There’s an image going around today of the national debt that is intended to scare the daylights out of you. It shows a stack of dollar bills in the form of the national debt and places it next to a soccer field, a football field and the Statue of Liberty (thanks to Joe Weisenthal at BI). At first glance, you’d be inclined to think, “whoa, that’s a lot of debt we owe! – we must be close to bankrupt, right?” Completely wrong.
The USA is an autonomous issuer of the US dollar. The country has endless supply of this currency meaning that no one else can produce it. Most importantly, the debt that is issued due to Congressional mandate, is denominated entirely in this currency. So, when you hear someone say that we might not be able to “pay back” our debts the proper response is “you, sir are full of it”. There is no such thing as not being able to cover the liabilities which are entirely denominated in a currency that we can create out of thin air.
Now, where this all gets more nuanced is with respect to the actual holdings themselves. People think that the debt is an inherent negative because they assume that it needs to be paid back at some point and that it generates some sort of solvency issue for the US Federal government. But that’s just a misconception. Warren Mosler sent me an email last night highlighting this point:
“Ever hear anyone say ‘I wish they’d pay off those Tsy bonds so I could get my money back and go buy something.’? Of course not. Tsy borrowing gives people who have already decided to save, a place to go. Dollars that came from deficit spending – dollars spent but not taxed. If they were spent and taxed, they’d be gone, not saved.
Tsy bonds provide a resting place for voluntary savings.They are bought voluntarily. They don’t ‘take’ anything away from anyone.
For example, imagine two people, each with $1 million. One pays a $1 million tax. The other doesn’t get taxed and decides to buy $1 million in tsy bonds. Pretty obvious who’s better off, and who’s still solvent and consuming. Someone tell the Democrats and the Republicans, thanks.”
Great explanation. Now, we can alter the image from the scary article above to visualize this point. US citizens own roughly TEN TRILLION DOLLARS worth of US government bonds. These are securities that the US government has issued due to Congressional mandate which US citizens park their savings in. I think of them as a form of persistent stimulus as they add to the net financial assets of the private sector via interest payments (by adding to the budget deficit). These savings include pension funds, the Social Security Trust fund, the US Civil Service Retirement Fund, the US Military Retirement Fund, 401K’s and a whole slew of other forms of private sector savings. The remaining 30% is foreign owned and due to the fact that the USA runs a current account deficit with foreigners whereby we send them pieces of paper with old dead white men on them, they send us real goods and services and they park this “cash” in the form of US government bonds because there’s not much else they can do with dollars (good luck buying Chevron next time China!).
To make a long story short, the way we think about the public debt needs to undergo a dramatic overhaul in this country. Of course, I don’t mean to imply that the spending represented by this public debt cannot become problematic. It most certainly could. Inefficient or mismanaged spending can result in a reduction in our overall standard of living in many ways and could even lead to hyperinflation, but anyone arguing hyperinflation in the current environment doesn’t have a very good grasp on the actual causes of hyperinflation. And this transformation in thinking is crucial if we are ever going to understand our monetary system and vote in leaders who can actually use this system to maximize its potential benefits. Clearly, given the absurdity of the debt ceiling charade in Washington, it shouldn’t surprise a single one of us to see that the domestic economy is in shambles….