The Q & A below is based upon works by:
Frank N. Newman, former Deputy Secretary of the US Treasury, recipient of the Treasury’s annual “Alexander Hamilton” award, and author of “Freedom from National Debt” (~ $10 at Amazon),
Francis X. Cavanaugh, US Treasury economist for over 30 years and author of “The Truth about the National Debt”: Five Myths and One Reality” (~ $10 at Amazon), and
Warren Mosler, economist, hedge fund founder, and author of “Seven Deadly Innocent Frauds of Economic Policy” (Oxford U. Press, ~ $12 at Amazon or $1 for a Kindle download).
Dr. Stephanie Kelton, Chair of UMKC Economics Department, at NewEconomicPerspectives.org
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Q1: Is our so-called “national debt” a real debt, an interest-bearing burden that must be repaid?
A1: No, it lacks the two essential qualities of a real debt. It’s just a “DINO” - a “Debt In Name Only”!
1. A real debt must be repaid. Our DINO has never been repaid and never will be repaid.
Yes, Treasuries are redeemed at maturity, but our DINO is the total value of all maturing Treasuries (TVMT). Only a federal budget surplus can reduce that total. Since dropping the gold standard in1971, we have rarely had even a modest annual budget surplus. No such surplus is now foreseeable. And the TVMT must keep growing with population to maintain an adequate supply of risk-free Treasuries.
We leave our grandchildren not debts but assets: nature, culture, and infrastructure. Lest we waste time, we must fully employ all of our idle resources, as did Presidents Lincoln (railways, telegraph, land-grant colleges), Theodore Roosevelt (National Parks, Panama Canal), and FDR (TVA, PWA, WPA, CCC, etc.)
2. A real debt must be a significant burden. Our DINO is not a significant burden on taxpayers.
Our Treasury redeems bonds (cost plus interest) by selling more bonds. The new bond-buyers pay for the redemption of the mature bonds. There are always enough buyers because the Fed can, if necessary, create an artificial shortage and demand by buying bonds on the open market with a few cost-free keystrokes. The CBO recognizes a “primary” budget deficit as one which does not include debt interest payments because they never consume physical resources and have no economic effect.
Our Treasury in no way resembles a home-buyer seeking a mortgage burden and risking foreclosure. It acts as a custodian accepting voluntarily offered funds. A Treasury bond is an interest-bearing term deposit, like a bank’s Certificate of Deposit. While a bank troubled by bad loans can have too many maturing CDs, our non-lending, fiat Treasury cannot have too many maturing bonds.
The Treasury auctions bonds only because Congress requires that the annual budget deficit be covered by the proceeds. This requirement, now a relic of the former gold standard regime, was suspended during World War II http://neweconomicperspectives.org/2013/08/mobilization-and-money.html#more-6200, followed by 35 years of strong economic growth without harmful inflation. Now, under our fiat currency regime, deficits can be financed by mere keystrokes while balancing full employment against inflation.
Inflation? Deficit spending NEVER causes inflation during a recession. During prosperity, bank lending ALWAYS causes inflation, creating over $6 of credit for every deficit dollar spent. Regulate the banks!
Q2. Could savers stop buying Treasury bonds?
A2. Yes, when savers no longer want insurance, annuities, pensions, 401(k)’s, or other provisions.
Q3: Could savers make a run on Treasury bonds?
A3: Yes, when savers can get risk-free returns from the Wall Street casino or from GM bonds, Illinois bonds, or Detroit bonds. Safety is not everything. Safety is the ONLY thing!
Q4: Could savers prefer foreign sovereign bonds?
A4: Yes, indeed! So far, over 60% of the world’s reserve currencies are in US dollars and half of all US Treasury bonds are held by foreigners. But that could change if China’s sovereign bonds become safer than ours. And that could happen only if China’s infrastructure (and so its productivity) becomes better than ours. And that could happen only if US voters worry more about our DINO / TVMT than they worry about our failing schools, falling bridges, bursting sewers, decrepit railways, and aging power grid.
Q5: Won’t we need higher tax rates to pay for infrastructure?
A5: Contrary to the myth, Congress does not spend with our taxes. To spend, Congress creates money out of thin air and stocks the Treasury. (Think about it: where and how did the first tax-payer get money for the first tax payment?) To prevent inflation, the IRS repossesses and destroys as much of the spent money as it can. (Cash payments are shredded and you can actually purchase the shredded paper!)
Every federal dollar spent is either repossessed by the IRS or saved by the private sector. Our annual budget deficit is exactly equal to the annual private sector savings increase. Yes, DEFICITS = SAVINGS! No deficits, no savings! Our DINO is really our Total Private Sector Savings (TPSS). The scary “Debt Clock” is really the wonderful “Savings Clock”! Where is the evidence that our economy has too much savings? The DINO scare is a Wall Street hoax created to privatize Social Security and maintain a huge unemployed labor force. http://www.sourcewatch.org/index.php?title=Portal:Fix_the_Debt
Since bank loans must be repaid with interest, budget deficits are the ONLY source of private sector savings. We need to DOUBLE our DINO / TVMT / TPSS to return it to the WW II level that was followed by 35 years of prosperity without harmful inflation, even with very high tax rates. Our ratio of DINO / TVMT / TPSS plus total bank deposits to GDP is less than half of the comparable figure for China. Our ratio of M2 (money supply) to GDP is half of Switzerland’s ratio and one quarter of Hong Kong’s ratio.