National debt surpasses $30T – should you be worried?

The U.S. national debt has surpassed $30 trillion. Should we be worried?

Like many people, I used to view the national debt the same way I viewed my personal debt. My household can borrow only so much money before we get into trouble. If we’re unable to make payments on time, we could get hit with late charges, a credit downgrade, even bankruptcy. Clearly, too much personal debt is dangerous for our financial health.

Does the same hold true for the federal government? Fortunately, no.

The federal government is not like a household or a business or a state or local government. Unlike the rest of us who use the U.S. currency, the federal government is the currency issuer. It does not need to get dollars before it can spend. It simply creates them as needed. It does this every time it spends – for any purpose.

All dollars are created out of thin air under the authority of Article 1, Section 8 of the U.S. Constitution. The government does not create dollars by pushing gold through some sort of money grinder. It simply tells its bank, the Federal Reserve, to mark up the account of whomever is to be paid by the government. Your COVID relief payment? Created out of thin air with computer keystrokes. Your federal tax refund? Same deal.

Conversely, your federal tax payment is simply destroyed into thin air by computer keystrokes. The feds don’t need our taxes to spend money. So why do they need our taxes? Federal taxes serve multiple purposes, but funding the federal government is not one of them. The primary purposes of federal taxes are to create demand for the currency – we work because we need to earn dollars to pay our taxes – and to remove some of those circulating dollars to reduce aggregate demand which can drive inflation.

But what of the debt? The national debt can be viewed in a couple ways. First, it can be viewed as the cumulative total of all dollars spent into existence by the federal government but not yet taxed out of existence. In that sense, it is our money supply, and eliminating it would eliminate our money supply and lead to economic disaster.

Alternatively, it can be viewed as the sum total of all outstanding Treasury securities (bonds). This is the sense in which most people view the debt. In this sense, any concern about the debt goes back to how things worked when we were on a gold standard. Under a gold standard, anyone with dollars could convert them to gold according to an established exchange rate. For that reason, the federal government could allow no more dollars in circulation than it held gold to back them. One way it took dollars out of circulation was to accept them in exchange for bonds. While the dollars were tied up in bonds, they could not be converted, and that meant the government could spend an equivalent number of dollars.

Unfortunately, the gold standard caused problems, especially when the government needed to spend. It’s no coincidence that governments on a gold standard or other fixed exchange regime suspend convertability when they go to war. They need to spend whatever it takes to win the war, and gold convertability would prevent them from doing so. (This also points out the fact that currency-issuing governments are not limited in the amount of money they *can* create, although there are factors – primarily, the availability of real resources – that limit how much they *should* create.)

Fortunately, we’ve been officially off a gold standard since 1971. (Convertability has been suspended since the 1930’s.) Today, bond issuance is entirely unnecessary, but it continues for a couple reasons. First, the Federal Reserve uses bonds to manage the overnight interest rate. (Whether regulating interest rates that way serves any useful purpose is debatable, but that’s one reason we have Treasury bonds.) The other reason is that people with lots of money view Treasuries as one of the safest places to park their money. In that regard, any concern about the size of the national debt should be aimed at reducing the massive inequality that allows a relative few to horde so much of our money supply while many others are struggling to survive.

Regardless of the usefulness or fairness of Treasury securities, their existence as our national debt is nothing to worry about. Dollars are created out of thin air. Thin air will never demand their return. Treasuries are created out of thin air and simply exchange non-interest-bearing dollars for interest-bearing ones. When a Treasury bond matures, the Federal Reserve simply uses computer keystrokes to move money from a securities account back to a reserve (checking) account and uses a couple more keystrokes to add some interest. This happens every week, and no taxpayers or grandchildren are involved.

If the government decided to stop issuing Treasuries, it could do so without harm. Existing bonds would mature and be paid off, and our national “debt” (using our second definition) would disappear. Rich folks would have to find somewhere else to park their money, but the world would survive. On the other hand, it will survive just fine if we continue issuing Treasuries as we have been.

The only people who should be worried about our national “debt” are those who are terrified by large numbers, but 30 trillion is nothing compared to the number of atoms in the universe. If you want to worry about big numbers, worry about that one instead – it will be just as pointless.

Leave a Comment

Your email address will not be published. Required fields are marked *