●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
MONEY IS NOT A PHYSICAL THING
To understand U.S. federal debt, you first must understand money, specifically the dollar. There is no physical entity called a “dollar.” You never have seen, smelled, touched or tasted a dollar. In today’s economy, a dollar is nothing more than a number in an accounting balance sheet.
The dollar bill in your wallet is not a dollar; it is a title to a dollar. It merely is evidence you own a dollar, much like a house title is evidence you own a house, or a car title is evidence you own a car or a patent is evidence you own an invention.
But unlike a house or a car, a dollar is no more physical than is, for instance, the number six. Although the number six and a dollar are real, you can’t see, smell, touch or taste either of them.
Is it possible to own something that is not physical? Consider a copyright. It demonstrates ownership of a book. But that book is not a physical thing. If I go to a store and I buy your book, who owns the book? I own the physical representation of the book, but your copyright gives you ownership of the non-physical book.
DOLLARS ARE ONLY NUMBERS
Your bank checking account and savings account do not contain dollars. They contain numbers that tell how many dollars you own.
Imagine you are one of the lucky employed, and you have a bank checking account and a bank saving account. Today, your boss gives you your first paycheck: $1,000. What exactly has your boss given you? Money? No, that paycheck is not money.
That paycheck is a set of instructions to your bank, telling your bank to increase the number in your checking account by 1,000. So, for instance, if your checking account number had read 3,476, now that number reads 4,476.
Although for convenience, you might say you now have 4,476 dollars in your checking account, you really have nothing in your checking account but the number, 4,476.
Let’s say you give someone your check for 3,000 dollars. Your check instructs your bank to reduce the number in your account by 3,000 and to increase the number in your creditor’s checking account by the same amount. Although, for convenience, you say you have transferred dollars from your account to your creditor’s account, there really has been no transfer. It’s just that your bank has reduced the number in your account and your creditor’s bank has increased the number in his account.
DOLLAR TRANSFER IS AN ILLUSION
When you wait at a railroad crossing, you see a red light moving back and forth, back and forth. Except the red light really isn’t moving. It’s two lights that blink alternately, and give the illusion of motion, an illusion so powerful that though you know it’s a illusion, you won’t be able to see it as two lights, blinking alternately. Try it.
Similarly, the illusion that dollars move from one account to another is so powerful, we all (including me) talk about dollars moving. But dollars, being non physical, cannot move.
Let’s say that the number in your checking account is 4,476, and you write a check for 6,000 (i.e. send instructions to reduce your account, and increase your creditor’s account by 6,000) Your creditor’s bank will follow your instructions, and increase his checking account number by 6,000. Then his bank will route the check to your bank for “clearing.” But, because your checking account number is too small, your instructions won’t “clear,” and your bank will return the check to your creditor’s bank, i.e the check will “bounce.” Your creditor’s account will be reduced 6,000.
ALL BANK DEPOSITS ARE BANK DEBTS
When you deposit dollars in your bank accounts, you actually lend to your bank. Those dollars are loans, not gifts. Your bank owes you those dollars, and if you want them, your bank is obligated to give them back to you. If you tell your bank you want the dollars in your savings account transferred to your checking account, will this be a problem for your bank? No, your bank simply will debit your savings account and credit your checking account.
By depositing dollars into your checking or savings account, you have forced your bank into debt. All bank deposits are bank debts. Banks love to be in debt. They actively solicit debts (deposits). Being in debt is the mission of a savings bank.
Bank deposits are not “unsustainable,” nor do they cause bankruptcies. Though a bank can become bankrupt, the fault is not deposits, but rather poor business practices. No bank ever went bankrupt because its deposits were too large.
ALL FEDERAL DEBTS ARE BANK SAVINGS ACCOUNTS
All federal debt is just the total of T-security deposits (T-bills, T-notes, T-bonds) in accounts at the Federal Reserve Bank (FRB).
Today, the total federal debt is about 12 trillion dollars. This means the total of deposits in T-security accounts at the Federal Reserve Bank, is about 12 trillion dollars. When you buy a T-bond, you “lend” dollars to the Federal Reserve Bank. You deposit dollars into your T-bond account at the FRB. You are a creditor to the FRB.
Your T-security account at the FRB is essentially identical with your savings account at your local bank. You put dollars in (credit); you take dollars out (debit), and meanwhile you earn a bit of interest.
Whenever you want your dollars back from your “loan,” you merely wire or mail instructions to the FRB to reduce the number in your T-bond savings account, and increase the number in your checking account. The FRB can do this all day long, in any amount. It’s a simple exchange of existing balances.
WHAT IF OUR CREDITORS WANT THEIR MONEY BACK?
Debt hawks worry about what will happen if all our creditors – China, Japan, European nations et al – suddenly want their dollars back. No problem. The FRB simply would debit all their T-security accounts and credit all their checking accounts. Instantly, all federal debt would disappear.
So, why can’t you and I pay off our loans that way? Why are our debts a burden to us, while the FRB’s debts are not a burden to the federal government?
There is a fundamental difference between a loan and a deposit. You aren’t the Federal Reserve Bank. When you borrow, you are not accepting a deposit. If someone lends you dollars, he is not opening a savings or checking account with you.
You borrow in order to spend, so if your creditor wants his money back, you may have spent it. But the FRB does not spend depositors’ dollars. It holds 100% of those dollars in T-security accounts. The FRB always can debit T-security accounts and credit checking accounts. There never has been a time when the FRB was unable to credit checking accounts, and there never will be.
So to all you people who worry that the federal debt is too large, the debt/GDP ratio is too large, the debt is “unsustainable,” China “owns” us, or somehow the U.S. government will not be able to pay its debts, I have some good news. The FRB could pay off 100% of all federal debt tomorrow, simply by transferring already existing dollars from T-security savings accounts to checking accounts.
If you are a lender to the federal government, your money is all there, right in your T-security account at the FRB. All of it. Every cent. So is China’s money, Europe’s money, Japan’s money – every one of those 12 trillion dollars of federal “debt,” all sit safely in FRB T-security accounts.
And despite what the fear mongers tell you, you don’t owe a penny of it. Nor do your children, nor do your children’s children. The FRB owes it all, and it’s all there in T-bill accounts.
So stop worrying about the size of the federal debt. Stop worrying that the U.S. Federal Reserve Bank has too many dollars on deposit. It’s not possible for the FRB to have too many dollars on deposit.
WHY DOES THE GOVERNMENT BORROW DOLLARS?
It doesn’t. It allows interest paying deposits in T-security accounts at the FRB. Why then, does the federal government issue T-securities? It’s an obsolete process based on an obsolete law that, very simply says: The total of T-securities issued each year, must equal each year’s total federal deficit.
Not that there is any functional relationship between deficits and T-security accounts (There isn’t.) It’s just that by law the two numbers must be equal. So, for instance, if the federal government spends $10 million and receives only $3 million in taxes, it runs a $7 million deficit, and is required by law to issue $7 million worth of T-securities, though T-securities have no relationship to deficits.
It’s almost like having a law stating for every car there also must be a horse – a meaningless relationship.
Years ago, there was a reason for this strange law, but no more. Change the law, and the government could run that deficit without issuing a single T-security. The dollars in T-security accounts are not used for federal spending. They just sit there, at the FRB, waiting to be paid back.
WHY ARE GREECE AND ILLINOIS GOING BROKE?
The U.S. “debt” is 100% in dollars, our sovereign currency. Being the sovereign creator of dollars (aka Monetarily Sovereign), we never can run short of dollars. So anyone wanting dollars from the FRB, will have no trouble getting them. The U.S. does not spend the dollars it “borrows.” Those dollars are kept in T-security accounts at the FRB.
When the U.S. spends, it send instructions to creditors’ banks to increase the dollar numbers in those banks. These instructions are cleared by the FRB. This is how the U.S. government creates dollars.
But Greece and Illinois are monetarily non-sovereign. They do not have a sovereign currency. Greece uses euros, which it does not have the power to create. It cannot store borrowed euros in its central bank. Greece needs to spend the euros it receives from borrowing.
Illinois too, uses dollars, but dollars are not its sovereign currency. Like Greece, Illinois has no sovereign currency. It spends the dollars it borrows, rather than being able to store them in a bank account.
Federal debt is not like non-federal debt. Same word; two different meanings. Federal debt is the total of deposits in T-security accounts at the Federal Reserve Bank. The Federal Reserve Bank has more that $12 trillion in deposits. Many private banks have billions in deposits.
Bank deposits are a sign of strength, not weakness.
Federal “debt” is a myth, promulgated by people whose agenda is to reduce federal spending for the poor and middle classes. Pay no attention to these evil people. Growing federal debt is a sign of strength, not weakness.
Rodger Malcolm Mitchell
Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%
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 Imports
18 thoughts on “What is the federal debt? A primer for politicians.”
Rodger, based on what you wrote above, I seek your help with a question. Please correct me where I go wrong. I am keenly interested in this.
A friend of mine says the US government gets its money from the Fed, which holds its weekly T-bills auctions. I say no, the US government gets its money from nowhere. If the government wants $100 billion for a war, then it simply credits the recipients (weapons makers, soldiers, suppliers, etc) by an aggregate total of $100 billion. This is called “government spending,” which is a misnomer, since it is simply a matter of changing numbers in computers. (For you and me, “spending” means the money leaves our ownership and control.)
Once the government “spends” this “money,” the “money” enters the banking system, which is overseen by the Fed. The money did not come from the Fed. It came from nowhere.
Consider the so-called “fiscal cliff” (which is a farce, since Congress will correct it when the time comes, but will make a show of wringing its hands). Who created it? The Fed? No, the Congress did, by mandating tax increases and spending cuts (i.e. austerity). The Fed had nothing to do with it. Congress wants to increase tax revenue in order to impose austerity (thereby worsening the depression, thereby increasing the gap between the “1%” and everyone else). Federal tax revenue goes not to the Fed, but to the IRS, which is part of the Treasury. When I send a check to the IRS, the IRS changes the numbers in my bank account (reduces it) by the value of the check. What happened to the “money” that I “sent” to the IRS? Where did it “go”? It went nowhere. If I change a “2” to a “1” in my computer, then the “2” did not “move” anywhere. (Thus we should abolish all federal income taxes. The government does not need or use that “revenue.” Moreover it is meaningless to say “the government cannot spend more than it takes in,” since the government does not use what it takes in.)
Nonetheless, my friend continues to insist that the government gets its money from the Fed, which makes the Fed all-powerful. I say the Fed is powerful, yes, but the Fed merely oversees the banking system. Its purpose is to control monetary inflation by playing with interest rates, which affects the perceived “scarcity” of (infinite) dollars. “Scarcity” maintains demand (i.e. trust in the fiat currency), thereby warding off monetary inflation. If monetary inflation becomes too severe (i.e. becomes hyper-inflation) such that the public loses all faith in the currency, then the banking system collapses, taking society with it.
As far as I can tell, this is the only reason why the Fed continues to sell T-bills. The government does not need or use revenue from T-bills, any more than the government needs or uses revenue from taxes. Plus, you mentioned the obsolete law that says the total of T-securities issued each year must equal each year’s total federal deficit. (I presume that this law is a vestige of the days before 15 Aug 1971 when the USA was still on the gold standard. Gold is a limited commodity, unlike fat currency.)
Monetary inflation (i.e. loss of trust in the currency) is not to be confused with price inflation, which is usually caused by shortages in something. In the USA that something is energy. When the price of energy goes up, the price of everything else goes up. (Things like housing prices are a product of their own separate market.) Price inflation is a product of ordinary supply and demand. Not so with monetary inflation, since the supply of fiat dollars is infinite. Monetary inflation is not caused by “printing too many dollars.” Monetary inflation means that demand falls, i.e. people lose faith in the currency, regardless of the amount of currency in circulation (with “currency” being numbers in a computer matrix).
But wait: if the Treasury creates and issues money by changing the numbers in computer systems, doesn’t the Fed do the same thing with quantitative easing? Doesn’t the Fed exchange money for garbage (e.g. fraudulent securities)? No, because this is not negotiable “money.” The Fed changes the reserve accounts of banks, but the resulting value cannot be spent or negotiated. It must “sit in the bank” (although it is not physical). The reserve is used to backstop the banks’ lending, speculation, and fraud.
Do banks create money? Yes, in the sense that credit is negotiable. Bonds and loans can be traded. The money system consists of both money and credit. Ultimately they are the same thing. All fiat money is debt (i.e. a claim on a digital value). And since debt is synonymous with credit, all money is also credit. A dollar bill means you have a digital credit of one dollar.
But when the government “spends,” the money does not come from the Fed. It comes from nowhere. This is my contention. The government does not rely on the Fed for its money. The government creates its own money, and puts it into the Fed banking system. Thus, as you note above, there is no functional relationship between deficits and T-security accounts.
You write, “Years ago, there was a reason for this strange law, but no more. Change the law, and the government could run that deficit without issuing a single T-security. The dollars in T-security accounts are not used for federal spending. They just sit there, at the FRB, waiting to be paid back.”
Yes. So again, the government does not get its money from the Fed’s auctioning of T-bills. The auctioning (as I understand it) is done for the purpose of maintaining “demand” for dollars (i.e. trust in dollars).
And still my friend insists that the government gets is money from the Fed. I tell him that perhaps he thinks that unlimited fiat dollars are the same as a limited commodity, like oil or gold. I say that the government creates its own money, and thus has no need for Fed dollars. Besides, as you note above, the dollars in Fed accounts just sit there, unspent.
Now, here is where my friend may have me. He says the Fed buys bonds at auctions and pays for those bonds using newly-created digital money, i.e. it credits the Treasury’s account. The Treasury can then print new T-bills up to the amount of the newly-created money. The Treasury can not, under the current system, decide to issue money that is not backed by previously sold bonds. Therefore the government can only create money in accordance with Fed bond purchases. Therefore the government essentially gets it money from the Fed. If you say the government creates its own money, then do you have any sources to back that up?
SO RODGER. Who is in error here. Him, me, both, or neither? Please help me out with this. I want to understand more. Thanks greatly for reading.
You are 99% correct; your friend is 99% wrong.
The Fed does create a relatively minuscule amount of money, mostly by lending to banks. The Fed also does credit the Treasury with its (Fed’s) profits. And the Fed can use some of those dollars to buy T-securities.
If the Treasury wishes to spend, it must sell bonds to equal the spending, not because it uses the bond money, but because there must be an accounting equivalence between net spending and T-securities.
The vast majority of bonds are not sold to the Fed, but to other nations and to people like you and me. The Fed’s primary role in this process is as a bank. It maintains the T-security accounts, just as your bank maintains your savings account.
And though your bank maintains your savings account, it does not create the dollars in that account.
The Fed was not invented to create dollars. The Fed is only 100 years old, and this nation is 236 years old. The Treasury was creating dollars long before there was a Fed.
The Fed could disappear tomorrow, and the Treasury could continue creating dollars (i.e. “spending”) forever.
Thank you very much Rodger. You always explain everything so clearly and simply, and yet the brainwashing out there is so total that once in a while someone says something that makes me think, “Am I just DREAMING all this, or is really as simple as Rodger explains?” The answer is yes, it is that simple.
By the end of 2011, NM Incite, a Nielsen/McKinsey company, tracked over 181 million blogs around the world, up from 36 million in 2006.
Of all those, yours is my favorite.
One other thing. Some people complain that the Fed is privately owned. I say this doesn’t matter, for two reasons. First, the US government creates its own money. Second, even if we do away with a privately owned Fed, we will still have the problem of people refusing to understanding what you write about. Europe is doubly cursed. Even if they do away with the euro currency, (as they must) the public will still remain brainwashed about the source of money. However it seems impossible to even convince average Europeans that they must dump the euro currency that is killing them.
His friend is in the “monetize the debt” paradigm so many believe. The main point is the Treasury spends first as Congressional appropriations dictate. Bonds are bought AFTER the spending. When the bond auctions take place, the buyers are there because they want a risk free interest bearing place to put those dollars the Treasury and subsequent dollar recipients spent.
Rodger, I explained your response to my friend. Looks like you shut him down. As I wrote to him, I had several additional thoughts that I communicated to him.
Example: “If the government gets its money from the Fed, as you claim, then why do military contractors lobby the Congress for funds? Why don’t contractors lobby the Fed?
Why was Bernanke the one who coined the term ‘fiscal cliff’ to describe the lunacy of Congress?”
Incidentally the Iranian government, as an IMF member, has been needlessly imposing austerity in the Iranian public since 10 Jan 2010. The result has been a currency crisis that has worsened steadily since then. Therefore critics of Iran’s government are correct when they say that Iran’s economic troubles are at least 80 percent caused by Iran’s government, not the Western sanctions. Assad of Syria was also needlessly imposing austerity in the Syrian public. The result was a revolt. I can explain much more if anyone is interested, but it would essentially be a re-hash of what Rodger has been saying all along, applied to Syria and Iran.
One other thing…when I asked my original question of you, I suspected that I had not read your post properly. After you gave me your answer, I read your post again. Sure enough, it was all right there in the first place, but I had not understood it. Again, many thanks.
The fed cannot lend money to corporates, the government can give those companies very lucrative contracts.
This is the way most of our purchasing power is stolen.
People want a social program but dont want to pay for it, a companies lobies congress to pass a bill to “help” people, the government passess the bill, they issue bonds, the fed hits their keyboard creating a few billion (diluting existing dollars), the government forks it over to the company which spends it on things the citizens should have purchased. When people complain about prices being higher just blame on a mysterious boogie man called inflation.
It’s the easiest way to rob a nation without anyone having a clue.
This not a hard subject, it’s theft. The shocking thingis people want more of these programs (really theft).
Mark, the simplest way to see who has the real power is to look at a concrete case. Suppose your Uncle died & left you a house. In a mattress you find (a) A million dollars in Ben Franklins. You say WOO HOO! I’m rich!!!
OK suppose it was (b) A million dollars in some US government paper you’ve never seen before. You take it to your accountant & he says that’s about a million in US Treasury Bonds!! Do you say WOOO HOOO! Or do you say shucks, that’s not real money?
You say WOO HOO!! You can go to any bank & they’ll exchange those bonds for a suitcase with about a million in Ben Franklins.
Who made you rich, your Uncle or the Bank?
Now the Fed can only do Monetary, can only EXCHANGE Dollars for Bonds. It can set the exchange=interest rates but they’re always pretty near par (for short term), and nearer the nearer the maturity date is. It just does what a Bank does.
The Fed is NOT ALLOWED to create EITHER Dollars or Bonds and give them to people without taking back some Dollars or Bonds in return. It’s just a money-changer, not a money issuer/giver.
Now Uncle Sam’sTreasury sort of can’t create Ben Franklins, Dollars. It’s irrationally restricted to putting Bonds in his mattress, not Bens. So though it’s a little more complicated than that, you can think of the Treasury as only creating these Bonds. But it CAN create them out of nothing. Just print ’em up. It can do Fiscal. Uncle Sam’s Treasury can sign checks to you because you worked for him, or just because you’re his favorite nephew. The Fed CANNOT.
So again, if you go through a transaction with Uncle Sam’s Treasury & end up with these Bonds, and maybe then exchange them for Dollars at any bank, like the Fed, again the question is : Who made you rich? Uncle Sam, or his Bank, the Fed?
Your Uncle, not the Bank in all cases, of course.
The restrictions on the Treasury to have a positive Fed account balance ( only dates from the 80s IIRC), to match deficits with bonds, etc etc are just there to confuse you. They don’t mean much at all. But the restriction on the Fed – “Only Do Monetary” means a great deal.
It’s a general rule of everything, all sciences, all knowledge, all life:
If people talk about it a lot – it means nothing.
If people never mention it – it means a lot.
The Treasury hold bond auctions, which primary dealers are required by law to participate in.
I would say that the Treasury *is* borrowing by selling bonds, but only in a technical sense. This is the part where it gets a little confusing and it’s really easy to misunderstand exactly what’s going on.
No, this is wrong.
The fed creates 99% of the currency. You are 99% wrong and your friend 99% right.
The fed says so.
The government borrows the majority from the fed. The fed charges interest in the debt (purchasing power) and after paying themselves hefty salaries, they give the rest to the treasury.
You are confusing the two meanings for “currency.” One is just coins and paper dollars, which account for a negligible fraction of total currency — the total money supply.
The Treasury does not borrow from the Fed. If it did, where would the Fed get the dollars to lend to the Treasury? From the Treasury, of cours.e
Than why isnt it the fed issuing bonds? Why is the US government doing so?
You know who sends the payments to pay pensions?
Please read link i gave. Says fed notes comprise 99% of US currency. Fed says so, not me.
Vane,if the Treasury sends you a $500 Social Security check, and you cash it, such that your bank marks up your account by $500, then $500 in money is created. No physical currency was involved, and no borrowing. Nothing physical moved. Please tell me why you think this constitutes “borrowing” from the Fed.
One thing that people have difficulty grasping (because it is so simple and obvious) is that money is not physical. Money consists of digital values in computers. Coins and bills are not money. They are claims on digital values. If you had the power to digitally increase your own bank account, then you would not be borrowing, nor obtaining anything from the Fed. Instead, you would be creating money out of nothing, just like the government does.
Isn’t there anybody in Congress or the executive branch that understands this stuff? It seems not. I get so disgusted hearing campaign ads that refer to “crushing debt” and “cutting spending” as the critical issues when the candidates could be discussing things that really matter. Just as distressing is that Facebook friends and others don’t get it either and want to wage wars of words about balancing the budget and paying off the debt. Why is the reality of the so-called federal “debt” so hard for so many people to swallow?
Something that has been driving me a bit nutty is the statement that higher taxes on the rich will reduce inequality through redistribution. And my answer to that is “Doesn’t it depend?”
The following scenario:
Income is 100 and you take a tax -10 net 90
Deficit -100 revenue +10 deficit reduced to 90. 10 in spending is removed from economy if those taxes are used to reduce deficit.
The only way it is “redistributed” is if government now increases spending by 20 to 110 into the economy.
Is my logic flawed?
Just a slight technicality: “Redistribution” draws the wrong mental picture. It assumes that tax dollars taken from the rich are given to the poor. In reality, tax dollars taken from the rich are destroyed. The government gives dollars to the poor by spending.
In any event, the higher the tax rate on the rich, the better they become at finding ways not to pay. At one time, we had a 92% upper marginal tax level. I doubt anyone paid anything near that, even on their last earned dollar.
Remember, the rich bribe Congress to put in those special deductions.
I agree on the actual mechanic (money destroyed), I was just trying to illustrate the flaw in that common redistribution statement. In the end the only way to “redistribute” is to increase spending targeted to lower economic classes, so the federal budget on net would need to go up.
At least this moron is not in the picture:
Gary Johnson , Libertarian Candidate for President (Oct, 23, 2012):
“The greatest threat to our national security is the simple fact that we’re bankrupt. With $16 trillion in debt, $1 trillion deficits, and Congress’ inability to pass a budget, we have to continually borrow money. Many of the countries from which we borrow are not particularly friendly. We have lost sight of our constitutional duty to provide for the national defense. We need to reverse course and get spending under control so that we can focus on the issues that we face at home, and restore constitutional government.”