–Why federal debt is not debt, and federal borrowing is not borrowing

Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity breeds austerity and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

On June 20th, 2011, this blog published a post titled “Why a dollar bill is not a dollar, and other economic craziness.” I hope you had a chance to read it, because it is something of a prelude to today’s post.

Monetary Sovereignty is dead simple. It can be expressed in one short sentence: A Monetarily Sovereign government has the unlimited ability to create its sovereign currency. That’s it. Everything else derives from that.

Many people find Monetary Sovereignty to be counter-intuitive, because some seemingly identical words mean different things, depending on whether they reference Monetarily Sovereign entities or monetarily non-sovereign entities.

If I told you a man has made a lot of “hits,” your understanding of that phrase would depend on whether I was talking about baseball or organized crime. There is no relationship between a baseball hit and a crime hit.

Similarly, the words “debt,” “owe,” “borrow,” and “lend” have totally different meanings, depending on whether you’re talking about the federal government or an individual person. Unfortunately, this difference often is not recognized by the media, the politicians or even by old-line economists.

Imagine you are the only person in the world and your bank is the only bank in the world. Your checking account has a balance of $1,000, which represents all the dollars in the world. For whatever reason, you now wish to borrow $2,000 from your bank. Can you do it?

Yes, if your bank has a 20% fractional reserve lending limitation, it can lend up to $5,000, in a series of steps described at Fractional Reserve Banking.

Where will the bank get that $2,000? From nowhere. Money does not exist in any physical form. All your money – all anyone’s money – is just numbers on a bank statement. Changing those numbers changes the amount of money you own. When a bank lends money, it creates those dollars, by marking up checking accounts. Personal borrowing creates dollars.

Then, when you pay down the loan, you destroy the dollars your bank previously created.

Contrast that with the way our federal government “borrows,” i.e. creates “debt.” Federal “debt” is nothing more than the total of all outstanding Treasury securities, among which are T-bills, T-notes and T-bonds.

Anyone can “lend” to the federal government. If you wish to lend $1,000 to the government, you purchase a T-bill. The process is this: First, you deposit $1,000 in your checking account, i.e. your bank marks up the numbers in your checking account by one thousand. Then, the federal government instructs your bank to mark down the numbers in your checking account by one thousand, while simultaneously marking up the numbers in your T-bill account by one thousand (ignoring, for the sake of illustration, interest).

The simultaneous mark down of your checking account and markup of your T-bill account creates no new dollars. “Lending” to the federal government does not create dollars. And when the government pays down its “debt,” no dollars are destroyed. The whole process is an equal exchange.

[Banks create dollars by lending, and dollars are destroyed when these loans are paid down. The federal government does not create or destroy dollars by borrowing. It creates dollars by spending and it destroys dollars by taxing.]

In summary, the words “debt,” “owe,” “borrow,” and “lend,” when describing personal (monetarily non-sovereign) finances, involve the creation and destruction of money. Those identical words, when describing federal finances, involve nothing more than an equal exchange. No money is created or destroyed.

Just as saying a man has a lot of hits to his credit can give an entirely wrong impression, saying the government has a lot of “debt” or “owes” a great deal, gives the wrong impression. The words are wrong. Federal debt is not debt as we commonly think of the word.

A crime “hit” really should be called “murder,” to differentiate it from a baseball hit. So should federal “debt,” “owe,” “borrow,” and “lend,” be changed to differentiate them from personal “debt,” “owe,” “borrow,” and “lend.”

You may have some thoughts on this, but my suggestions are:

Debt (of the federal government): Total T-securities outstanding
Owe (by the federal governemnt): Has T-securities outstanding
Borrow (by the federal government): Sell T-securities
Lend (to the federal government): Buy T-securities or, exchange dollars for T-securities
Pay down (federal T-securities): Exchange dollars for T-securities

Yes, I know this never will happen. But perhaps thinking of things in those terms will help people better understand Monetary Sovereignty, and why federal “borrowing is not a burden on us or our children, nor is it a threat to, or an imprudence by, the federal government. It’s just an equal exchange, that no longer is financially necessary.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports


6 thoughts on “–Why federal debt is not debt, and federal borrowing is not borrowing

  1. Nice job.

    It’s a problem with language when we confuse “folding money” with bank created dollars. And then we confuse government spending with bank creation.

    I simply tell people that all government spending has to go back to the government in taxes and the delay in doing so is called a “deficit”.


    1. Thanks Gary,

      Strictly speaking, there is no “folding money.” A dollar bill is a title to a dollar. It in itself is not a dollar. (Just as a house title is not a house.)

      Dollars cannot be seen, touched, heard, smelled, tasted or folded. Think of dollars as mere numbers. They have no physical existence.

      Also, strictly speaking, all government spending doesn’t have to go back to the government. The government can spend and never levy taxes. The so-called “deficit” is the difference (not the delay) between taxes and spending.

      You are right though, that there is substantial difference between federal money and bank-created money. Bank dollars are temporary; loans must be repaid. Federal dollars never need repayment.


  2. Excellent summary, Rodger, your blogs are invaluable!
    In an effort to understand this further:
    Say Apple sells electronics to customers world-wide, collects a revenue of $100B in 2011, and makes a profit of $40B. Apple deposits $40B into its checking account and buys all Treasuries. No new money is created but in today’s lingo does the US Gov’t “debt” actually go up by $40B as a result of Apple’s desirable & profitable sales !?!


    1. Prakash,

      Most people believe the federal “debt” is the total of federal deficits. Mathematically that happens to be true, but functionally debt and deficit are unrelated.

      Visualize this:

      Federal “debt” is the total of outstanding T-securities.
      Federal deficit is the difference between federal taxes and spending.

      We could have a “debt” (i.e. create and sell T-securities) without a deficit. Even if the government ran a surplus (taxes exceeded spending), the government could continue to sell T-securities.

      We could have a deficit without a debt. If the federal government continued deficit spending, but stopped issuing T-securities, we would continue to have deficits, but no debt.

      The only reason we create and sell T-securities is because of an obsolete law that requires the Treasury to sell T-securities in the amount of the deficit. It is a legal requirement, not a functional need.

      Eliminate that legal requirement, and all “debt” could disappear, though deficits could grow.

      Rodger Malcolm Mitchell


  3. My point was one of language and why MMT is considered bizarre as explained by it’s proponents even though your post above does it better.

    What I meant by “folding money” is the bills in my wallet. They were “created” and are physical and most of my generation grew up with commodity money (I wish I had all those silver quarters I spent on Cigs and beer) unlike Dr. Rays scoreboard money which is to the uninitiated sounds silly.

    I do believe telling people, any one, that the government doesn’t need to tax the money back is an exercise in futility and sounds to the same aforementioned uninitiated as, again, silly .

    We must not forget that taxes are used for social engineering and punishing political opponent’s constituencies and will always return to the treasury where the money goes back to nowhere because that’s the way it is.

    So, from the above, I’ll stick to my “working man” explanation that the government spends by sending everybody on their payee list a check, the money thus created is “taxable from each person or entity who receives the money and as these payees spend their recipients are taxed etc etc. until the money goes back to the treasury.

    By definition, we do call it “taxable income” for a reason because thousands of government employees with guns will take it back.

    Under this scenario you will see:

    ” I simply tell people that all government spending has to go back to the government in taxes and the delay in doing so is called a “deficit”. ”

    And your grandchildren not only won’t pay for it and go bankrupt but will benefit because the money is in their hands to be used until spent as “taxable”.

    I bought and sold houses in the 70’s and 80’s and owed 0 taxes for most of those years because of borrowing money using houses, whose title was held by a third party, (so technically no one held title) as collateral.

    But I had the house and could borrow and spend because borrowing is not a taxable event. (I’m not forgetting the minimum tax)

    1986 changes in tax law brought most of us out of that lifestyle as real estate crashed and burned many.

    Happy Holidays if you’ve made it this far.


  4. Paul Krugman continues to be a debt hawk. These two whoppers are from his latest column, ironically titled “Nobody Understands Debt”:

    – “Our federal government needs to ensure that our debt grows more slowly than our tax base.”

    – “Federal debt isn’t harmless. Taxes must be levied to pay the interest on it.”


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