The Krug, and many other mainstream economists, is attempting to build a bridge between the simple truths of MMT and the overly complex lies that he has pushed for his entire career to save face. The “What happens if they won’t buy our debt?” fear mongering just doesn’t hold water when one understands the nature and mechanics of our money creation.
Nothing happens Paul, except investors lose interest they could have had on excess reserve holdings. The spending still occurs and If selling Treasuries ever becomes a problem we should stop selling Treasuries, not stop investing in our country and its ability to be productive in the future. The only thing that might cause such an issue would be those investors looking around America and seeing that they are investing in a failed third world state. They would have to stop doing business in US dollars first though.
US dollars can only leave the Federal Reserve banking system in two ways. They can be used to purchase Treasury bonds or pay a federal tax obligation. Both “destroy” dollars, not recycle them to enable Congress to spend. This is because our monetary system was built around defending a gold reserve that no longer exists as backing for our currency. The money that changes hands as we conduct commerce, including physical cash, is not actually money. It is a “representation” of money that was created as a tax credit and that remains within the banking system as reserves, captive for all time until Congress reclaims it via taxation.
Our “debt” is nothing more than a number of asset swaps that were enabled because Congress spent more than it taxed (deficits) and created excess reserves of high power money. Those excess reserves are traded for Treasury bonds at a price fixed by the Federal Reserve somewhat below their face value. When the bond matures the money that was destroyed in their sale transaction is replaced in the bond owner’s reserve account at face value, with the difference made up with new money creation. The government creates the reserves and then offers interest for their return.
Not a bad gig for investors, but hardly a show stopper for spending. Spending, far from making investors antsy, funds the investments, so you never hear investors complain about “crowding out” or “confidence”. Only politicians and their lapdog economists make those ridiculous noises. In fact, if Congress “balances” its budget for any length of time those investors will begin yowling about a lack of Treasury bonds available. A balanced budget is a pre-emptive 100% tax rate on money created by Congress and if the stupid is allowed to go on too long will become a recession or depression as the economy contracts with no high power money available to retire private bank debt.
