The old formula for defining deficits used to be “Spending — tax collection — gold reserve value = deficit”. This allowed for the value of the gold in reserve to be in circulation in currency. It was mandated that any spending in deficit be “matched” (not funded) with bond issues by Treasury. Bonds are just a swap of liquid (convertible to gold then)reserves for nonconvertible assets that pay interest.
Since the purpose of bonds was to draw down excess reserves in the system they never directly provided revenue for Congress to spend. They did allow policy space for spending while remaining within the limitations of the gold reserve, which, to the uninformed often appeared to be revenue. Simple logic would defy this, as spending was the only source of excess reserves to purchase bonds. Mostly, bonds served to level out reserve levels between spending and tax collections in the banking system while making those reserves productive.
If you understand dual entry spreadsheet accounting you already understand that the government cannot use revenue from any source to spend. The dual entry system breaks down the total economy into sectors according to how they interact with the currency: ie: government (issuer) and private (user). Money never exists in the government sector as it is created upon entry into the private sector with a balancing negative entry labeled “debt” made in the government sector to enable error checking (all sectors “must” balance to zero) and tracking.
This debt entry balances out any money that returns to the government sector as a first order accounting function and cancels both. (-1+1=0) This only works because the government is Constitutionally authorized as the monopoly issuer of the currency so it neither needs nor uses its own currency back to spend. Once this simple system of money creation and cancelation sinks in it becomes just another small extension of logic to realize that the debt is nothing more than an accurate record of the money created by Congress that hasn’t yet been canceled by use to pay a federal tax obligation. It is our national savings and store of value represented by Treasury bonds.
As bonds mature they are returned to reserves via new currency creation at their face value. They are sold at the discount set by the Fed at auction, so the face value always includes interest. This is “debt service” in the nondiscretionary budget. Most of the uninformed believe that this budget item is only interest on the debt, not realizing that the purchase price of the bond also becomes destroyed in the sale and must be replaced.
With a sovereign fiat currency, selling debt is made useless as a part of any funding mechanism, and the propaganda value of such a large number labeled debt does far too much damage to allow to continue. It is my opinion that we should discontinue the issuance of bonds and just use the reserves spent into existence by appropriations. The Fed uses bond sales to set interest rates, but that is also a questionable practice given the ineffectiveness of monetary policy since we left the gold standard. It is highly unlikely, however, that politicians will give up such low hanging fruit easily. Even Bernie talks about tax increases as “pay fors” for his programs and his econ advisor, Dr Stephanie Kelton, is one of the primary economists advocating for MMT.
