Context matters

Context matters.

In economics, one key context is Monetary Sovereignty, The U.S. government is Monetarily Sovereign. It controls the dollar, can create unlimited amounts with a keystroke, and can set its value against anything else.

Over the years, the government repeatedly and arbitrarily has changed the dollar’s official value compared to gold and silver.

Along those lines, many words and phrases you hear every day might not mean what you—or even the speaker—think they do. Here are a few:

I. Federal government DEBT (sometimes confusingly called the “national” debt). Ask any politician, and they will tell you, “The U.S. federal debt is the total amount the federal government owes or has borrowed and not yet repaid.”

This is not correct. The U.S. government, being the issuer of the dollar, never borrows dollars.  It creates dollars by spending them. 

The federal government pays for things by instructing banks, via check or wires, to increase the balance in a checking account. When a bank obeys those instructions, new dollars are created.

Federal debt is the total of outstanding Treasury bills, notes and bonds. They represent deposits — not loans — into Treasury accounts, similar to bank savings accounts.

These T-securities do not provide the federal government with dollars, but rather:

1. Provide a safe place to store unused dollars and
2. To help the fed control interest rates by creating a “base” interest rate.

Treasury securities do not represent borrowing by the federal government. Federal “debt” is not a financial burden on the government.

If the federal government wished, it could pay off the entire federal “debt” today simply by returning the dollars held in the T-bill, T-note, and T-bond accounts.

II. A Federal DEFICIT is the difference between tax collections and spending. Because the federal government has the infinite ability to create dollars (by instructing banks to increase balances), federal deficits do not burden the federal government.

In fact, federal deficits benefit America by adding growth dollars to the economy. Gross Domestic Product (GDP) = Federal Spending + Nonfederal Spending + Net Exports. 

When the government fails to run sufficient deficits, the economy goes into recessions or depressions, which are cured by increased deficit spending.

A federal deficit is an economic surplus.

III. A Treasury BILL (T-bill) is about the same as a dollar BILL  Both are backed by the full faith and credit of the U.S. government. There are just two key differences: 

1. The T-bill has a maturity date; the dollar bill doesn’t.
2. The T-bill pays interest; the dollar bill doesn’t.

Issuing trillions of dollars in T-bills is no more a financial burden than issuing trillions of dollars in dollar bills, i.e. none at all. Worries about the size of the federal DEBT are the same as worrying about the number of dollars in existence.

Strangely, you hear that the people own two many T-securities, but never that the people own too many dollars.

IV. Treasury NOTE and Treasury BOND (T-note, T-bond).  In the private sector (which includes businesses and state and local governments) the words “note” and “bond” denote borrowing.

The federal government does not borrow, and the words “note” and “bond” merely describe longer term versions of T-bills. T-notes and T-bonds. Like T-bills, they do not provide the federal government with dollars and are not a financial burden on the federal government.

The current federal DEBT, which is composed of T-BILLS, T-NOTES, and T-BONDS, totals nearly $35 trillion dollars, today, yet it is no greater a risk or burden than it was in 1940, when the federal “DEBT” totaled only about $40 billion dollars.

Every time you hear or read concerns about the size of the federal DEBT, understand this: The source of those concerns either is ignorant about federal finances, or is trying to deceive.  There are no other alternatives.

V. TAXPAYER DOLLARS State and local governments spend taxpayer dollars. The federal government does not spend taxpayer dollars.

That is one fundamental difference between a Monetarily Sovereign government (the U.S., Canada, Australia, Japan, the UK and others) vs. a monetarily non-sovereign entity (state/local governments, euro-using governments, businesses, and individuals).

A monetarily non sovereign government can run short of the money it  uses. A Monetarily  Sovereign government cannot run short. For example, France, Germany, and Spain can run short or euros. The European Union, which is Monetarily Sovereign, cannot run short of euros, and the U.S. cannot run short of dollars.

Keep these facts in mind as you read the following:

VI. The DEBT/GDP ratio. Here is what you falsely are being told by those who are ignorant or lying about federal finances:

“The debt-to-GDP ratio shows a country’s total public debt as a percentage of GDP. The ratio gives an indication of how manageable a country’s debt is given its economic output. A high debt-to-GDP ratio can have several economic consequences: 

• • Crowding out private investment: Government borrowing competes with private sector capital, potentially slowing economic growth Hoover Institution.
  • Rising interest costs: More taxpayer dollars are allocated to servicing debt rather than public investment thepolicycircle.org.
  • Fiscal sustainability concerns: Economists warn that ratios above 90–100% in advanced economies may reduce growth and increase default risk if not managed us-debt-clock.com+1.
  • Policy challenges: Reducing the ratio would require significant deficit reduction, either through spending cuts or revenue increases, potentially over multiple decades.

The above comments are false, and worse than being false, they are misleading to the average person. There is zero relationship between a Monetarily Sovereign government’s ability to “manage” debt, i.e. pay creditors.

Federal “debt” does not “crowd out” anything. The government does not borrow, and it’s deficit spending (which is how “debt” increases) actually adds growth dollars to the economy.

Rising interest costs do not use taxpayer dollars and do not service federal debt. New dollars are created to pay interest, and these new dollars increase economic growth.

The Debt/GDP ratio has no meaning or predictive value for a Monetarily Sovereign government. Whether the ratio is 10%, 100%, or 1000% is meaningless with regards to default risk, economic growth, or any other economic measure.

Reducing the ratio is unnecessary, unwise, and does not require spending cuts. If the federal government chose, it could reduce the ratio to 0%, merely by not issuing any more T-securities. It could do that simultaneously with increased spending.

The following statement also is false and misleading:

The basic premise behind the debt-to-GDP ratio is that a country’s ability to pay off its debt increases as its GDP increases.

This occurs as tax revenues typically increase in line with economic activity. If debt rises faster than GDP, the interest on those debts will consume more tax revenue, leaving less for other spending. Ultimately, this will act as a drag on GDP growth, and eventually, the government may not repay the debt.

The author of the above statement either is ignorant about federal financing or is purposely trying to deceive. There are no alternatives. Federal tax revenue does not pay for interest or for anything else. The purpose of federal taxes is to:

1. Control the economy by taxing what the government wishes to restrict and and by giveing tax breaks to what the government wishes to reward.

2. Assure demand for the U.S. dollar by requiring dollars to be used to pay taxes.

Federal taxes do not fund federal spending; state/local taxes do fund state/local spending. Federal spending is funded by money creation.

If you understand that simple concept, you understand more than most people, including many economists.

VII. Trade deficit A trade “deficit” means a nation’s imports are greater than its exports, based on the currency it uses.

Contrary to popular belief, a trade deficit can be good or bad depending on context.

You run a trade deficit with every retailer you buy from—the grocery store, butcher, cleaner, movie theater, and so on—because you purchase more from them than they do from you. Is that bad?

Not at all; you simply exchange the dollars you’ve earned for goods and services. America’s trade deficits come from giving dollars—created with a few keystrokes—in return for valuable goods and services. 

All Monetarily Sovereign governments should run ongoing trade deficits, the bigger the better. With just a few federal computer keys pressed, we receive food, clothing, cars, energy, and countless other goods and services.

Why would any informed American want to change that? The negative connotations of the word “deficit” confuse those who don’t understand Monetary Sovereignty.

VIII. Trust fund We often are told that the Social Security and Medicare “trust funds” are running low on dollars, so taxes will have to be raised or benefits reduced. This is not true.

Federal “trust funds”  are quite different from their private-sector counterparts, making the name misleading.

While “trust fund” suggests a secure source of funding, in the federal context it’s really just an accounting tool that tracks money coming in and going out for certain programs.

In private-sector trust funds, receipts are deposited and managed by trustees who invest the assets for the benefit of specified recipients. With federal trust funds, the government doesn’t set aside the money or invest it in private assets. Instead, it records receipts as credits in the fund and pools them with other Treasury collections to be spent.

The federal government controls these accounts and can change their purposes, adjust collections, and modify spending through legislation.

It has complete authority over the balances and can determine the funds’ solvency whenever it chooses. Social Security and Medicare “trust funds” are fully under federal control, regardless of FICA tax contributions. Even without collecting any FICA taxes, Congress could ensure their solvency simply by passing a law.

Note that no “trust funds” back the finances of the White House, Congress, the Supreme Court, the military branches, or countless other federal agencies, yet we don’t hear talk of the White House and others becoming “insolvent.”

Although “trust funds” were originally designed to ensure solvency, they actually undermine it by promoting the false notion that taxes need to be raised or benefits cut.

IX. Tariffs. Most Americans do not realize that tariffs, both import and export, are taxes on importers, i.e. sales taxes on consumers.

In America, tariffs are shared between sellers and consumers, adding to the overall cost of sales. Whether for exports or imports, tariffs turn governments into unnecessary middlemen in transactions.

In an untariffed sale, the buyer pays the full selling price to the seller, who then uses it for expenses and profit. In a tariffed sale, a portion of the selling price goes to the government. In both cases, the buyer ends up paying more while the seller takes home less, and dollars are removed from the private sector.

The private economy sacrifices money to the Monetarily Sovereign government, which has the infinite ability to create money. Visualize pouring your drinking water into the Pacific Ocean. That is the effect of tariffs.

Repeated transactions can remove massive amounts of money from the private sector, while causing prices to increase.

Consider the following comment by By Ben Casselman and Ana Swanson