The problem with your assumptions is that they are based on your own experience with money as a “user” of our nation’s currency, not from the perspective of the “issuer” of that currency. You are far from alone in this, as even award-winning economists make the same error. Let’s start at the beginning, clear your mind of what you “think” you know, and deal with the topic logically and from the reality of our current monetary system.
Firstly, our currency was never “backed” by gold or any other commodity. It was once “limited” to an amount equal to our nation’s gold reserve, but even that was rather loosely defined and seldom adhered to. The “gold standard” was always the first thing to go whenever our country went to war and special provisions are still made for such times. Specifically, we create money to prosecute war without requiring Treasury debt to pay for it. The Fed just makes sure checks to the MIC don’t bounce, marking up accounts as necessary with keystrokes.
This, perhaps, is why the declaration of war powers given to the Executive is so easy to obtain from Congress. Money can be created by spending without becoming “debt” simply by not issuing Treasury bonds for it. The act of issuing bonds isn’t what creates money as bonds require existing money to purchase, so it isn’t accurate to say that our money is based on Treasury debt. Also, interest paid on bonds is just another form of injecting money into the private sector via Congressional spending. Considering these realities, Treasury bonds are, obviously, not a “funding” mechanism, so what are they?
They are, like taxes, just a way of removing money from circulation, albeit temporarily. Taxes, and all other forms of “revenue” of our federal government, actually destroy money and can’t survive that function to be respent. The federal government, being the monopoly issuer of the currency, has no use for our money and creates new money every time it spends. It does need us to need its money to pay taxes and occasionally it needs us to have less money to avoid inflation, but it never “needs” revenue from any source to provision itself or “pay for” programs Congress approves. As the monopoly issuer of the currency, the US can never “go broke” or fail to pay any obligation denominated in its currency. It can also “afford” anything that exists and is priced in the currency the government creates at will.
To state that the US dollar has no intrinsic value denies its ability to retire tax obligations to the federal government. At the core of our monetary system, the US dollar is a tax credit and the only “debt” incurred in issuing them is what the Treasury “owes” the holder of dollars as a tax credit. The ability of the federal government to levy and collect taxation gives the dollar its “value”, and our government is damn good at doing that. It is, in fact, so good at taxing commerce that the US dollar has remained the preferred store of value in the world in spite of it not being the reserve currency of trade since ’71.
The many myths, conspiracy theories, and confusion surrounding our money is due to a general lack of knowledge of the functions of the Fed and Treasury, as well as a good dose of knee jerk reaction to the word “debt”. Forget all of the fancy formulas economists use to justify their salaries. A simple understanding of dual-entry spreadsheet accounting is all one needs to grasp the basics of our monetary system. To provide a tracking mechanism for dollars in circulation when those dollars materialize in the private sector from thin air a matching negative entry is made in the government’s sector of the balance sheet of our economy. Those entries represent what Treasury owes the private sector in tax credits, not a mortgage on future productivity.
When those dollars return to the government sector (Treasury) via “revenue” they destroy the debt entry that matched them when they were created, diminishing the total debt. When Congress spends in excess of what it collects in taxes (deficit) the total money supply is increased, as is the debt. This makes the national debt nothing more than a record of all federal spending that hasn’t yet been recovered via taxation. It is our net money supply and the only source of any store of value the private sector has.
A “balanced” budget that collects a dollar for every dollar Congress spends allows no store of value for doing business with the government and effectively “steals” the resources and labor government uses. This, if continued for very long, will crash the economy as federal dollars are required to retire private sector bank debt. The economy can only grow sufficiently to “rollover” private debt for so long and one that depends upon private debt too heavily is very fragile and susceptible to recessions and depressions from business cycles.
Without sufficient interjection of federal money into the economy, especially during downcycles, critical supply chains can disappear overnight. Only when we accept the reality of our government “funding” us, not us funding the government, can we fully understand the processes of federal spending and private sector credit. The red ink of our federal government is the only source of black ink we have.
