America is NOT in debt!

The idea that America is in debt is possibly the most widespread misconception in our country. It is also probably the most damaging.

The idea that America is in debt is possibly the most widespread misconception in our country.  It is also probably the most damaging, as it negatively affects government spending.  Every deficit dollar allocated by Congress is done so with fiscal conservatives fretting about our ability to someday pay back all of these “borrowed” dollars. 

Those fiscal conservatives are idiots.

The U.S. dollar is a fiat currency. Dollars can only be created by the U.S. government (for simplicity, it helps to think of the Fed, the Treasury, and the government as a single entity, as they work in concert). All dollars are introduced into the economy by deficit spending.

When large amounts of dollars are amassed, the people, banks, businesses, or countries that hold them often choose to "invest" those dollars in federal government bonds, as they earn a bit of interest, and are basically non-risk places to park money. This is our "National Debt." As you might have already figured out, it's not really debt at all.  It is more akin to a savings account – and nobody says that a bank is “in debt” to you just because you have some money in a savings account there.

Back in the gold standard days, the creation of dollars was restricted by our gold holdings. When the government wanted to create more dollars than we could back with gold, they actually did borrow in the form of bonds.  Happily, those days are over, and dollar creation is no longer restricted by our gold holdings.  The government can create as many dollars as it needs, with zero risk of default.  The only danger is demand-pull inflation, which has never been a problem.  But
regardless, some number of new dollars are needed to account for savings, growth, and other forms of leakage, so deficit spending is necessary to keep the economy from contracting.

The government is still required by law to issue bonds in the same amount as the federal deficit. This law is a holdover from the gold standard days. But now, sales of government bonds are used to control the interbank lending rate. By controlling the sale of these bonds (and buying them at auction when necessary), the government can keep the interest rate where they want it.

Given that the country is not borrowing dollars, and there is no danger of interest rates rising until the government decides to raise them, there is no good reason to lower government spending.  Government spending accounts for about one quarter of our GDP, and any cuts in that spending are felt deeply by the economy.

So the next time you hear a presidential candidate talk about the need to lower the deficit, run the other way, because that guy simply does not understand how the economy functions. 

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Murphy-Solon November 13, 2012 at 01:50 PM
You were wrong about the election, your party lost in stunning fashion. Perhaps your party did not know what they did, but you're soon to find out.
Ed Fisher November 13, 2012 at 04:00 PM
A week after the election and you're still obsessing over it. A majority of voters are apparently much less intelligent than you. We voted. Your supreme wisdom was summarily ignored. Get over it.
John Biesterfeldt November 13, 2012 at 05:17 PM
John Galt is a character in one of the most unreadable books ever. I'm not a big fan of the healthcare compromise myself, but that's what you get when one obstructionist party prevents you from enacting the better - and far more business-friendly solution - single payer healthcare. I'm sure you are blaming the looming "fiscal cliff" on Obama as well, when it was really the brainchild of Republicans, who held up the stimulus until they got this economic Sword of Damocles hung over all of our heads. But, hey, anything to sink the other party's guy, right? Our potential fate under a budget-cutting Romney/Ryan administration would have been far worse. Obamacare might be expensive, but at least it addresses a real problem (millions of uninsured Americans). Cutting the federal budget, as I have attempted to explain, is a painful solution in search of a problem.
Mark Brooks November 14, 2012 at 01:57 PM
Thanks for the discussion. So many people (and I'll include myself) have no idea how the economy actually works. In fact it seems many professional economists and academics may have no clue either - I refer you to the book Debunking Economics by Steve Keen.
John Biesterfeldt November 14, 2012 at 02:38 PM
Thanks, Mark, your comment is much appreciated. I've come across some of Keen's articles, and I largely agree with him. Unfortunately, economics is just a hobby for me, and once those guys whip out their equations, my eyelids get unbearably heavy. I prefer to read the guys who keep it simple. There are only two things you must know about the economy, and the rest will fall into place. Number one, government bonds do not represent a "debt" that has to be paid off. Bonds (in a fiat economy) are just another way to hold dollars. We could do away with bonds tomorrow, and the economy would hardly be affected. (Though we would need to employ another method of controlling interest rates.) The government creates dollars, and those dollars bounce around the economy until they end up hoarded (often in the form of govt. bonds). Number two, the "money multiplier" theory of banking is baloney. If there are somehow no excess reserves availabe on the interbank market, banks can always borrow reserves from the Fed, so they are never reserve constrained when making a loan. This means that there is not a pile of loanable funds out there that borrowers are competing over, so there is no supply/demand pressure on interest rates. The supply of funds is functionally unlimited. If any of this stuff interests you (or anyone else), I'd be happy to point you to more material about Modern Monetary Theory. Thanks again for the comment.


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