I’ll bet you didn’t know this: Federal “deficits” and federal “debt” aren’t directly related.

Federal “deficits” actually are federal growth investments into the economy

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 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.

Federal “debt” is the total of T-security accounts. Think of them as safe-deposit boxes. The government never uses those dollars.

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:

  1. To help the Fed control interest rates, which in turn, help control inflation.
  2. 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.

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}.

Currently, The Federal Reserve holds $2.5 trillion of U.S. Treasuries, which is roughly one-sixth of U.S. “debt” held by the public.

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
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell



The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. 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:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually. 
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. 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.


12 thoughts on “I’ll bet you didn’t know this: Federal “deficits” and federal “debt” aren’t directly related.

  1. I know you like to use the analogy of a safe deposit box for describing what happens with T-securities, Rodger. And, you are correct that the government doesn’t use those dollars.

    However, you are wrong about the lack of any relationship between the deficit and the amount of T-securities issued and outstanding. Due to the obsolete law you referenced, which is from the days of the “gold standard”, the total of T-securities, the “debt”, is exactly equal to the sum all of the deficits and surpluses since the founding of the US. This is an accounting identity according to stock-flow consistent accounting. The deficit is a flow (money spent into the economy) that accumulates as the “US Government debt”, which is the stock of T-securities. Regardless of the terms used, that is the reality.

    I realized some months ago that there is a concept that I don’t remember you ever mentioning that might make some of your arguments more powerful.

    By accounting principles, the “debt”, which is a liability, has to be matched by an asset. In the case of a Monetarily Sovereign government that “debt” is equal (to the penny) to the “Net Financial Assets” (NFA’s) held by the non-government sector, both domestic and foreign.

    In other words, in the US, it is the dollar-denominated savings held by the public, which leads to the conclusion that reducing the “debt” means reducing the savings of the public. NFA’s include the T-security accounts (Treasury Direct), savings accounts, money market funds, CD’s, etc. (not investment assets such as stocks and non-Treasury notes and bonds).

    I seriously doubt that anyone wants to see some of their savings disappear because some idiots in government don’t understand MS or MMT.

    “When we hear the word deficit, we probably think of a shortfall or a deficiency. A deficit always sounds ominous. So when we hear that the government just ran a $3 trillion budget deficit, it can spark worry and even outrage. But there’s another way to think about government deficits.

    Just as a 6 becomes a 9 when you view it from a different angle, a government deficit becomes a financial surplus when you look at it from another perspective. A deficit hawk might look at this picture and see nothing but a sea of worrying red ink.


    That’s not how I look at it.

    Here’s what I see.


    I see what’s happening on the other side of the government’s ledger.

    When the government spends more than it taxes away from us, it makes a financial contribution to some other part of the economy. Their red ink is our black ink! When you look at it this way, it becomes clear that every deficit is good for someone!”

    —From: https://stephaniekelton.substack.com/p/something-ive-always-wanted-to-do which is taken from a TED talk by Stephanie Kelton. The graphs in her post didn’t copy over, but the second one shows the equivalence of the government “debt” and the public’s NFA’s. (Differences between the above-the-line amounts and below-the-line amounts are due to the effects of the foreign sector which completes the sectoral balance analysis – the net of all three sectors, government, private, and foreign must always equal zero. Thus, the curves above and below the line would be mirror images of each other.)


    1. You wrote, “The deficit is a flow (money spent into the economy) that accumulates as the “US Government debt”, which is the stock of T-securities.”

      That might be true (or almost true) if the federal government were the only source of dollars. But, the federal government isn’t even the largest source of dollars. So one would be hard-pressed to identify a flow of dollars from federal spending to T-security accounts.

      There is, in fact, no such flow. Federal spending dollars are largely divorced from T-security deposits. Evidence for that is the fact that the federal government is perfectly capable of spending trillions without accepting even one dollar in deposits in T-security accounts.

      And remember that the Fed creates from thin air, trillions of dollars, which it deposits directly into T-security accounts. Those dollars never touched the economy (aka the private sector).

      In short, T-securities are economically unnecessary, which means that thing we misname “debt” is economically unnecessary. By contrast, deficits are absolutely necessary, for without them, there would be no economy.

      There can be deficits without debt, and there can be debt without deficits. The two are not financially related, though current law requires one to be created when the other is created.


      1. What do you think federal spending is? By your own terms federal spending is injected (flows) into the economy.

        The federal government is not the largest source of dollars, banks are. Loans create deposits. But bank money is always debt money (entries are made on both sides of the balance sheet) and, as you say so often, federal money is not debt money (NFA’s are the other side of that balance sheet, accounting principles require it). Therefore, bank money does not add Net Financial Assets to the private sector, only federal deficit spending does.

        The fact that the government can spend as much as it sees fit (with or without taxes) is not evidence that the spending is divorced from T-security deposits. It’s evidence that the issuance of T-securities is unnecessary in a Monetarily Sovereign government. Warren Mosler recommends issuing only a small amount of short term T-securities, regardless of the deficit, for interest rate control.

        Although it’s obsolete, current law requires the Treasury to issue securities to match deficit spending. Theory notwithstanding, that means that deficit and the debt are, indeed, financially related.

        You also have a contradiction above:

        “And remember that the Fed creates from thin air, trillions of dollars, which it deposits directly into T-security accounts.” But, you have consistently said the deposits into T-security accounts are made by the purchasers of those securities and they stay there until maturity, like a safe deposit box. Actually, the quoted statement may be more accurate. Treasury issues dollar-denominated securities and exchanges them for dollars from the public, whether or not those dollars are used for spending.

        The reality is that the Treasury issues securities through an auction process in which primary dealers (major banks) are required to purchase whatever is for sale at an interest rate ultimately determined by the Treasury. Those securities then represent the NFA’s held by the public as the primary dealers sell them on to other investors like banks, money market funds, and individuals.

        I’ll be glad to continue this discussion in the morning.


        1. We may be at the “how many angels dancing on the head of a pin” stage.

          You wrote, ” . . . the issuance of T-securities is unnecessary in a Monetarily Sovereign government.” ” . . . current law requires the Treasury to issue securities to match deficit spending. Theory notwithstanding, that means that deficit and the debt are, indeed, financially related.”

          No, they currently are legally related. We can have so-called “debt” without “deficits,” and we can have “deficits” without “debt.” If they were directly related, this would not be possible. They would be the bookkeeping consequence of each other.

          They each are individual measures of two different things. I agree with Warren. We don’t need all that “debt,” but we need a lot more “deficits.”

          If my bank was required to have reserves that match the number of dollars I put in my safe deposit box, would these dollars be directly related on a balance sheet? Or just legally related?

          Liked by 1 person

          1. Reserves and Treasury securities are both liabilities of the U.S. government and assets of the private sector, in the same way that both checking account balances and CD balances are liabilities of the bank and assets of the depositor. One key difference being that the deposits made into checking vs. CD accounts is entirely at the discretion of the depositor, whereas in the case of the Federal Government, the balance between deficits and T-deposits is dictated by arcane law.

            As the currency issuer, the federal government has no assets (under normal circumstances), only liabilities. As stated many times on this blog, confusion arises when we uniquely call T-security deposits “debt”, as currency, reserves, and T-deposits can all be considered “debts” of the federal government. As Rodger stated, there is no natural financial relationship between federal deficits (net reserve deposits) and debts (T-security deposits), just as there is no natural financial relationship between checking account deposits and CD deposits. The application of double entry accounting to deficits and T-Security deposits is a legal requirement not a financial one, and is a holdover from the gold standard era.

            As a related side note, one argument I have had repeatedly is in relation to those who call QE as “money printing”. QE is fundamentally an asset swap and creates no new NFA in the private sector. The purpose of QE is to increase the liquidity of bank assets and to lower interest rates in order to increase private sector lending. If banks cannot generate loans from qualified buyers then that QE money just sits in Fed accounts as excess reserves in the banking system, as what happened with the $3T+ of QE during the GFC, which drove interest rates to 0. Deficit spending is the only way the federal government can “print” new money.


          2. “Angels dancing…” is what I was thinking earlier this morning. It is true that the deficit dollars don’t go to the T-security accounts, the relationship is an accounting and legal one. The sum of all deficits and surpluses is “represented” by the “debt” on the books of the Treasury.

            B. Gray says it well.


  2. On an interesting historical note, when the Clinton administration ran federal surpluses, it was no longer issuing new T-securities due to the lack of deficits. This was problematic for many pension funds and institutional investors as there were few safe haven investments available to hedge risk. Never fear, Wall Street came to the the rescue by offering up AAA rated mortgage backed securities as a substitute to T-securities. These had good returns and were backed by physical real estate assets in a growing market. What could be safer? Of course the demand for these substitute securities drove massive increases in mortgages issued through fraudulent underwriting (liar loans) and subsequent fraudulent risk ratings. This resulted in a massive real estate asset bubble that when it burst, it nearly brought down the entire global financial markets if it were not for the massive government interventions.

    The lesson here being if governments don’t run deficits, then the financial sector will try to fill in the void with potentially disastrous consequences.


    1. If Monetarily Sovereign governments don’t run large enough deficits, they will have recessions or depressions, just like Clinton did. It’s the lack of money that caused his recession. The real estate crash was just a byproduct of the more fundamental problem.

      One formula for GDP is GDP=Federal spending + Non-federal Spending + Net Exports. GDP growth depends on money growth. Clinton was lucky. Virtually all federal surpluses have yielded depressions, including the Great Depression.

      1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
      1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
      1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
      1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
      1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
      1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
      1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
      1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

      For monetarily non-sovereign governments (cities, states, euro nations) the situation is more difficult. They can’t create money so they need an outside source of money after taxes and borrowing run out. Some rely on local taxes, exports, federal inflow, and tourism.

      The states that have a negative balance of payments with the central government struggle along, and are wrongly blamed by the Republicans for being “profligate.”

      Liked by 1 person

    2. B. Gray – Going back to your previous comment, which I can’t reply to, one thing that does confuse me is if the net reserves are the federal deficits as you posit, how do those reserves become the NFA’s held by the public? We know that banks don’t lend reserves, they stay in those Fed accounts unless needed for settlement and then they’re only traded between banks and the Fed.

      Or, is this another case of “represented by” where the deficit is represented by the excess reserves, while the actual dollars are held in the NFA’s owned by the non-government sector?


      1. John – When the Federal Government spends it credits reserve accounts and when it taxes it debits reserve accounts, so the deficit is exactly equal to the net reserves credited by the Fed (credits minus debits). Domestic federal spending is always paid to some entity, person or organization, via a bank with an account at the Federal Reserve. When the treasury authorizes a payment to some entity, the Fed transfers reserves to the representative bank’s reserve account at the Fed with instructions to credit the payees demand account at that bank in the amount exactly equal to the reserves that were transferred. The opposite process is used in the case of tax payments, which debits both the individual’s demand account and the bank’s reserve account. The money that is credited in the individuals demand account is technically bank money, but it is convertible to government currency or reserves (for settlement) on demand. Of course banks are only required to cover about 10% of their deposit liabilities in the form of reserves and currency, so much of the excess reserves created by deficit spending are converted to other income generating assets such as loans and treasury securities.

        In the case of government spending there is a 1 to 1 relationship between reserves created and bank deposits, whereas in the case of QE, those reserves represent “excess” reserves in the banking system that only result in new bank deposits when a loan is created. At a macro level, money that is created from deficit spending becomes a NFA of the private sector, as it does not have to be “paid back”, unlike money created from bank lending. Money created from bank lending is purely transactional in nature as it nets to zero at a macro level, and ultimately results in a net asset transfer from the private sector to the financial sector in the form of interests payments. Without sufficient government deficits, a growing economy would be based on a Ponzi scheme type construct requiring private sector debt to continuously increase at unsustainable rates (interest growth > GDP growth), which leads to recessions, financial crises, or both.

        Money is a fungible resource and money that is created by government spending is indistinguishable from money created by bank lending. This is one reason why so many people are truly confused as to where money actually comes from in the economy, and are easily duped into believing the “big lie”.


        1. Thank you. Your first paragraph has the details I was looking for. The rest I am familiar with.

          I have found that friends I talk to about the federal government creating dollars ad hoc when paying vendors, employees, etc., they understand completely. They just have difficulty making the distinction between government money and bank money.


  3. Nice conversations.
    The original post boils down to this:
    1. The federal government can spend as many dollars as it chooses, regardless of tax collections.
    2. The fundamental purpose of federal taxes is to control the economy, by rewarding what the government likes and by punishing what the government doesn’t like. Taxes do not provide spending dollars.
    3. The government can create as many T-security accounts as it wishes, to accomplish two goals:
    A. To provide an interest-paying parking place for unused dollars, which helps stabilize the dollar
    B. To help control interest rates.
    T-securities do not provide the government with spending money.
    4. There is no necessary fiscal connection among #s 1, 2, and 3. Spending, taxing, and T-securities are separate functions.

    Liked by 1 person

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