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America is NOT in debt!

The idea that America is in debt is possibly the most widespread misconception in our country. It is also probably the most damaging.

The idea that America is in debt is possibly the most widespread misconception in our country.  It is also probably the most damaging, as it negatively affects government spending.  Every deficit dollar allocated by Congress is done so with fiscal conservatives fretting about our ability to someday pay back all of these “borrowed” dollars. 

Those fiscal conservatives are idiots.

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). All dollars are introduced into the economy by deficit spending.

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 figured out, it's not really debt at all.  It is more akin to a savings account – and nobody says that a bank is “in debt” to you just because you have some money in a savings account there.

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 dollar creation is no longer restricted by our gold holdings.  The government can create as many dollars as it needs, with zero risk of default.  The only danger is demand-pull inflation, which has never been a problem.  But
regardless, some number of new dollars are needed to account for savings, growth, and other forms of leakage, so deficit spending is necessary to keep the economy from contracting.

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. But now, sales of government 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.

Given that the country is not borrowing dollars, and there is no danger of interest rates rising until the government decides to raise them, there is no good reason to lower government spending.  Government spending accounts for about one quarter of our GDP, and any cuts in that spending are felt deeply by the economy.

So the next time you hear a presidential candidate talk about the need to lower the deficit, run the other way, because that guy simply does not understand how the economy functions. 

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

MZ November 10, 2012 at 01:11 PM
Murphy, this is great news. I was so worried about crazy, out of control spending by the federal government, but not anymore! All in for another trillion dollar stimulus! Murphy, you and I should start up a sham company, give it a cool "green" sounding name and get some of that Obama money. We could do it and be guilt free since they can just print more with no worries at all. Someone will buy the bonds even if we get downgraded again and again. The US dollar will always be the investment choice of everybody and that will never change, John told us so. Intact, I have a great idea, we could start a fake green company that captures the methane from Bulls and reuses it to power the grid. Helps with global warming and is renewable. Further we could gather up all their "patties", process them, and use them instead of coal for additional power generation. The name of our company could be something like The Green BS Co. Now print some of that fiat currency and send it our way!
Murphy-Solon November 10, 2012 at 01:13 PM
MZ, we should just print enough to pay off the debt, fix our schools and roads, give free health care and put a roof on Browns stadium.
MZ November 10, 2012 at 01:23 PM
Murphy, there is no debt. That's the best part of this. We don't need to worry about something that doesn't exist. The so called debt is nothing more than the boogie man. However, we should still have another stimulus, this time even bigger! I think somewhere around $500 million for our green start-up company should be fine for us. Then the schools, roads, health care, Medicare, SS, and a roof on Browns stadium ( if they promise not to use it for Browns games). MZ and Murphy, solving tomorrows energy problems today with The Green BS Co.
Murphy-Solon November 10, 2012 at 01:26 PM
I say, let sequester happen.
Jack Kelly November 10, 2012 at 03:54 PM
When it came to the auto bailout, what Mitt stated was that, in addition to an "orderly bankrupty" (which is an oxymoron in itself), is that it should be saved by the private section. Which, at the time was impossible because the banking industry was in turmoil at the time (fresh off the Lehman Bros. collapse), $$$ was frozen and NOBODY was lending money. So, IN REALITY, what would have happened is the liquidation of the auto industry because the auto industry would not have been able to get financing in the private sector. This little SIGNIFICANT tidbit didn't get much mention.
Jack Kelly November 10, 2012 at 04:08 PM
Malpractice reform, IMO, is missing the point and not much of a drain as people are making it out to be. Sorta like right-wingers making voter fraud this big, widespread problem. Which it's not. One of the big problems of the system is that people are getting more out of it than they ever paid into it. I remember hearing -- awhile ago -- that people are getting on average of 30% more than they ever paid in. And that's an average. The reality is is that the age will have to be raised to 67/68. People are just living longer. Just because Biden didn't answer that is irrelevant. It's not like HE has control to do that. And Ryan's plan would've have taken upwards of 25 years to balance the budget. Too many people seem to think that the budget can be balanced tomorrow. That's laughable. We are so much in the hole (thanks PRIMARILY to the unfunded Bush-era tax cuts, 2 wars, Medicare Part-whatever all signed by GWB, and Medicare/Medicaid), it will take a good decade to do it gradually. And a bipartisan study has come out that has stated the tax cuts for the upper-income folks are NOT beneficial to the economy, do not make them "job creators" or anything of the sort from the talking points the GOP have been spewing for the past few years. But, Senate Minority Leader and racist Mitch McConnell had that study tossed. Hmm...wonder why. Can't wait for him to be kicked to the curb in 2014 when he (hopefully) is not re-elected.
John Biesterfeldt November 11, 2012 at 07:10 AM
"We are so much in the hole.... it will take a good decade to do it (balance the budget) gradually." Here's the thing, Jack - we are not "in the hole." That's the whole point of the article. Dollars have been created (deficit spending), and those dollars have been earned. Now those dollars are in the hands of the people that earned them, and they are buying things. There is no debt to be paid off. New money has been created, yet no inflation has ensued, because our economy was able to produce more to meet that new demand. Balancing the budget would either mean less govt. spending or more taxes - either way, you are lowering aggregate demand, which hurts the economy. Balancing the (federal) budget is always a disaster for the economy, even in good times. The only time you can get away with a balanced budget is if you are a net exporter, and that ship has long since sailed. The lesson here is that there is some level of deficit spending that helps the economy, yet does not result in inflation. Even with what alarmists are claiming is excessive deficit spending, we have not yet reached the point where too many dollars are chasing too few goods.
John Biesterfeldt November 11, 2012 at 07:21 AM
MZ, you may not be as stupid as your friends think - much of what you said was actually correct. If you check the numbers, downgrading our govt. bonds had exactly zero effect on their sales and the resulting rates of return. So someone really will buy those bonds, even if we get downgraded again, because there is zero risk that the government will be unable to redeem them. The sale of govt. bonds, though, really doesn't matter too much. We do not raise dollars by selling bonds. When we need dollars, we get them through taxation and printing. The auction of govt. bonds is now used to control the interbank lending rate, which allows us to control the interest rate. And the govt. is perfectly willing and able to buy those bonds all by themselves.
John Biesterfeldt November 11, 2012 at 07:28 AM
Murphy and MZ - we recently increased the deficit by about $6 trillion. So when is the world going to come to an end? Where are the skyrocketing interest rates? Where is the massive demand-pull inflation? Hmmm? Anybody? Whatever economic theories you guys are working off of can't explain the realities of today's economy. Time to try something new.
MZ November 11, 2012 at 11:46 AM
John, you seem to be misunderstanding me. I'm all for more massive government spending. You have already proven that nothing bad will happen. The issue is that now I think 6 trillion isn't enough. We should go all out and spend as much as we possibly can. You see, I just want a little piece for The Green BS Co. A measly 500 million will suit me just fine. Is that too much to ask? If we can truly spend as much as we want with no risk of anything, inflation won't happen, downgrades don't matter, nothing will ever replace the US petro dollar and the world will always buy our bonds, my $500 million should be a no brainer. Obama phones for everybody!
MZ November 11, 2012 at 11:48 AM
Easy John, you are clearly an economic expert, but please keep in mind you don't know me or my friends. Maybe Western Europe should start the printing presses.
phil blackmore November 11, 2012 at 12:02 PM
Here is one for you...now how fair is this crap? Nah he is not paying off his union buddies..... http://www.examiner.com/article/obama-to-cut-medical-benefits-for-active-retired-military-not-union-workers
John Biesterfeldt November 11, 2012 at 06:39 PM
"Maybe Western Europe should start the printing presses." Europe (all members of the Eurozone, not just Western Europe) does not have a fiat currrency. Eurozone countries actually do borrow currency from the ECB, and there is no single governing body in place to determine fiscal policy for all. Every country is on their own in that regard. Eurozone countries are therefore more akin to our states - users of currency, but not creators. Those nations cannot print new money, they have to attract euros from other Eurozone nations. The ECB could solve a lot of problems by printing more euros, but the member nations can't agree on how to fairly distribute them.
John Biesterfeldt November 11, 2012 at 06:54 PM
I think I understand you just fine, MZ - you can't understand the reasoning, so you are making up something to argue against. I already addressed the issue of printing up too much money. Nowhere did I ever suggest printing up unlimited amounts of dollars, and nowhere did I ever suggest that this can be done without inflation. Maybe if you read things more carefully, you could learn something. This isn't coming off the top of my head, this is from a well-developed school of economic thought. http://moslereconomics.com/2011/08/04/mmt-history-and-overview/#comment-61119 And finally, it's not a partisan issue. I don't think the Obama administration knows what it's doing, either. But at least Democrats aren't gung-ho on balancing the budget, so they are far less likely to lead us into another recession or depression.
John Biesterfeldt November 11, 2012 at 07:04 PM
Are you sure you're replying in the correct thread, Phil? This isn't about Obama or health care, this is about economics.
MZ November 12, 2012 at 10:42 PM
John, so you caught me with my reading comprehension problem and have called me out for having friends that think I'm stupid. Since I cannot battle with your superior intellect i simply have a few questions for you. I went back and read your blog s l o w l y, and perhaps because I am stupid I didn't see where you explain how high government spending can go prior to inflation becoming a problem. You state clearly (even to a simpleton like me) that we shouldn't cut government spending because it is a quarter of the anemic GDP. Is it ok to allow the current spending to increase? Further, doesn't it matter what the government spends the money on? Would you suggest that all spending is equal? If the government can simply print more dollars is there a need to raise taxes, is there a need for federal taxes at all? If so, why and what would be a reasonable rate? Is the return on government spending higher or lower than the private sector? If lower, doesn't it make sense to lower taxes? If higher, shouldn't we just let the government make all the calls and go all in for socialism? By the way John, nowhere did I say I wanted unlimited printing of money, just a cool $500 million for The Green BS Co. We have already thrown way more than that away with the last stimulus.
Murphy-Solon November 12, 2012 at 10:44 PM
Yeah John, help a few guys build a green company.
Murphy-Solon November 12, 2012 at 10:52 PM
If I was a Saudi oil sheik, not only could MZ and I realize our dreams for a green company, but I would demand more dollars for a barrel of oil if excess printing has reduced the value of each dollar. This global recession might be putting off our day of reckoning but inflation will surely come.
John Biesterfeldt November 13, 2012 at 03:20 AM
“...perhaps because I am stupid I didn't see where you explain how high government spending can go prior to inflation becoming a problem.” Theoretically, right up to the point where we start to run short of resources, including labor. Consider the idea of a government job guarantee – everybody that wanted a job could work for minimum wage, say, picking up roadside trash (it's not important what the job entails). The govt. writes the checks with newly created money, and the newly employed go out and spend their earnings on the usual stuff – housing, food, utilities, cars, gas, etc. If there is enough housing, food, etc. to go around (and there clearly is), there is no reason to think that prices would rise, as competition would keep prices in line. “Is it ok to allow the current spending to increase? Further, doesn't it matter what the government spends the money on?” As we are not experiencing demand-pull inflation (too many dollars), we should be able to increase current spending without inflation.
John Biesterfeldt November 13, 2012 at 03:21 AM
“Further, doesn't it matter what the government spends the money on? Would you suggest that all spending is equal?” All spending is not equal, of course, but it's not the government's job to produce stuff for sale. Our private sector does a fine job of that already. What matters is where the government spending goes. If it goes to the poor, then 99.9% of that money will be spent (and the poor will be able to buy shelter and food). If it goes to the rich, then a large percentage of that money will be saved (not spent), and we will have to hope that some of the rest “trickles down” to help everybody else. Which, BTW, does not work. “If the government can simply print more dollars is there a need to raise taxes, is there a need for federal taxes at all?” Not really, until the economy is working at full capacity. The federal government can always create dollars to fund its operations. But if the economy is at 100% of its capacity, then new dollars would cause inflation. “If so, why and what would be a reasonable rate?” For why, see above. The reasonable rate would depend on the relative disparities in income, and the political ends the country was working toward. Right now, a very small percentage of Americans is capturing a very high percentage of our economy's production (income), and part of the reason we have to print up all of this new money is because those people save so much instead of spending.
John Biesterfeldt November 13, 2012 at 03:22 AM
“Is the return on government spending higher or lower than the private sector?” There is no “rate of return.” Those calculations are based on faulty reasoning. All dollars are created by the government – business cannot create dollars. They can only create value, and that allows them to attract more (government-created) dollars. The more important variable to consider is the velocity of that money. Given to a poor man, a dollar will start at the bottom and work its way through the economy, being spent a number of times, until it eventually ends up in the hands of a rich man, who will eventually save it. At that point, the dollar stops being spent, and it stops doing the economy any good. “If lower, doesn't it make sense to lower taxes?” Sometimes. If you lower taxes on the poor, say, by eliminating the FICA tax, almost all of that money will be spent, which does the economy some good. If you lower Bill Gates' taxes, much of that money will just be saved, and it will do less good than if the govt. taxed it and spent it. “If higher, shouldn't we just let the government make all the calls and go all in for socialism?” As much as people like to imagine that we have a socialist in office, that is far from the case. Our government, with very few exceptions, does not own or control the means of production. Our government exerts some influence by being the economy's largest consumer, but that's about it.
John Biesterfeldt November 13, 2012 at 03:29 AM
"This global recession might be putting off our day of reckoning but inflation will surely come." Based on what? Got anything to support that? Or are you just beefing because your man lost, and you want to blame your troubles on the other guys?
Murphy-Solon November 13, 2012 at 11:43 AM
First of all, I'm an Independent that voted for Obama. You are trying to make a case that there is a free lunch after all. Based on what? Common economic sense. If each dollar is worth less, more dollars will be declared. Go ask Argentina about your theory.
John Biesterfeldt November 13, 2012 at 12:09 PM
I suppose it was your flippant references to funding a green company (Solyndra?) that threw me. If that served some sort of purpose besides being dismissive, I don't know what it was. Forgive me for being irritated. There is a bit of a "free lunch" for the producer of fiat currency, if it isn't overdone. But the government gets the same sort of "free lunch" with taxation. In either the taxation or the deficit spending scenarios, the government is skimming a bit of the economy's production for its own purposes. But it is clear that the government can add some currency to the economy every year with no ill effects. In fact, that money induces production that would not otherwise happen. Argentina had many other problems, including foreign debt. We have no foreign debt. America does all its business in dollars. That's why China, Saudi Arabia, Japan, and other countries with which we have a trade deficit hold large piles of dollars (now, in the form of govt. bonds). And although I'd like to take credit for this being my theory, it's not. http://en.wikipedia.org/wiki/Modern_Monetary_Theory
Keith Best November 13, 2012 at 01:39 PM
The uncertainty of the election was holding back employers. They were poised to start hiring with the election of Romney/ Ryan. Now that Obamabots have ended that hope, employers will be laying back because of Obamacare and higher taxes on small business owners. Many are laying off people.You Obamabots have no idea what you have done. Who is John Galt?
Murphy-Solon November 13, 2012 at 01:50 PM
You were wrong about the election, your party lost in stunning fashion. Perhaps your party did not know what they did, but you're soon to find out.
Ed Fisher November 13, 2012 at 04:00 PM
A week after the election and you're still obsessing over it. A majority of voters are apparently much less intelligent than you. We voted. Your supreme wisdom was summarily ignored. Get over it.
John Biesterfeldt November 13, 2012 at 05:17 PM
John Galt is a character in one of the most unreadable books ever. I'm not a big fan of the healthcare compromise myself, but that's what you get when one obstructionist party prevents you from enacting the better - and far more business-friendly solution - single payer healthcare. I'm sure you are blaming the looming "fiscal cliff" on Obama as well, when it was really the brainchild of Republicans, who held up the stimulus until they got this economic Sword of Damocles hung over all of our heads. But, hey, anything to sink the other party's guy, right? Our potential fate under a budget-cutting Romney/Ryan administration would have been far worse. Obamacare might be expensive, but at least it addresses a real problem (millions of uninsured Americans). Cutting the federal budget, as I have attempted to explain, is a painful solution in search of a problem.
Mark Brooks November 14, 2012 at 01:57 PM
Thanks for the discussion. So many people (and I'll include myself) have no idea how the economy actually works. In fact it seems many professional economists and academics may have no clue either - I refer you to the book Debunking Economics by Steve Keen.
John Biesterfeldt November 14, 2012 at 02:38 PM
Thanks, Mark, your comment is much appreciated. I've come across some of Keen's articles, and I largely agree with him. Unfortunately, economics is just a hobby for me, and once those guys whip out their equations, my eyelids get unbearably heavy. I prefer to read the guys who keep it simple. There are only two things you must know about the economy, and the rest will fall into place. Number one, government bonds do not represent a "debt" that has to be paid off. Bonds (in a fiat economy) are just another way to hold dollars. We could do away with bonds tomorrow, and the economy would hardly be affected. (Though we would need to employ another method of controlling interest rates.) The government creates dollars, and those dollars bounce around the economy until they end up hoarded (often in the form of govt. bonds). Number two, the "money multiplier" theory of banking is baloney. If there are somehow no excess reserves availabe on the interbank market, banks can always borrow reserves from the Fed, so they are never reserve constrained when making a loan. This means that there is not a pile of loanable funds out there that borrowers are competing over, so there is no supply/demand pressure on interest rates. The supply of funds is functionally unlimited. If any of this stuff interests you (or anyone else), I'd be happy to point you to more material about Modern Monetary Theory. Thanks again for the comment.

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