On Monday, CNN ran a story with the headline: “Trump: U.S. will never default ‘because you print the money’” which raised some eyebrows. The general public, trained by mainstream “economists”, the media and politicians had a freak-out moment, claiming that Trump is nuts. Firstly, because the general public thinks that the national debt is an actual debt and secondly, the general public thinks that “printing money” is something the federal government does and that something will lead to hyperinflation. Among the populace who understands how the monetary system works, eyebrows were raised for a different reason: It’s unusual hearing any politician say something that is true. Well, sort of true.
Trump says the following:
“If interest rates go up, we can buyback debt at a discount if we are liquid enough as a country. People say I want to default on debt – these people are crazy. First of all you never have to default because you print the money I hate to tell you, so there is never a default.”
Donald Trump did tell the truth to a point. Here is what Trump said that is, in fact, true:
“First of all you never have to default…”
Believe it or not, Donald Trump is correct here, so all of you “fiscally conservative” Republicans who are supporting the guy really need to take note. The US Government cannot involuntarily default on the national debt, because first, the national debt is not a debt and second, the US Government issues the US dollar.
Go back to the founding of the United States as a nation. There were no US dollars. Where then did they come from? The US Government (See Article 1, Section 8 of the US Constitution). As I’ve said before, the US Government needs things: paper, pens, chairs, etc. What the US Government did was impose a tax payable in US dollars. The market then needed to get ahold of US dollars and the only place it could get them from is the US Government. So, the market sold goods and services to the US Government and in turn, the US Government paid the market in US dollars. Now the market had the US dollars to pay the tax and the US Government took command of the market and economy. Sometimes, the federal government ran deficits and sometimes it taxed more than it spent. Federal spending and taxation goes on, year after year, until we arrive at 2016 and so, the national debt is ACTUALLY every US dollar ever issued by the US Government, from the founding of the nation until today, that has not been taxed away. Check it for yourself. Add up all US dollars in cash, reserve accounts and securities accounts and the total equals the national debt to the penny.
Factually, the only way that the US Government can default on its so-called “debt” is if ignorant/malicious politicians in Washington prevent the US Government from fulfilling its obligations. So, here Trump is right – The US Government cannot involuntarily default.
So, where’s Trump wrong? Three places.
1. “If interest rates go up, we can buyback debt at a discount if we are liquid enough as a country.”
Again, the US Government is not a corporation. It is not a user of currency. The US Government is the currency issuer and its supply of US dollars is always equal to infinity. If you have an infinite supply of US dollars, you are always liquid. The US Government can at all times buy back every bond that it has issued – period. As Scott Fullwiler points out:
“What Trump misses is that in a downturn, monetary policy already takes care of everything he’s worried about. In 2008, debt service was $253B and debt held by private investors was 36% of GDP. In 2009, debt service fell to $187B while debt rose to 47% of GDP (partly because GDP fell, granted) because Fed cut rates. In 2010, debt service was $196B and debt was 55% of GDP as Fed cut rates still again. In 2015, debt service was still $30B less than in 2008 while debt by private investors was 62% of GDP. As counterfactual, assume debt service at 2008 level each year since–actual debt service was $263B less cumulative over the 7 years. And that doesn’t even include higher Fed profits since 2008 due to credit easing and rounds of QE that it sent to the Treasury. If as counterfactual you assume Fed remittances to Treasury in 2008 as annual benchmark, actual for next 7 years was $344B higher cumulative.
So, simply as a result of the Fed’s actions, government debt service reductions plus remittances to Treasury reduced deficits by cumulative $606B. So, Trump gets government can’t default, etc., but misses that monetary policy already reduces debt service plus raise remittances in downturn… even if you “buy at a discount” you still get the debt service at a higher rate either through Fed’s Treasury sale or interest on reserves reducing remits.”
Exactly. Monetary policy “takes care of everything Trump is worried about”. The US Government doesn’t need to buy back Treasuries at a discount. It can buy back Treasuries whenever it wants to, because the US Government cannot be “illiquid” in US dollars – ever.
Next up, some people will ask, “But what about bond markets”?
I cannot stress the following enough: Bond markets do NOT hold the US Government hostage. For a bond market to have US Treasury securities to play with, there must FIRST be:
1. US Treasury securities to trade! (This is obvious)
2. US dollars issued to buy US Treasury securities!
Bond markets are at the mercy of the US Government, not the other way around. They are 100% dependent on the US Government issuing the bonds and the US dollars to buy the bonds in the first place.
At this point, some will ask, “Well what about China then?”
What about China? China is NOT a US dollar factory. It does not have any authority to issue the US dollar and so, it doesn’t. It has its own currency. But more to the point, just like you, your friends, family, neighbors and Walmart, China must EARN US dollars to have them and it does just that – by selling goods to the United States. Once it obtains the US dollars through earning, those dollars go into a reserve account at the Federal Reserve. It then buys some US Treasury bonds to earn some interest. When China buys the bonds, the Federal Reserve then merely shifts the dollars in China’s reserve account into a securities account also held at the Federal Reserve. Want to pay off China?
The Federal Reserve moves the dollars from China’s securities account at the Federal Reserve back to China’s reserve account at the Federal Reserve. The US dollars never leave the Fed, they just shift back and forth. So, what does this tell you? A US Treasury bond:
1. is a US dollar that pays interest
2. is an interest-bearing savings account
The entirety of this so-called national debt is actually the national savings – period. There is no debt, because it is denominated in US dollars, which the US Government issues. If the national debt were in, say, Canadian dollars, then the US Government would have a problem. But, because the “debt” is in US dollars, there is no debt. Lastly, concerning bonds, I’d like to point out that in today’s monetary system, US Treasury bonds are totally unnecessary. The Federal Reserve could maintain a zero interest rate policy and then the US Treasury could simply stop issuing bonds. The next thing Trump is wrong about is:
2. “you print the money I hate to tell you”
Absolutely 100% incorrect. The US Government does not “print money” to fund spending, ever. Printing money is a function of the gold standard and does not apply to today’s US dollar. Allow me to explain.
Back in the days of the gold standard, the US Government had to maintain gold reserves. People and nations could exchange their US dollars for gold and the US Government agreed to exchange them. So, to defend its gold reserves, the US Government could fund spending in three ways:
3. Printing Money
Sound familiar? So, what is “printing money”?
Printing money is what a government on a fixed exchange regime like the gold standard could do if it wished to spend over and above what it could take in. This means that on a long enough time line, printing money would far outstrip what the government had in gold reserves. Hence, such a thing can be quite problematic. However, there is no gold standard today. In 1971, Nixon ended Bretton-Woods and the nightmare of the gold standard once and for all. Today’s US dollar is free-floating, non-convertible fiat, issued at will by the US Government and so, the US Government’s supply of US dollars is always equal to infinity. Under a free-floating, non-convertible fiat regime, the US Government cannot “print money” to fund spending, because it merely credits bank accounts with IOUs when it wants to spend. In other words, when the federal government spends, it simply goes into a bank account, types a number, say 2,000 and suddenly $2,000 exists out of nowhere. Taxation comes after spending, not before. So, federal taxes do not fund federal spending either.
The “printing money” argument is pure mythology, conjured up by the mainstream who wish to scare the public away from federal spending and encourage them to rely on non-existent “free market solutions”.
Lastly, the third place Trump is wrong is:
3. “I understand debt better than probably anybody. I know how to deal with debt very well. I love debt — but you know, debt is tricky and it’s dangerous, and you have to be careful and you have to know what you’re doing,”
Trump may understand corporate and household debt, but clearly he does not understand the concept of public debt. Any national government, like the US Government, that issues its own currency cannot go into actual debt as long as that “debt” is in that nation’s currency. In other words:
1. The Australian government is not in debt
2. The Canadian government is not in debt
3. The UK government is not in debt
4. The Japanese government is not in debt
and most relevant to the topic at hand, the US Government is not in debt. Don’t get me wrong: it’s fantastic that Trump gets the fact that the US Government cannot default, but he’s still far off the mark when it comes to the monetary system and macroeconomic reality. However, you heard the truth and cannot unhear it:
“First of all you never have to default… I hate to tell you so there is never a default.”
The US Government cannot involuntary default.