THE UNIVERSAL ECONOMY UNIT V: GOVERNMENT “DEBT” IS NOT GOVERNMENT DEBT
Words matter. When a person opens a $5000 savings account at a bank it paints one picture. But if one states that the bank has borrowed $5000 from a person and now is in debt to that person for $5000 plus interest, it paints quite another. It is the same thing, but one statement creates a feeling of safety and wellbeing while the other creates a sense of doubt and fear of loss.
So it is with the misleading terms “deficit” and “debt” as applied to the U.S. federal budget. “Deficit” refers to the annual money created by the U.S. Treasury and Federal Reserve Bank (the Fed) over and above the amount of money returned to the government in annual taxes. This money is injected into the private sector to match the growing overall economic activity (Gross Domestic Product – GDP) and a growing population. The term “debt” generally refers to the total value of Treasury bills or government bonds purchased by individuals, firms, or foreign nations. But in fact, there is no such thing as “deficit” and “debt” in the conventional sense of these terms in a sovereign nation utilizing a sovereign fiat monetary system. There is simply a record of account.
Imagine the playoffs for a state basketball championship. Two games will be played today and the winners will face off tomorrow. Officials are used to awarding 60 or 70 points to teams during a typical high school game. But the opening game is different. By the middle of the 4th quarter both teams have scored nearly 90 points. Officials panic! Point spending is out of control! How will they pay them back? A point debt ceiling needs to be imposed or there won’t be sufficient points for the 2nd game. And the championship game tomorrow will be left with a point debt that has to be paid back before they can score any positive points. There is pandemonium as officials remove (tax) points from both teams to balance the point deficit and refuse to “spend” any more points.
We would all readily agree the above scenario is ridiculous. Officials can’t run out of points or hand a point “debt” down to a future game. And if they do something as silly as creating a point debt ceiling the game will collapse. But we have been so misled and are so ingrained in our simplistic belief that the federal government budget is like a household budget that we cannot visualize that U.S. fiat dollars are like points at a game. They are created out of nowhere by “officials” at the Fed and, like points, the supply of dollars is infinite and never needs to be “paid back.” In fact, the Treasury must “spend” more dollars than it collects in taxes each year or, like the basketball game, the economy will collapse.
Would it be wise for the treasury and the Fed to create endless dollars? Of course not. It would result in inflation and the dollar would become worthless. Indeed, one of the functions of the Fed is to match the dollars in circulation with the real productive capacity of the nation. Since the GDP and population of the nation typically grow every year, the dollars placed into circulation must also grow.
Moreover, stated as a percentage of GDP, the annual U.S. “deficit” has remained constant between 0% and 5% for nearly 70 years. The few times during those years when the nation unfortunately ran an annual budget surplus, it was, without exception, followed by an economic recession. And from 2009 to 2011 the deficit jumped to around 9% of GDP because the Fed created over 16 trillion dollars to bail out corrupt Wall Street banks. But by 2013 the deficit had returned to its norm of 2% – 4% of GDP. So, in terms of GDP, the “deficit” hasn’t grown in 70 years and there is nothing scary about it. But the corporate news media and “purchased” politicians never talk about the “deficit” as a percentage of GDP or discuss its historical record. It is always stated in “hundreds of billions of dollars.” Though completely misleading, it is much more frightening stated in these terms and can be used for public manipulation.
Additionally, it is rarely ever stated that the annual dollars the U.S. government has spent into circulation has been grossly inadequate for years. It comes nowhere near the true productive capabilities of our society. The results are obviously irrational situations where we have all the resources needed to rebuild our infrastructure but haven’t the funds to “pay” for them, where we have empty hospital beds across the nation but can’t “afford” national healthcare, where we have surplus food going to waste but need to cut food programs for schoolchildren because we “don’t have the money,” and on and on.
The term “government debt” also serves to mislead and alarm. We endlessly hear . . . America is over 20 Trillion dollars in debt! Medicare and social security are bankrupting us! China will own our children! But let us take a moment to look at just the so-called debt to China.
China sells more “widgets” to Americans than it purchases from Americans. This is the oft mentioned trade imbalance. Americans simply want more products from China than Chinese want from America. So, we Americans give our dollars to China in exchange for Chinese widgets. China wants the dollars and we want the widgets so it is a voluntary trade and everyone agrees or they wouldn’t do it. But as of 2017, China had an excess of 1.18 trillion dollars they didn’t wish to immediately spend. These dollars are held in China’s reserve account (another name for a checking account) at the U.S. Federal Reserve Bank. Of course, 1.18 trillion dollar bills don’t actually exist. It’s just an entry on the Fed’s computer screen.
Like all sensible people who have extra money, the Chinese want to put unneeded funds into an interest paying savings account. And where is the safest place on planet Earth to place one’s savings? The U.S. Treasury. So, China buys U.S. Treasury bills and the Fed reduces China’s computer screen checking account by 1.18 trillion dollars and adds 1.18 trillion dollars to their computer screen savings account. Absolutely nothing changes hands. Entries are changed on a screen. When China wants to spend its money the Fed simply reduces China’s computer screen savings account by the requested amount, adds interest with a few more keystrokes, and increases China’s computer screen checking account by the total. China is then free to buy whatever it wants that can be purchased in U.S. dollars. But it is here where the terminology becomes so misleading.
When China opens a savings account (buys Treasury bills) America is not “borrowing” money from China. America not only does not need China’s money to “pay its bills,” the U.S. Treasury and Fed created all of the money that American’s spent on Chinese products in the first place. It is part of the annual “deficit” spending. When China wants to spend their savings account, the Fed changes numbers on a screen and China has its money. The so-called Chinese “debt” is paid. End of story.
All of the rest of the 21 trillion dollars in current U.S. “debt” is similar to China. The government didn’t “borrow” this money. It created it in the first place through deficit spending and it doesn’t use it to pay any bills. It is simply providing a secure savings account service for other nations, corporations, and individuals.
Words matter. The terms “deficit,” “debt” and “borrow” are manipulators. They are used to spread doubt and fear. They are the tools used by the super wealthy and their paid for politicians to open the door to “austerity” and privatization of all things public. They enable the insatiable greed, gross inequality, and oligarchic control that has now replaced democracy in America.
Unit VI will discuss: Wealth = (Matter = Energy) X Human Knowledge
For more in-depth reading on fiat monetary systems the University of Missouri – Kansas City’s Professor L. Randall Wray’s book, Modern Monetary Theory – A Primer on Macroeconomics for Sovereign Monetary Systems can be read free online in its First Edition, or the Second Edition can be purchased at any bookstore.