If you owned a legal money-printing press, would you borrow money?

If you owned a legal, money-printing press, would you borrow money? Think about it.

The U.S. government has the infinite ability to create (aka “print”) U.S. dollars. So why would it ever borrow dollars?

It doesn’t.

Treeing - Wikipedia
The same “bark”?

Despite what “learned” pundits tell you, the U.S. government never, never, ever borrows U.S. dollars.

The government issues U.S. Treasury bonds, which are totally unlike the private sector bonds that corporations issue.

The fact that the same words — “bills,” “notes,” and “bonds” — are used to describe completely different things, has confused people who should know better — politicians, economists, and the media — for decades.

It’s as though a professional botanist told you dogs are like trees because they both have “bark.”

In the same vein, the so-called federal “debt” is not debt. It’s not even federal.

Here are Warren Buffett’s comments.  He gets it about 95% right.

Warren Buffett explains the simple reason why the US will never default on its debt
Ethan Wolff-Mann·Senior Editor, Updated Tue, May 5, 20204 

Warren Buffett | Bill & Melinda Gates Foundation
Warren Buffett

The U.S. Treasury is borrowing $3 trillion in three months to pay for the pandemic response, a record sum that dwarfs the $1.8 trillion borrowed in 2009 during the financial crisis.

The debt will be sold in bonds to a variety of foreign and domestic investors.

Sorry, Mr. Wolff-Mann, but because the federal government is Monetarily Sovereign, the U.S. Treasury has the infinite ability to create dollars (at the behest of Congress).

If Congress voted for the Treasury to create $3 trillion, or $300 trillion, or $3,000 trillion, the Treasury could do it at the touch of a computer key.

Clearly, it has no reason to borrow dollars.

So it doesn’t.

The so-called, misnamed “debt” is two separate things that have been merged for obsolete reasons:

1. The “debt” is the net total of all deficits through history. Deficits are the difference between taxes received and financial obligations (aka “bills”) paid.

The government doesn’t owe deficits. They already have been paid for. That is what makes them “deficits.”

2. The “debt” also is the total of deposits into Treasury Security accounts, those T-bills, T-notes, and T-bonds that are nothing whatsoever like private sector bills, notes, and bonds.

The government accepts deposits into Treasury Security accounts to provide a safe storage place for unused dollars. This stabilizes the dollar and is partly responsible for the U.S. dollar being the most popular currency in the world.

Rather than putting unused dollars into risky private bank accounts, foreign governments and private investors prefer the safety of U.S. Treasury accounts.

The accounts resemble safe deposit boxes in that the money in these accounts is wholly owned by the depositors, not by the U.S. government, which never touches those dollars.

To pay off these accounts, the government simply returns the contents of the accounts to the owners, i.e. the depositors.

At the 2020 Berkshire Hathaway Annual Shareholders Meeting on Saturday, billionaire investor Warren Buffett carefully explained in simple terms why the U.S. will never default on its debt.

When a concerned shareholder asked him whether there was a risk, he didn’t prevaricate, but started with a “no.”

“If you print bonds in your own currency, what happens to the currency will be the question,” said Buffett. “But you don’t default. The U.S. has been smart to issue its debt in its own currency.”

A U.S. dollar bill actually is a zero-interest, Treasury bond. It is evidence that the bearer owns a U.S. dollar.

Other countries don’t do this, Buffett pointed out.

“Argentina is now having a problem because the debt isn’t in their own currency, and lots of countries have had that problem,” he said.

“And lots of competent countries will have that problem in the future.”

Similarly, U.S. state and local government and euro nation debt isn’t in their own currency. State and local governments use the dollar. Euro nations use the euro, which is the currency of the European Union (EU).

France, Germany, Italy et al have problems with their debt (which is real debt) because they do not issue the euro. The EU does.

Over the years, many have worried about the growing national debt as tax cuts and spending have created an ever-widening gap between revenue and outflows.

But in his explanation, Buffett highlighted the distinctions that make the U.S. Treasury much different than your personal checkbook.

Mainly, the government owns the printing press to pay the money to the holders of its debt.

Close, but that’s not precisely what happens.  The money already exists in the accounts. The depositors put it there. 

Paying off the “debt” merely involves returning the depositors’ dollars. The only function of the metaphorical “printing press” is to add interest dollars to the accounts.

“It is very painful to owe money in somebody else’s currency,” said Buffett. “If I could issue a currency Buffett bucks, and I had a printing press and I could borrow money, I would never default.”

If he could print Buffet bucks, that would be widely accepted, he never would borrow money, just as the U.S. federal government never borrows dollars.

This is a common refrain of Modern Monetary Theory as well as longtime Fed Chair Alan Greenspan, who once said something similar: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”

The chief worry about just printing money to pay obligations is inflation.

That is another widespread, false belief. Creating (aka “printing”) dollars doesn’t cause inflation. Shortages of critical goods and services — mostly oil and food — cause inflation. (See: Inflation: Why the Fed is confused)

“What you end up getting in terms of purchasing power can be in doubt,” Buffett said.

But whether the U.S. can pay the dollars that it owes is not in doubt. The Oracle of Omaha noted back to when Standard & Poor’s downgraded the U.S.’s credit rating in 2011.

The U.S. government does not “owe” any dollars. It already has paid for what it has purchased. That is the “deficit.”

And the dollars in Treasury Security accounts — the T-bills, notes, and bonds — are owned by the depositors. The government doesn’t owe them just as your bank doesn’t owe you the contents of your safe deposit box.

“To me that did not make sense,” he said. “How you can regard any corporation as stronger than a person who can print the money to pay you, I just don’t understand. So don’t worry about the government defaulting.”

Buffett then addressed the frequent government shut-downs that happen over partisan arguments about raising the debt ceiling.

“I think it’s kind of crazy incidentally…to have these limits on the debt,” he said. “And then [the] stopped government, arguing about whether it’s going to increase the limits. We’re going to increase the limits on the debt.”

Buffett pointed out that the debt “isn’t going to be paid, it’s going to be refunded,” and referenced the period in the 1990s when the debt came down and the country simply created more.

“When the debts come down a little bit, the country’s going to print more debt. The country is going to grow in terms of its debt-paying capacity,” he said. “But the trick is to keep borrowing in your own currency.”

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

Paul Krugman on How to Fix the Economy - and Why It's Easier Than You Think
Paul Krugman

That was Warren Buffett. Now, here is Paul Krugman, winner of the economics version of the Nobel Prize. He too gets it about 95% right.

Here’s why the US doesn’t have to pay off its $31 trillion mountain of debt, according to Paul Krugman, Franck Robichon/Reuters

Though individual borrowers are expected to pay off debts, the same isn’t true for governments, Krugman argued in a column for the New York Times on Friday.

That’s because unlike people, governments don’t die, and they gain more revenue with each passing generation.

Not quite right. State and local governments are expected to pay off debts. Euro governments are expected to pay off debts.

But the Monetarily Sovereign U.S. federal government always pays what it owes to vendors, on time. It does not accumulate debt.

The reason is not that “governments don’t die and gain more revenue.” Monetarily nonsovereign governments do borrow and must pay off loans, and may not gain enough revenue to pay off those loans.

Our Monetarily Sovereign government is a different animal, altogether. It does not borrow, it does not have loans to pay off, and its tax revenue does not pay for anything.

Its tax revenue is destroyed upon receipt. (See: “Does the U.S. Treasury Really Destroy Your Tax Dollars?”)

“Governments, then, must service their debts – pay interest and repay principal when bonds come due – but they don’t necessarily have to pay them off; they can issue new bonds to pay principal on old bonds and even borrow to pay interest as long as overall debt doesn’t rise too much faster than revenue,” he added.

Treasury bonds don’t supply the federal government with spending money. The government never touches those dollars. The government doesn’t use bond deposits to pay anything.

Treasury securities provide two main functions:

  1. They help the Federal Reserve control interest rates by providing a “base” rate.
  2. They help stabilize the dollar by providing a safe haven for unused dollars.

They do not help the federal government fund any thing.

Though the debt-to-GDP ratio hovered around 97% last year, interest payments on that debt is only around $395 billion, according to the Office of Management and Budget, or around 1% of last year’s GDP (Gross Domestic Product).

The debt-to-GDP ratio is oft-quoted, but completely meaningless. The federal government can pay all its financial obligations whether the ratio was 10%, 100%, or 1,000%. (See: Enough Already, With The Debt/GDP ratio)

Federal purchases are part of GDP, but are not paid for with GDP. All federal financial obligations are funded by newly created ad hoc dollars.

Historically, it’s also unusual for governments to pay off large debts, Krugman said. Such was the case for Great Britain, which has largely held onto the debt it incurred as far back as the Napoleonic wars.
It’s more irrelevance from the Nobel winner. Deadbeat governments may not pay creditors, but the Great Britain “debt” is not owed to creditors. It’s an accounting myth for describing the total of deficit spending, which is funded by money creation.
Krugman’s argument comes amid growing contention over the US debt level, with policymakers still sparring over the conditions they want to raise the country’s borrowing limit.
House Speaker Kevin McCarthy has said he would reject a short-term debt ceiling increase unless spending cuts are negotiated, having proposed a bill that would slash around $4.5 trillion on spending.
This is purely a political ploy, having absolutely nothing to do with the realities of federal funding. The formula for GDP is:
GDP = Federal Spending + Nonfederal Spending + Net Exports
Slashing $4.5 trillion for federal spending would, by formula, slash at least $4.5 trillion from GDP (Probably more, because federal spending begets private sector, nonfederal spending.)
In short, Republican McCarthy wanted to trash the economy, because a Democrat was President.

Congress now has less than two weeks to raise the borrowing limit before the government could potentially run out of cash, US Treasury Secretary Janet Yellen warned.

Sadly, Yellen is too cowardly (or ignorant?) to tell the truth. The so-called “borrowing limit” is the ultimate fraud. It’s not a borrowing limit, because the U.S. doesn’t borrow.

It’s a limit on deposits into T-security accounts, which do nothing to change the federal government’s ability to fund its spending.

A default on the country’s obligations could result in catastrophe for financial markets, experts have warned.

Krugman has called for the debt ceiling to be abolished, as the risk of a financial crisis offers Republicans a “choke point” on fiscal policy.

Krugman is correct. The debt ceiling is a fraud being committed on naive American voters. It’s a bit of meaningless, though harmful, political chicanery, designed to pretend financial frugality.

All those who think the debt ceiling is a good idea either are liars or ignorant. There is no alternative.

Period.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
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