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More Misunderstanding and Misinformation

The first part of Misunderstanding and Misinformation is here.  There are few more important points to be made - particularly ones on “federal debt”. 

First, let’s revisit this notion that federal government as fiat currency monopolist over U.S. Dollar is NOT revenue constrained.  Warren Mosler (independent candidate for U.S. Senate - CT) often compares federal government to a score keeper at a sporting event.  A score keeper credits points to either side or multiple participants but score keeper never runs out of points to give.  The same goes for federal government - it will never run out of points or U.S. dollars to give or credit to our or business bank accounts.  This means that when people say the “U.S. is running out of money” - they are wrong!

As for “federal debt” and the misinformation about U.S. going bankrupt over the amount of federal debt, let’s start with a quote from Alan Greenspan (someone who pretty conservative - actually beyond conservative):

When there is confidence in the integrity of government, monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies and can guarantee or stand ready to guarantee the obligations of private issuers as they see fit. This power has profound implications for both good and ill for our economies.

Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. [emphasis added]

Again, anyone who says that “U.S. is going bankrupt” because of federal debt is WRONG! 

This doesn’t mean that federal government can spend unlimited amounts without consequences or sever limitations.  There are limitations such as real resource constraints and inflation.  The important thing to understand is that our monetary system and fiscal policy can be very effective in addressing many of economic challenges we face to today such huge income inequality and high unemployment and even retirement income.  But neoliberal/conservative ideology prevents us from addressing these problems through our monetary and fiscal systems.

Back to “federal debt”.  Two things:

1) Federal debt as evidenced by Treasury Securities is an asset to you, me, banks, businesses and yes foreign countries like China.  Treasury Securities are nothing more than another form a savings for non-government sector - one that pays interest.  Take away or pay-off Treasury Securities would have a profound negative impact on “net worth” of non-government sector - including our grandparents.

2) Technically (brace yourself), Federal government doesn’t need “federal debt” to spend.  As fiat currency monopolist over USD it doesn’t need it.  Federal government could tomorrow decide to not issue any more debt and still be able to pay its obligations by simply crediting bank accounts across the country either electronically or the old fashion way - via a check.  So why does it issue “federal debt”?  Federal debt does allow Federal Reserve to manage the levels of liquidity in the economy and short-term interest rates.  Eliminating federal debt would make it very difficult for Federal Reserve to manage liquidity and short-term interest rates.

We have bigger problems and challenges to address - the amount of federal debt is NOT one of them. 

Good luck.