The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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AP: August 12, 2009:
“The Obama administration is projecting that when the current budget year ends on Sept. 30, the (deficit) will total $1.84 trillion. The soaring deficits have raised worries among foreign owners of U.S. Treasury securities including the Chinese, the largest holder of such debt.”

Perhaps no subject has caused more controversy than the federal debt and deficit. The deficit includes interest payments, which this year are projected to be $260 billion, a substantial amount, even with today’s low interest rates. Interest payments will continue to grow as the debt and interest rates rise.

So we deal with three related worries: We worry about paying for the large and growing federal debt. We worry about our creditors buying our debt. And we worry about the growing amount of interest the government must pay.

Every one of these issues could be solved with one stroke of the pen.

The federal government borrows by creating Treasury securities (T-bills, T-notes and T-bonds) from thin air, backed only by “full faith and credit.”  It then trades these securities for dollars it previously created.  When the securities mature, the government trades them back, plus interest.

“Full faith and credit” is an intangible collateral. The government has an unlimited supply. This gives the government the power to create unlimited amounts of T-securities.  Finding buyers for these T-securities is addressed by offering interest rates high enough to attract investors.

While the government currently creates T-securities from thin air, it just as easily creates dollars from thin air – similarly backed only by full faith and credit – and can eliminate the borrowing step.  No longer would we be troubled by federal debt, federal deficits, concerns about China et al or interest payments. The same controls over T-security creation would apply to money creation. We merely would eliminate the one step that causes so much controversy.

Why does the U.S. government create T-securities ostensibly to obtain U.S. dollars?  Borrowing is a relic from the gold-standard days, which ended in 1971. Prior to that, U.S. dollars were backed in part by gold, a tangible product in limited supply.  This limit prevented the government from creating as many U.S. dollars as it needed, so it had to borrow these dollars.

When you think about it, the notion of the U.S. government “borrowing” U.S. dollars – dollars it alone has the power to create – is ironic. The government can eliminate debt, along with all the controversy these subjects cause.

Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com