What is the national debt, and why is it so scary?
As we begin another Presidential election cycle a lot of attention is bound to be focused on our nation’s fiscal health, but very little of the information disseminated will be accurate, or even true. It seems that our nation’s character has shifted from bold innovator and world leader to fearful and cautious follower of naysayers. “Can do” has been replaced by “can’t afford” in the political narrative, even among leaders of the Democratic party, long assumed to be advocates of federal spending for the public purpose with its roots in FDR’s New Deal.
Nancy Pelosi, the current speaker of the house, began her latest position by declaring that all legislation brought to the floor will be judged on its addition to the deficit, demanding that “PayFor” be the holy grail for spending initiatives, meaning that supporters must show taxation or cuts in other programs to make them deficit-neutral to avoid adding to the national debt.
With so many voters having to tighten their belts in the new American economy, it is difficult to justify their government going on a spending spree, — or is it? To answer that we must understand federal finance and recognize that the federal government holds a unique position among all entities that collect and spend US dollars. Its uniqueness comes from its Constitutional authority as the monopoly issuer of the currency and a mandate to create it “for the common welfare” as defined in Article 1: Section 8.
The national debt isn’t a mortgage against future productivity. It is capital from past productivity that remains unspent in the economy. This is mostly due to current inequitable distribution, but the people, relating the word debt to their own experience, view it as a problem of government overspending and are more willing to suffer from that distribution rather than burden future generations. This prevents them from fully realizing the benefit of their democratically elected government in their lives as a force for managing a more equitable economy and makes them more willing to accept more private debt to fund their requirements.
The US dollar is always self-funding via the authority/mandate given to Congress to create it for the common welfare. A Treasury bond can only be paid for by the creation of money, not taxes. The dollars needed to buy bonds must first exist before bonds can be sold. Only deficit spending can create the excess reserves needed, meaning that deficit spending funds Treasury bond purchases, not the other way around. Every dollar created comes with its own debt to balance the spreadsheet of the economy and that debt is only canceled when the dollar is used to pay a federal tax obligation, which also cancels the dollar as an accounting entity.
The government sector can never have money from any source and the private (non-government) sector can never have a public debt obligation. They would simply cancel each other out as a first-order accounting function. That makes the debt a record of all dollars created by Congress in our history that haven’t yet been collected to satisfy a tax obligation, our net aggregate national savings/wealth. Taxation can never be a funding operation for the federal government, and Treasury debt is actually only a temporary tax that pays a small dividend for relinquishing liquidity of cash reserves.
Both only remove money from the economy, not fund anything for the federal government that neither needs nor uses revenue from any source to spend. Taxation is, obviously, needed to avoid inflation and serves to provide some measure of equity in the economy, but Treasury bonds, sans a gold reserve to defend, serve very little purpose beyond welfare for investors and as propaganda fodder for politicians to prevent the masses from demanding nice things like other countries have.
Every deficit in one sector has a corresponding surplus in another sector and every seller requires a buyer who desires what is being sold more than they desire the money asked for it. If the private sector is to see any benefit from the resources and labor it trades for dollars to provision the government the budget must always be in deficit for the government sector. The government’s red ink is the only net source of black ink the private sector has because the government holds the monopoly patent on creating US dollars.
Private sector bank credit is always zero-sum in terms of money creation because it cannot be net retired with more private debt, only rolled over with more credit. Whenever the government doesn’t leave enough in the economy sufficient to fund economic and population growth, the trade deficit, wealth accumulation, and retire private debt in a timely manner that debt goes into default and the economy crashes. Forcing the middle-class to fund the economy with private bank debt while failing to provide for retiring that debt is not how to grow an economy, but it does provide profit for the banking industry, until it doesn’t.
The last seven times we got within shouting distance of a balanced budget for any length of time were immediately followed by recessions or depressions. This relationship between sectoral balances and recessions can be seen in a graph here.
Make America spend again.
