- Politics and Social Issues»
- Economy & Government
The U.S. "National Debt" explained, MMT-style
The "National Debt" is not a measure of debt, but a measure of saved dollars.
Step One: forget everything you thought you knew about economics.
Most of the conventional wisdom is bunk. Flush your old college Econ 101 course out of your memory and start with a clean slate. If what you think you know doesn't stand up to both logic and hard data, it's probably wrong.
Where dollars come from
The U.S. dollar is a fiat currency. Dollars can only be created by the U.S. government (for simplicity, it helps to think of the Fed, the Treasury, and the government as a single entity, as they work in concert). Dollars are introduced into the economy by deficit spending. (Where else are they going to come from?)
Where dollars go
When large amounts of dollars are amassed, the people, banks, businesses, or countries that hold them often choose to "invest" those dollars in federal government bonds, as they earn a bit of interest, and are basically non-risk places to park money. This is our "National Debt." As you might have already noticed, it's not really debt at all.
Here is the best analogy I have heard to illustrate this... You have $12,000 in a non-interest-bearing checking account at your bank. You only need $2000 available for checking, so you put $10,000 of your money in a Certificate of Deposit account at the same bank. The bank marks down your checking account by $10K, and marks up your CD/savings account by $10K. When it matures, the bank marks your CD account down by $10,000 and marks your checking account up by, say, $10,050. You were always in the same financial position - you had $12,000 (now, a bit more). And the bank was always in the same position as well. Nobody ever says that the bank is "in debt" for $10,000 just because you moved money from your checking account into a savings account. Saying that the U.S. government is "in debt" because people have exchanged dollars for government bonds is just as misleading. Government bonds are basically dollar equivalents - you can easily trade them for dollars, or vice versa. And the government creates them both from thin air.
The "National Debt" is not a measure of debt, but a measure of saved dollars. And since that pile of saved dollars never gets any smaller, you can consider those dollars to be "retired." Government bonds, in a net sense, don't ever get cashed in and spent (although they could). They just sit there, unused, and once in a while a small bit of interest is added to the pile. And that pile has no discernable effect on the economy.
America is the richest country in the world. We are not in debt up to our ears. That should just be common sense.
Then why does everybody call it the National Debt?
Because those people don't know what they are talking about. But realistically, it's an arcane subject, and not many people are interested in learning the details, so it's hard to blame people for simply parroting what they have heard over and over. Politicians have no such excuse - anybody that gets to vote on the federal budget should know how money works.
At best, those people are living in the past. Back in the gold standard days, the creation of dollars was restricted by our gold holdings. When the government wanted to create more dollars than we could back with gold, they actually did borrow in the form of bonds. Happily, those days are over, and we are no longer restricted by some amount of a certain shiny ore randomly chosen to represent value.
The government is still required by law to issue bonds in the same amount as the federal deficit. This law is a holdover from the gold standard days. Now, those bonds are used to control the interbank lending rate. By controlling the sale of these bonds (and buying them at auction when necessary), the government can keep the interest rate where they want it.
What about banks? Don't they create money?
Banks can only create credit. Every dollar loaned out by a bank comes with an attached liability. A bank can lend you $1000, but that does not make you any richer, as you are now in debt for the same amount. And the bank is not any poorer, because (assuming you pay them back) they are owed $1000 (plus interest). No net dollars created there. Also, you may notice that your dollars don't bear the name of Wells Fargo or Chase Bank. ;)
So, with all of these new dollars, how are they holding their value?
The value of dollars is backed up by our economy's productive capacity. As long as we don't create so many dollars that we can't keep up with the demand they create, inflation should not be a problem.
Here's another analogy: A bakery, one of many in the city, sells 100 loaves of bread in a typical day. With the bakers and the equipment they have, they are able to crank out 150 loaves/day if the demand is there, but normally they don't run at full capacity. There is no shortage of flour, eggs, milk, energy, etc. - i.e., if they need more flour, they can get it.
If the government decides to distribute some new dollars to the poor (how or why isn't important), more people now have the means to buy bread, and demand goes up to 120 loaves/day. The bakery easily adjusts to the increased demand, buying more supplies and working a bit faster. Since there is no shortage of any ingredients needed to produce bread, the per-loaf price remains the same. (Remember that there are many bakeries in town - if they raised their price for a loaf, plenty of other bakeries would take their customers by keeping their prices low.) This is an example of an economy's productive capacity being able to absorb new dollars without inflationary pressure.
On the other hand, if the government decided to distribute so many new dollars to the poor that the demand for bread rose to 200 loaves/day, the bakery would either have to invest money in their labor and/or equipment to satisfy demand, which takes time, or they would simply raise their prices (as would the other bakeries, assuming they are in similar circumstances). Or, the increased demand for ingredients might lead to a shortage of flour or eggs, which would drive up the per-loaf cost of bread. Now, you have inflation (demand-pull inflation, to be exact). This is an example of an economy's productive capacity being outstripped by demand (too many new dollars created).
America clearly has plenty of dormant productive capacity. Detroit could certainly produce more cars if there was sufficient demand. We don't suffer from many shortages of anything. So new dollars are welcomed by businesses, and prices remain low. Most, if not all, of our inflation can be blamed on the price of oil, which we have no control over. (That's cost-push inflation.)
Some links on Modern Monetary Theory
When I was introduced to MMT a couple of years ago, it was a revelation. I haven't looked at politics the same way since that time. I encourage you to read up on the subject, and here are a few links to get you started: