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, 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.