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Issue Analysis

    There Is No National Debt

    As we approach the next artificially constructed, politically motivated, intentionally promoted national crisis, we should keep one thing in mind: though we speak of a national debt, there is no single national debt.  

    The debts the government owes are real enough, and a source of national shame, totalling as they do over $16 trillion.  But those debts are owed to millions of holders of the various Treasury notes, bills, and bonds, each of whom may own multiple securities of various maturities.  Sold weekly, the securities come due and, as people get around to it, are either rolled over or redeemed every business day.

    That is important because as we run up against the debt ceiling, the fear mongers will claim that failure to raise the ceiling will cause us to default on the debt, as if it is one single sum owed to a single debt holder.  Defaulting on it is made to sound like the sky is falling, as if it would be the end of the nation itself.

    Another category of securities are those held by government agencies, such as the Social Security "Trust Fund" and the federal pension funds.  Failure to redeem one of these securities would be politically explosive, exposing the duplicitous nature of the generational theft caused by runaway spending.

    In fact, defaulting on one of these debts, as stupid and irresponsible as that would be, would merely cause people to reconsider the soundness of tying up their money in Treasury securities.  That would cost the government more in interest payments in the future, which would probably lead to a chain reaction of inflation.  On the other hand, it might lead people and institutions to invest in more productive ways, such as in the stock market.

    A debt default is not the end of America, but it would be the end of one kind of easy money for the big spenders in its government, and make balancing the budget all the less likely. It would be a very bad thing, all the more so because it is so unnecessary.

    The federal government takes in hundreds of billions per month from its various sources, such as payroll taxes and federal income withholding. The income is enough to meet interest payments and notably to pay off the principal on maturing securities. 

    As Peter Ferrara says, we must correct the debt dishonesty to win the debate:

    Federal individual and corporate income taxes, and excise taxes, are more than 6 times greater each year than the interest on the national debt. So if President Obama wants to focus on paying the bills we have already racked up, he doesn’t need to borrow still more to do that. That would only rack up still more bills.

    The only chance of default, therefor, is if the Treasury Department decides to prioritize above debt service the payment of some other government obligation -- such as the President's greens fees or the power bill at the Department of Energy.

    There are probably as many of these other federal expenditures as there are federal debts.  We must begin making decisions now to decide which of the federal expenditures has lowest priority, so paying it can be delayed or eliminated in the event of a debt limit freeze.

    The bad news: the federal government borrows about 40% of what it spends.  I refuse to spend a single minute figuring out if that 40% figure is accurate. Whether the actual figure is 25%, 40%, or 60%, the effect is the same: smart cuts must be made to prioritize debt service over other spending.

    The natioanl debts are trillions of dollars that could be put to productive use in the economy, but are instead loaned to the federal government in what are thought to be low risk loans. The risk is indeed low that the President and his Treasury Department, for all their bluster, would foolishly fail to service the nations's debts.  

    2 comments
    Jeff Van Beveren
    07/10/2013

    The title of this article is accurate, but most of the rest is misleading. The term "National Debt" is a misnomer, purposely misleading. What it refers to is better described as a tally of the amount of dollars that our Federal Government has created and distributed to the private sector for our use. A better term would be the "National Wealth". If we were to actually "payoff" this $16 trillion so-called "debt" there would be no dollars for us to use and circulate amongst ourselves. I guess everyone wants to barter instead.

    Our monetary system is a sovereign currency (US dollars) issued only by the United States of America, inconvertible to other currencies or commodities, with a floating exchange rate for other currencies. Inconvertible means that the only thing anyone can make the US government give them in exchange for their dollar is another dollar, never gold, or Euros, or Yuan, or whatever.

    This system is absolutely completely different from a household or business checkbook, the income/outgo account balancing rules do not apply. You and I can't create dollars, but the US Government (and only the US Government) can and must.

    The US Government creates dollars at will by spending them into existence and can do so in unlimited amounts at any time it desires. This derives directly from the US Constitution. At the most fundamental level all dollars are created by Congress authorizing the Treasury to increase the number of dollars in some bank's federal reserve account (either directly by computer keystrokes, or by issuing a government check or paper dollars to someone who deposits it in a bank thus increasing the bank's reserve account).

    The US does not actually borrow or tax to spend. In fact any tax money you paid to the government had to have been previously spent into existence by the government in order for you to have it in the first place. Over the years Congress has created a byzantine legal labyrinth of organizations (e.g. the private Federal Reserve Bank, etc.) and required methods as to how dollars are created (e.g. Treasury must "issue securities" through the "Fed" via "open market auctions" etc.), which prevent the Treasury from simply paying the "bills" directly. This labyrinth of required methods makes the issuance of dollars look like borrowing when fundamentally it is not (though it does guarantee lots of income for bankers). This "borrowing" myth and the equally byzantine budgeting process also hides the fact that there is no actual connection between taxing and spending.

    The US Government makes no obligations denominated in any currency other than it's own dollars. The US can payoff any "debt" instruments (such as treasury bills, bonds, et cetera, and the interest on them) at any time by issuing more dollars. There is absolutely no possibility of a default on any quantity of these "debts" at any time (although a false default by Congress arbitrarily refusing to allow the payment to be made is possible- see "debt ceiling").

    Since the government creates dollars at will, it does not need to tax in order to spend. We do not have to tax the rich to give to the poor. In fact, we can't. Taxes are simply the opposite of federal spending, the un-creation (destruction) of dollars. When the tax transaction is completed it just reduces the number in the same reserve account that was increased by some earlier federal spending. My tax dollars did not create any food stamps or jet fighters; they just disappeared.

    There are good and very important reasons for taxes (though not for the current uneven and counterproductive assignment of them on the populace), one of them has to do with inflation, but that is another discussion.

    Since the "national debt" is not loaned to the government from the private sector (rather it is a tally of the dollars that the government has injected into the private sector) it is not inhibiting productive use in the economy, it is enabling it!

    In summary:
    There is no "national debt" that we have to repay in full someday, it is a national asset that is misnamed to delude us.
    We cannot default on any dollar denominated instruments (unless we arbitrarily decide to not pay it).
    We don't need to tax or to borrow to spend. Period. (There are other reasons to tax).
    The so-called "national debt" does not inhibit the economy in any way other than as a scare tactic to promote selected ideologies and agendas.

    These are still considered unconventional concepts by the mainstream media, but they have been around for a while. Don't just take my word on this- educate yourself! Some suggestions:

    Books by Frank N Newman (former undersecretary of the Treasury) .
    Works by the professors of the University of Missouri Kansas City Economics Department, including L Randall Wray, Stephanie Kelton, William K Black, Mathew Forstater.
    NewEconomicPerspectives.org including the Modern Money Theory Primer.
    Works and blogs by Hyman Minsky, Pavlina Tcherneva, Warren Mosler, Marshall Auerback, Scott Fullwiler, Dan Kervick, and many others...

    lheal's picture
    Loren Heal
    07/11/2013

    That's factually inaccurate. Our national wealth is far greater than the amount of the debt.

    It's leftist fantasy that government creates all wealth by deficit spending.

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