Welcome! Today, we explore the insights provided by Tom Neuburger, who has been outlining the intricacies of money creation and Federal spending in nations that hold monetary sovereignty. This concluding part of his series delves into the often-misunderstood issue of national debt.
It’s crucial to note that the Modern Monetary Theory (MMT) framework acknowledges the potential for governments to overspend, leading to consequences. However, rather than resulting in default or bankruptcy, excessive spending can lead to heightened inflation.
In a timely parallel, a UK writer has addressed the misplaced fears surrounding government borrowing. Colonel Smithers recently highlighted this issue in an article titled Don’t Panic, Mr Mainwaring! The Myth of the Bond Vigilantes. Here’s an excerpt from the beginning of his piece:
I recently got asked by a musician friend if we should be worried about high government borrowing costs because ‘UK government bond yields are at a historic high’…
In this article, I will examine various assumptions that underpin this narrative, as well as point out critical elements that are often overlooked.
Key topics include:
- The misconception that the government must borrow to fund its spending.
- The belief that the government lacks control over long-term interest rates, which are dictated by the market and bond vigilantes.
- The paradox that the government is, in essence, spending rather than borrowing, as it circulates substantial interest on the bonds it sells. It’s essential for commentators to focus on where this money flows, who benefits, and its implications for the economy.
- The opportunity costs associated with maintaining a financial system linked to government bond sales, which diverts talent from sectors like health research or climate change mitigation.
Now, let’s dive into the main discussion.
By Tom Neuburger. Originally published at God’s Spies
“[T]he government … ought to be so constituted as to protect the minority of the opulent against the majority.”
—James Madison, June 26, 1787
“[A positive interest rate policy is] basic income for those who already have money.”
—Warren Mosler, here
This is the fifth installment of a concise series examining the nature of money. It began with a discussion on what dollars truly are. We revealed a fundamental truth:
• Only the government can create dollars.
All subsequent points in this series stem from that fact. Memorizing this will clarify many aspects of the discussion. Here’s where we’ve been so far:
• Part 1: The Dollar – “Why ‘Entitlement’ Cuts May Succeed“
• Part 2: The Purpose of Taxes – “Why Governments Tax: A List“
• Part 3: Understanding the ‘Deficit’ – “What Is This ‘Deficit’ We Hear So Much About?“
• Part 4: The Treasuries Market – “What Is the Federal Bond Market Really?“
In this fifth part, we tackle the question: “If our government can create dollars from nothing, what exactly is the ‘national debt’?”
To answer that, we revisit Part 4, focusing on the obligation to sell Treasury bonds. You can refer to that section, but in brief, the government has imposed this requirement on itself. While it can directly create dollars and authorize spending as needed, the Treasury is bound by law to sell bonds as a means of financing its operations—laws that could be overturned.
Core Principles
Let’s lay down some foundational points:
• The government is the sole source of all U.S. dollars.
There is no alternative source. The Federal Reserve creates dollars because the government allows it to do so. Banks generate dollars through lending beyond their reserves—essentially creating money they don’t have—because the government authorizes that power. The government always retains control over dollar creation.
• As a result, the government does not inherently need to borrow. Much like airlines that don’t need to borrow “airline miles” to distribute them, the government can create currency as required. Period.
• Every dollar spent by the government is a dollar placed into someone’s hands. Without spending, no dollars exist.
• The Treasury operates through bonds only because the law dictates it. If those laws were overturned, the Treasury could simply generate dollars to meet its needs.
• Treasury bonds are, therefore, a gift to those who possess money. If you lack sufficient funds, purchasing government bonds is out of reach, but for those with disposable income, it’s an option.
Understanding the ‘National Debt’
Thus:
• The “national debt” represents the market for U.S. Treasuries.
• Given that having a Treasuries market is a choice, the “national debt” functions as an investment tool—a vehicle to transfer money to wealthy individuals through interest payments.
• Therefore, the “national debt” is not a debt, but rather a gift.
Purpose of the Treasuries Market
So, why establish this market for U.S. Treasuries?
Firstly, consider the affluent. Wealthy individuals require a reliable, risk-free place to safeguard their assets, particularly during uncertain times. The Treasuries market satisfies that need.
Next, reflect on the money supply. Dollars are in circulation because the government spends and banks are permitted to lend beyond their reserves. When the money supply becomes excessive, the government has mechanisms to retract some of it.
How does this work? There are two primary methods through which the government withdraws money from the economy. The first is through taxation. While everyone pays taxes, the current system is structured in such a way that the wealthy often pay significantly less than their fair share.
Between 2014 and 2018, Elon Musk’s wealth grew by $13.9 billion, yet he paid only $455 million in federal income taxes, resulting in an actual tax rate of approximately 3.27% (ProPublica, 2021). In contrast, the average American family’s effective federal income tax rate was 13.3% in 2018 (Tax Foundation, 2021). This stark discrepancy underscores how wealth can accumulate without proportional taxation.
As noted by ProPublica:
In certain years, billionaires like Jeff Bezos and Elon Musk have paid zero in federal income taxes—Musk in 2018 and Bezos in 2007 and 2011, showcasing a significant disparity in tax responsibility.
How, then, does the government manage to extract excess money from affluent individuals? The second method is through the Treasuries market. When individuals buy bonds, they temporarily relinquish their cash, allowing the government to reduce the money supply.
In summary, the government employs two means to manage the money supply: taxation and the Treasuries market. This discrepancy creates an inequality in our system. When the government seeks to lower the money supply, it does so by taking uncompensated and involuntary contributions from taxpayers, while offering reimbursed and voluntary opportunities to the wealthy via Treasury bonds.
In the words of Cory Doctorow, the situation is summarized as follows:
Taxes serve to coercively diminish the purchasing power of the private sector (they’re a stick), while T-bills achieve the same outcome voluntarily (they’re the carrot).
It’s clear from the above that if the “national debt” is defined by the U.S. Treasuries market, and were the government to:
- Cancel any law mandating bond issuance, and
- Repay all outstanding Treasury bonds, bills, and notes, and
- Cease issuing new ones—forever, not a single bond
…the entire U.S. Treasuries market would vanish entirely.
Would individuals with wealth desire this outcome? You might not be concerned unless you have funds to invest in Treasuries, which currently yield over 5%. However, the ultra-wealthy definitely have a vested interest. They require a secure location for their funds during uncertain times, and our government tends to cater to their needs (as evidenced by the earlier quotes).
In conclusion, the national debt represents the total of all “deficit” spending reflected as the cumulative amount of publicly-held Treasury bonds. If we were to eliminate this “debt,” it could lead us to a profoundly different economic landscape.
