has happened?
Well, nothing really, except for a portfolio composition change again. The Fed moved some dollars back and forth and the rich guy’s composition went from some bonds and some liquid US dollars to all liquid US dollars. The key factor here is that ALL of the US dollars never left the Federal Reserve. They remained in accounts held at the Federal Reserve.

At this point, we should understand that the US National Debt is:

1. A bunch of interest-bearing savings accounts.
2. All US dollars issued by the US Government that haven’t been taxed.
3. The national savings.

Knowing this, we can now answer the question, “Can the US Government default on the US national debt?” Yes, it can, but only if it chooses to do so. The US Government cannot involuntarily default – ever.

What this means is that Ted Cruz, Hillary Clinton and all of the neoliberal politicians who claim that interest-bearing savings accounts are crippling America and mortgaging our children’s future, would have to PREVENT the US Government from “paying its bills”. That is the only way that the US Government could default. Currency-issuing governments like the US Government do not involuntarily default, because they issue the currency the people use to buy bonds and pay taxes.

If you are afraid of the US national debt, then you are afraid of interest-bearing savings accounts.