We often speak of the federal “debt” as being the total of all federal “deficits.”
It arithmetically seems to work out that way, but only seems.
The truth is that federal “deficits” and federal “debt” are completely separate numbers, fundamentally unrelated.
FEDERAL DEFICITS (Net Investment)
Federal deficits merely are the mathematical differences between federal taxing and federal spending. Remember, however, that federal taxing does not fund federal spending.
In fact, your federal tax dollars are destroyed upon receipt. Your dollars, which begin in your checking account (M1 money supply), end up with the Treasury, where they cease to exist in any money supply measure. Gone.
The primary purpose of federal taxes is to control the economy. The federal government taxes what it wishes to discourage and provides tax breaks to what it wishes to encourage or reward. (This is unlike state and local government taxes, whose primary purpose is to fund state and local government spending.)
Any mathematical relationship between federal spending and federal taxing numbers is bogus. The federal government could collect zero taxes while continuing to spend, forever. Similarly, it could tax without spending, but this would throw the nation into a depression.
The point is that deficit spending represents the federal government’s investment in the economy. In fact, rather than referring to federal “deficits” we more accurately should refer to federal “net investment.”
To date, the federal government, which owns unlimited money, has made a net investment in the economy of about $25 trillion dollars.
This troubles the debt-nuts who want you to believe the federal government can run short of its own sovereign currency. It can’t. Never, never, ever.
FEDERAL DEBT (Deposits in T-security accounts)
The Federal debt is the total number of dollars deposited in T-security accounts. These accounts are similar to bank safe-deposit accounts in that the federal government does not touch the money other than to add interest dollars.
The federal government removes dollars from T-security accounts only to pay off owners of the accounts.
The dollars in T-security accounts do not fund federal spending.
Depositors’ dollars remain in these accounts, buttressed by interest payments, until account maturity, at which time the dollars are returned to the depositors.
The federal government never uses those dollars
Thus, despite common (and incorrect) usage, the federal government has not “borrowed” the dollars in T-security accounts.
And, in fact, the federal government never borrows dollars. Because it is Monetarily Sovereign, it has the unlimited ability to create its own sovereign currency, the U.S. dollar.
There never is a need for borrowing, and for the same reason, the government does not use tax dollars to facilitate spending. The government creates 100% of the dollars it spends, ad hoc.
The purposes of T-security deposits are:
- To help the Fed control interest rates, which in turn, help control inflation.
- To provide a safe, interest-paying place to park unused dollars, which helps stabilize the dollar.
In short, there is no direct connection between federal deficits and federal debt. The government could run deficits (i.e. spend more than tax income) without accepting even one dollar is debt (i.e. deposits into T-security accounts).
And the federal government could run trillions of dollars in debt (i.e accept T-security deposits) while spending no more than deficits (spending less tax income).
Dept and deficits are completely separate functions.
SO WHY DOES FEDERAL “DEBT” EQUAL THE TOTAL OF “DEFICITS”?
If deficits and debt are not connected, and neither one pays for federal spending, why does federal “debt” (deposits) just happen to equal the total of “deficits” (net investments)?
It is a quirk of federal law, that the government is not allowed to run deficits that arithmetically are greater than T-security deposits. This law creates the illusion that somehow, debt is the total of deficits (i.e. federal investment being equal to deposits in T-security accounts).
What happens if the total of federal deficits is greater than deposits in T-security accounts?
Answer: The Federal Reserve steps in and, having the ability to create dollars, it deposits enough dollars into T-security accounts to balance the total against total “debt” (deposits}.
The Federal Reserve is a federal government agency. Many people are confused by the fact of a federal agency “lending” money to the federal Treasury, but this is just a legal workaround to overcome the obsolete law requiring federal investments to equal or be less than deposits in T-security accounts.
Contrary to popular wisdom:
There is no functional relationship between federal net investments in the economy (misleadingly known as “deficits”) and deposits into T-security accounts (misleadingly known as “debt”).
The federal government has the power to run “deficits” without “debt,” or to run “debt” without “deficits.” The two numbers are not functionally connected,
Calling them “deficits” or “debt” is highly misleading, and the negative connotations are harmful to federal financial planning.
Accepting deposits into federal T-security accounts does not constitute “borrowing.”
The federal government cannot unwillingly go bankrupt, nor can any agency of the federal government, including Social Security, Medicare, poverty aids, et al.
All claims that some federal agency will run out of money are bogus (unless Congress wants them to run out of money.)
Rodger Malcolm Mitchell
Facebook: Rodger Malcolm Mitchell
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
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 Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.