Quora is a site where people ask questions, and other people answer them. Many people ask about the U.S. federal “debt,” and I’ve tried to illuminate the world, one candle at a time.
Here, for example, is a typical question and answer, with a follow up by one reader. The original question and answer were:
Answer from Rodger Malcolm Mitchell: Contrary to what others are telling you, there is no “debt crisis.”
The federal government, unlike you and me, is Monetarily Sovereign. And unlike you and me, it never can run short of dollars with which to pay its debt. In fact, paying debts is the method by which the federal government creates new dollar.
In fact, the so-called “federal debt” isn’t even debt. It is the total of deposits into Treasury Security accounts, similar to savings accounts.
To “lend” to the federal government, you instruct your bank to send your dollars to your Treasury Security account.
There your dollars remain – they are not used by the federal government. Then when your account matures, your dollars, plus interest are returned to you.
Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.” Ben Bernanke: “The U.S. government has a technology that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” St. Louis Federal Reserve: “The government is not dependent on credit markets to remain operational.”
It is not a burden on our Monetarily Sovereign government, nor is it a burden on federal taxpayers.
Federal taxing does not fund federal “debt.”
People who worry about the federal debt do not understand Monetary Sovereignty.
The so-called “debt” has increased an astounding 40,000% since 1940, and here we are, with the economy healthy and growing, and inflation near the Federal Reserve target.
Chamchadik
You’re right- being fiat, the us federal reserve can just print as much currency as it wants and settle all debt: I would like to hear your reasoning on why they haven’t done this already?
————————–Reply——————————————-
Rodger Malcolm Mitchell
The so-called federal “debt” is merely the total of outstanding Treasury securities (T-bills, T-notes, T-bonds). It isn’t “debt.” It is “deposits.”
The government does not issue T-securities to obtain dollars. It creates all the dollars it needs.
Issuing T-securities has two primary purposes:
1. To provide a safe, interest-paying, storage place for holders of dollars. This helps stabilize the dollar.
2. To assist the Fed in controlling interest rates. This helps control inflation.
Yes, the government could eliminate all federal “debt” tomorrow, if it wished, simply by returning the dollars in the T-security accounts, back to the owners.
But, there is no reason why the government would want to reduce the “debt.” These T-securities serve valuable functions, and the “debt” is no burden whatsoever on the government, on taxpayers or on anyone else.
The word “debt” confuses people. If instead, it was properly called “deposits,” no one would want it reduced.
Perhaps, the next time someone tells you the federal “debt” should be reduced, you might answer, “Why would the government want fewer deposits into Treasury security accounts? These deposit accounts are valuable to the government and are no burden on anyone.”
The single most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.
Implementation of The Ten Steps To Prosperity can narrow the Gaps:
3 thoughts on “A debt question from Quora, asked and answered”
Hello Rodger,
I face similar questions from my articles and this is my response adapted from the work of Professor William Mitchell and also from you:
The Fedgov does not borrow in the sense that it uses the money given to it as a treasury deposit.
Bonds are issued by the government into the primary market, which is simply the institutional machinery via which the government sells debt to “raise funds”. In a modern monetary system with flexible exchange rates, it is clear the government does not have to finance its spending so the institutional machinery is voluntary and reflects the prevailing neo-liberal ideology – which emphasizes a fear of fiscal excesses rather than any intrinsic need.
Further, from a macroeconomic flow of funds perspective, the funds (net financial assets in the form of reserves) that are the source of the capacity to purchase the public debt in the first place come from net government spending. Its what astute financial market players call “a wash”. The funds used to buy the government bonds come from the government! There is just an exchange of bank reserves for bonds – no net change in financial assets involved. Saving grows with income.
Under current institutional arrangements, governments around the world voluntarily issue debt into the private bond markets to match $-for-$ their net spending flows in each period. A sovereign government within a fiat currency system does not have to issue any debt and could run continuous fiscal deficits (that is, forever) with a zero public debt.
There is a US Code that says national government spending deficits must be MATCHED with a bond issue unless 1. growth goes negative or 2. there is a national emergency in which the matching is allowed to be dropped.
If the Federal Government made two key changes there would be no need for treasury issuance and these are:
1. Change the law so that Federal deficit spending was not matched with treasury issuance.
2. Set a support rate on the Federal Fund Rate instead of a target rate so that the buying and selling of treasuries is not used to maintain the target rate.
The ‘national debt’ would roll off in a few months as treasuries were converted to dollars again. From savings account to checking account just like your savings at a commercial bank.
True. Once such tweaks are made, then there would no longer be any need to issue Treasury securities, except of course as the market demands them as a safe haven investment (which helps stabilize the financial system) and also doubling as a platform to help control inflation. Any new Treasuries issued going forward would be due to supply and demand, with no connection to deficit spending, and the overall number would drop and stabilize at a much smaller level than it is now.
Yes, think of the Treasury as a bank that offers savings accounts into which people make deposits. These deposits are called Treasury securities (T-bills, T-notes, T-bonds). There is no reason for the government to try to minimize these deposits. They do not burden or threaten anyone. They are just deposits.
#Monetary Sovereignty - Mitchell 
Hello Rodger,
I face similar questions from my articles and this is my response adapted from the work of Professor William Mitchell and also from you:
The Fedgov does not borrow in the sense that it uses the money given to it as a treasury deposit.
Bonds are issued by the government into the primary market, which is simply the institutional machinery via which the government sells debt to “raise funds”. In a modern monetary system with flexible exchange rates, it is clear the government does not have to finance its spending so the institutional machinery is voluntary and reflects the prevailing neo-liberal ideology – which emphasizes a fear of fiscal excesses rather than any intrinsic need.
Further, from a macroeconomic flow of funds perspective, the funds (net financial assets in the form of reserves) that are the source of the capacity to purchase the public debt in the first place come from net government spending. Its what astute financial market players call “a wash”. The funds used to buy the government bonds come from the government! There is just an exchange of bank reserves for bonds – no net change in financial assets involved. Saving grows with income.
Under current institutional arrangements, governments around the world voluntarily issue debt into the private bond markets to match $-for-$ their net spending flows in each period. A sovereign government within a fiat currency system does not have to issue any debt and could run continuous fiscal deficits (that is, forever) with a zero public debt.
There is a US Code that says national government spending deficits must be MATCHED with a bond issue unless 1. growth goes negative or 2. there is a national emergency in which the matching is allowed to be dropped.
If the Federal Government made two key changes there would be no need for treasury issuance and these are:
1. Change the law so that Federal deficit spending was not matched with treasury issuance.
2. Set a support rate on the Federal Fund Rate instead of a target rate so that the buying and selling of treasuries is not used to maintain the target rate.
The ‘national debt’ would roll off in a few months as treasuries were converted to dollars again. From savings account to checking account just like your savings at a commercial bank.
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True. Once such tweaks are made, then there would no longer be any need to issue Treasury securities, except of course as the market demands them as a safe haven investment (which helps stabilize the financial system) and also doubling as a platform to help control inflation. Any new Treasuries issued going forward would be due to supply and demand, with no connection to deficit spending, and the overall number would drop and stabilize at a much smaller level than it is now.
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Yes, think of the Treasury as a bank that offers savings accounts into which people make deposits. These deposits are called Treasury securities (T-bills, T-notes, T-bonds). There is no reason for the government to try to minimize these deposits. They do not burden or threaten anyone. They are just deposits.
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