The US Debt is Enormous and You Shouldn’t Care

Did you know that the US National Debt is almost $17 trillion and growing at a rate of hundreds of billions of dollars a year? Or wait, maybe the debt is at $70 trillion. Or is it $86.8 trillion?

Regardless, what’s important is that our country owes a zillion bajillion dollars and that growing number will lead to the federal government going bankrupt like the City of Detroit, the Chinese marching in with their US debt holdings and taking over, or worse! Even in the short term, you have people like Donald Trump stating that “When you have [debt] in the $21-$22 trillion [range], you are talking about a [credit] downgrade no matter how you cut it.” A credit downgrade! That means the US would have to pay even higher rates on the money it borrows, meaning the debt would increase even faster! And Donald Trump is really rich, so you know he’s smart and wouldn’t be making ludicrous claims with no basis in reality.

Mother of God...

Mother of God…

Are you terrified yet? Ready to demand that the government balance the budget or, better yet, pay off our debt entirely? Relax. I was once like you, worried that the US Government was overspending and undertaxing our way to financial collapse and putting an undue burden on future generations. I cringed at the thought of the US government paying nearly $3 trillion in interest – almost $10k per American – while I responsibly paid all my credit cards and debt payments in full each month. I got a warm, fuzzy feeling from politicians and journalists who talked of balancing the federal budget (that would probably include almost every politician these days). But I, like many others, bought into a critical misunderstanding of how taxation, spending, and public debt work with fiat currency like the US Dollar.

In reality, there is no coherent possibility for the US government to go bankrupt, experience a credit downgrade, or be coerced by foreign debt-holders due to excessive debt. These are all logically absurd outcomes that don’t even merit acknowledgment. In fact, just the notion of any government being in debt of the currency it issues is rather absurd as well.

Chuck E. Cheese’s and the Never-Ending Supply of Fiat Currency

Anyone familiar with the term “fiat currency” is aware that the US government has an infinite supply of dollars at all times. Every dollar in circulation today was created, and distributed, by the US government at one point or another. Note that I used the term “distributed” instead of “spent,” but those words are equivalent in this context since the distribution of dollars from the US government to other parties is the very definition of government spending. Once a dollar is in circulation, it can be used to pay taxes or exchanged for goods and services in the free market.

The US government’s capacity to produce dollars is quite similar to Chuck E. Cheese’s capacity to produce its tickets. It can create them and distribute tickets however it likes, and it also collects them at their arcade stores. But, the process of awarding tickets through its machines doesn’t depend on how many tickets are collected at their stores. Quite simply, Chuck E. Cheese’s can never run out of tickets or ever have a compelling need to acquire them.

All that's missing is "This note is legal tender for all debts, public and private."

All that’s missing is “This note is legal tender for all debts, public and private.”

Now, imagine a world where Chuck E. Cheese’s is duly elected to represent the people, and a new constitution is drafted giving them powers of taxation and declaring the ticket as the national currency. Let’s assume that, on day one of this new order, the government has not yet distributed any tickets. Although they still have infinity of them, as they always do, the people have none and are using a barter system (or maybe SOJs and Bitcoins) for trade.

It’s not really a government without any government spending, so President Cheese himself declares that they are hiring policemen, teachers, road builders, and miscellaneous paper pushers to be paid in tickets. To his dismay, he gets exactly zero applications. Nobody is trading tickets, nobody has a need for them, and in fact tickets don’t even burn well enough to heat one’s house. Likewise, nobody is willing to take a job that pays in tickets.

But President Cheese is a resourceful mouse and he figures out a solution. “All citizens will be required to pay a tax of 10 thousand tickets at the end of the year, and violators will be thrown in jail for tax evasion!” he decrees. Now that may not be the fairest way to allocate tax burdens to the population, but it does the job. People, now clamoring for tickets to avoid jail time, sign up to become government employees in droves. Those that don’t join the public sector instead trade their goods and services to government employees in exchange for tickets. Soon, everything from aardvark meat to zucchini bread can be bought and sold for tickets.

For the sake of this example, suppose that 10 billion tickets are paid to government employees in the first year, while 9 billion tickets are collected in taxes. With 10 billion tickets going into economy, and 9 billion coming out, that leaves 1 billion tickets in circulation. It also means that the government spent a billion more tickets than it collected, although strangely there is still no government debt. At the end of the day, the government leveraged its power of taxation to take some of the workforce and put it towards providing roads, police, and teachers. The government can continue operating with this budget as long as it wants. The only direct impact of the deficit is that a billion tickets are put into circulation each year. Sounds all well and good, right?

Does the Deficit Matter at All?

Remember that government spending injects money into an economy, while government taxing takes it away. If you have too much of the former, but not a lot of the latter, the supply of money grows at a very fast pace. When it grows faster than the output of the economy, the currency in question experiences inflationary pressure. Inflation is not always a bad thing – it is effectively equivalent to a tax on those who hold money – but large or unpredictable amounts of it usually are undesirable.

Yet, sometimes inflationary pressure and putting money into an economy can actually result in a more productive and prosperous society. This is generally true during recessions, including the recent 2008 crash that we’re still recovering from. In a recession, businesses lose revenue and therefore lose money available to spend on wages. Cutting the price of products or services is easy – consumers love a good price reduction – but wages are another story. Wages are sticky, meaning that people don’t like accepting pay cuts, so instead businesses employ fewer people to reduce their wages paid. That leaves us with unemployment, and unemployment represents wasted production in an economy.

Reduced taxes would give businesses more money to spend on wages and individuals more money to buy what they want, decreasing unemployment and helping put an end to the recession. Alternatively, increased government spending could make use of the labor being wasted to unemployment and end the social ills that come with it, also leading to a faster recovery from recession. Either of these, of course, would result in a larger deficit.

Considering all this, cutting taxes and/or increasing spending until a recession is over and unemployment goes down to low levels seems to be a pretty obviously good idea. Yet our government doesn’t do it nearly as much as it should. Why not? Because, as I indicated in the beginning of this article, too many people are paralyzed over fear of national debt.

Instead of issuing new currency to cover deficits, the US government issues treasury bonds. Issuing these bonds is not necessary for government spending, it is merely a relic in constitutional procedure from when the US dollar was on the gold standard. The only practical difference between issuing currency and issuing treasury bonds is that bonds pay interest, effectively encouraging saving and putting upwards pressure on interest rates in the free market. This occasionally results in weird situations when the Federal Reserve decides it wants to lower interest rates, like the government buying treasury bonds from itself. It also means the government has an obligation to redeem those bonds for dollars when they mature, and this is what’s known as the national debt. The term “debt” is something of a misnomer and is not the same debt that people, businesses, and local governments are used to. To “pay off its debts,” the government must simply convert outstanding treasury bonds back to dollars.

The Phony Debt Crisis

Rather than handling fiscal policy in a way that maximizes the well-being and productivity of society, policymakers in Washington bullheadedly pursue disastrous policies in the name of debt reduction with little basis in reason or reality. The size of government is a legitimate question for society to debate, yet rather than compromise between cutting taxes and increasing spending during a recession, we often do the opposite. In the face of a rampant unemployment, Republicans ask for spending cuts while Democrats ask for tax increases.

Actually, our country CAN literally sustain deficit spending forever, as can any country with a sovereign currency.

And now, with the debt rapidly approaching a completely arbitrary debt ceiling, some congressmen are threatening to allow the US to default on its debt payments, despite the massive negative impacts that could have on the economy. That’s like the ocean defaulting on payment of water. Or Chuck E. Cheese’s defaulting on payment of its tickets.

And before you blame it all on the Republicans, keep in mind that it wasn’t long ago that our current President voted against a debt ceiling increase himself:

Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘‘the buck stops here.’’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

I therefore intend to oppose the effort to increase America’s debt limit.

None of this is accurate, except perhaps the part about a failure of leadership. Our children need not be burdened by today’s deficits because the government doesn’t need anything from them to pay off its debts. What matters for our children is that they have the technology, education, and infrastructure to provide for their generations. Even if this quote were true, the right away to do something about it wouldn’t be to default on debt payments.

Why can’t our policymakers simply set government spending at a level that allows it to provide the services that society desires from it, and then set taxes at a level that minimizes unemployment without letting inflation get out of hand? Why must our leaders posture, fear-monger, and repeat blatant falsehoods? Is that really too much to ask?

This kind of nonsense policy and rhetoric will continue as long as Americans continue to miscomprehend the nature of our debt and the effects that deficit spending has on an economy. Politicians will capitalize on fear and misunderstanding of our national debt to help their election chances, but don’t allow yourself to be fooled. I only hope that this article takes us a step in the right direction.


10 thoughts on “The US Debt is Enormous and You Shouldn’t Care

  1. Read this with interest and lots of re-thinking my current conceptions. I certainly thought the size of the debt number mattered, and you are arguing that it does not. Doesn’t the fact that 26% of our debt is owed to China mean that the size of that number matters? We have to convince them to take our tickets. It seems like in addition to inflation within the country, relative currency value matters and you didn’t address that in this article.

    1. I could’ve gone on to related matters, like the trade deficit with China, but I didn’t want to make this too long. What’s important to keep in mind about the US debt that China holds, is that the debt merely represents dollars. The only difference between the Chinese holding $100B in US dollars and $100B in US treasury bonds is that the treasury bonds have a present value of slightly less than $100B US dollars. The Chinese could, if they wanted to, “cash in” their debt holdings at anytime by selling them for dollars on bond exchanges. The only difference between the Chinese holding US debt and US dollars is that the debt pays a bit of interest.

      What can they do with dollars? Buy goods and services – just like anyone else can. They could all decide to start buying American cars and gadgets, taking vacations in the US, etc… Is that really a bad thing? The unemployed and the struggling American businesses probably wouldn’t say so.

      In reality, we have no problem in finding demand from China and elsewhere for our tickets. We have a large, ongoing trade deficit with China and people act like this is a bad thing. We send them tickets, and they send us clothes, cars, electronics, appliances, and other things of real value that improve our standard of living. China has a relative advantage at producing these things compared to the USA, and trade with them frees up American labor to do the things which we have a relative advantage at, as well as allow Americans to work fewer hours while enjoying the same or higher standard of living. That sounds like a great deal, and in reality I think it is. Yet people act like the trade deficit is a terrible thing that’s putting Americans out of work.

      As I see it, it’s the failed and misguided economic policies of our policymakers that bears most of the blame for Americans being out of work. Our private sector can’t afford to hire willing and able workers and our public sector is tightening its belt even when there are legitimate needs (like improving education, increasing access to health care, and fighting poverty) that our society wants from its government.

      The purchasing power of our currency is an important consideration, but it doesn’t come before the actual productivity and well-being of our society. And while increasing the money supply does put downward pressure on the purchasing power of the dollar, increasing our productivity (as we could easily do in times of high unemployment) would have the opposite effect.

  2. I’m a bit concerned arguments like are ignoring problems inherently caused by inflation. What happens to the retired people with static money in a saving account. They start with 2 million (reasonable retirement savings) and 15 years later if they’ve spent nothing on living they only have 1/4 of their saving value (formual uses 9% inflation per year 2/3 of our historic high).In reality they’d have nothing left.

    If the answer is they have to invest to avoid losses from inflation, it’s almost suggestive they should just use a more stable currency

    1. I don’t mean to ignore problems potentially caused by inflation. Framing the debate over deficit spending as “will additional deficits cause more harm through inflation than good?” is intellectually honest, whereas framing it as “if we don’t cut the deficit we’re gonna go bankrupt and get owned by China!!!” is decidedly dishonest.

      In the situation we’re in now, my understanding is that worries over inflation are greatly exaggerated. We experienced deflation for much of 2009, and since then we’re experiencing relatively low inflation rates of 1-3%.

      But I think the key thing to keep in mind is that inflation is essentially a transfer of purchasing power from holders of money to earners of money, not a destructive force in and of itself (although hyper-inflation can certainly paralyze an economy). Unemployment, however, IS a destructive force. When people are willing and able to produce for society, but are unable to, society doesn’t get to enjoy the fruits of their labor. Consequently, reduced production causes the purchasing power of the dollar to go down. Remember, retired people don’t need money to have a happy retirement. What they need is food, entertainment, health care, and other real things than an economy produces. If our economy produces less of those things, there’s less that’s available for retirees.

      When deficit spending is causing inflation but not improving the productivity and well-being of society, that is when I would rein in deficit spending and consider increasing taxes to stabilize the dollar’s value.

      As for unintended victims of inflation, they can be addressed with other policy changes. Increasing social security benefits for retirees can ensure that those on fixed income still have access to a standard of living that we as a society deem acceptable, for example.

      And as a practical matter, using ANY fiat currency as a long term store of value is a very poor choice, yet the dollar remains one of the world’s more stable currencies. There are bonds, stocks, saving&loan accounts, real estate, precious metals, or even bitcoins which all come with varying degrees of risk. Investing in at least those first three sends a message to the market saying “Hey, I’m choosing to delay the consumption power that these dollars represent.” On the other side of that coin are people paying for tuition, cars, or houses saying “Hey, I need more consumption and I promise to produce more in the future if anyone would lend me their consumption now.”

  3. DM, Thanks for your response. Continuing…

    1) Compensating inflation with welfare programs. I’m afraid you’ve hit a circular logic gap that I been trying to solve for a year but can’t reason around. If the inherent reason for inflation is that the government is spending more money than the taxed GDP can support, then spending more money on social programs cannot be the solution as well. The reason is that as much as you try to help, every dollar you borrow to give, increases inflation, and cancels out the dollars given (deminishing returns)

    2) While the role of China is largely overplayed, I continue to worry about bankruptcy on a 50 year scale with a serious frame of mind. The current system works great assuming people are willing to lend to you. The problem I see is not when you “borrow from joe to pay paul” but when you owe so much to “joe and paul” that you have to borrow more from both to pay both. Eventually if your creditors don’t get money back, they cut you off Case Study: Merrill Lynch

    The only difference between Merrill Lynch and a Government under water, is that a government can print money as you pointed out in the original article. I address this is point 3.

    3) As you said, we’re currently in an era of low inflation/possible deflation. It’s suggestive we’re experiencing this because we’re choosing to pay obligations by borrowing instead of printing (so the currency remains finite). The problem with bankruptcy is that it removes that option, and leaves only printing, which is where hyperinflation enters.

    4) I agree that inflation transfers value to independent earners as they will be able to charge more for their goods/services. I’m worried that typical corporate employees which are the growing majority, will unfortunately not realize gains equal to inflation and will be almost as equally “boned” as the unemployed.

    The largest problem I see with this though is that we have 100-150 million people not working and they get “boned” (technical term) by inflation.

    5) ” retired people don’t need money to have a happy retirement” The example I used of retired people assumed 2 people were able to live off 33k a year, but they lost 3/4 of their savings “value” to inflation (approximately averaged to 100k a year). I agree then that what we’re discussing IS people’s ability eat and pay for healthcare.

    Conclusion. I’d argue Rome collapsed not because of failed social policies, but because it failed to manage it’s finances and pay for it’s policies.

    1. 1) Correct. There’s no inconsistency here. Maximizing the value produced by a society should be the goal of economic policy. Inflation doesn’t impact production – goods or services produced are available to be consumed one way or the other. Unemployment represents wasted production. Tax cuts and/or increased government spending can put unemployed people to work, thus producing more goods and services for society. More goods and services for society means a bigger pie from which everyone in society gets a slice. My point is that we should focus on maximizing value, and obsession with debt and inflation among our policymakers get in the way of that.

      2) This misses the point of this article. The government doesn’t require anyone to lend to it to continue spending dollars, and the only thing it owes to bondholders are dollars (of which it has an infinite amount of), just like Chuck E. Cheese’s does not need to borrow tickets to keep giving them out in their arcades. Merrill Lynch did not take on debts in its sovereign currency, the US does. That’s an extremely important distinction that is lost on most people. I tried to make that clear in this article, although I realize it’s not a very easy concept to grasp for the first time.

      3) Issuing treasury bonds instead of dollars is not the reason that we experienced deflation, that was because we had a recession and financial crisis. That’s another complicated topic, which has to do with a shock to consumer confidence and demand (and when demand falls, prices fall). Issuing treasury bonds does create an artificial incentive to save and delay consumption in the short term, which tends to lower prices in the short term, but in the long term it increases the monetary base all the same.

      It’s important to consider that treasury bonds are equivalent to dollars on the date of the bond’s maturity. Issuing a treasury bond is effectively equivalent to issuing dollars in the future. There is no such thing as bankruptcy for the US government, because it can never run out of dollars.

      I’m not remotely an expert on Rome, but I think present day USA has plenty of failed policies as well. Tax increases and spending cuts in the face of a recession because of a misplaced fear over bankruptcy and debt are pretty high up there.

  4. DM- Your article was interesting because it reminds the reader there are 3 ways for a government to pay for items: taxes, loans, and currency printing.

    Regarding your point #2 above. I’d argue that while yes the government “could” print 0.9-1.3 trillion dollars per year, this is not what they’re doing. The Federal Reserve website currently estimates we only have 1.3 trillion in circulation total right now, however the annual deficit is estimated between 0.9-1.3. In the past 6 years if we were paying for it thru printing currency, we’d have almost 10 trillion total in circulation. Instead what we’ve seen is a debt ceiling increase from 9.5 trillion to going on 18 trillion, indicating that most of the deficit is rolled into debt.

    In response to “issuing a treasy bond is effectively equivalent to issuing dollars in the future.” Based on our low currency total in circulation relative to our debt, I would argue that historically and currently our main method of paying treasury bonds is by issuing more treasury bonds and paying the last investor with new ones. This is why I compared it to the Merrill lynch methodology.

    Your article is interesting in that it explores options. Please correct my currency total if I got it wrong but if we stopped borrowing all together and only printed currency to handle the deficit my concern is that we would double the total currency in one year, which I would expect would be a very bad thing for inflation (50%+ inflation rate). If this is remotely accurate, then option 3 (printing) is less of an option than we might have hoped.

    1. The first line isn’t entirely true. Before dollars can exist in circulation, they need to be spent (or printed, if you’d rather) by the government. The government cannot tax or borrow dollars it has not spent. It can not only tax and borrow with a fiat currency.

      1.3 trillion is the monetary base, m0, but what most people consider the money supply is m2, which is monetary base + short term deposits on banks. That is >10 trillion. Nobody believes we would experience anywhere near 50% inflation by increasing the deficit a few hundred billion or by having the Federal Reserve buy up even more treasury bonds in exchange for cash (as they already do with QE). But this is all besides the point.

      Money is not wealth. Low inflation rates in the present will not improve the standard of living for future generations. Only real goods and services that people value counts as wealth, and only real investment in productive and human capital can benefit future generations. When our economic policies result in huge amounts of waste, perhaps represented best by the millions of able but unemployed workers in our economy, that is the problem. That is what detracts from our wealth in the present and our productive ability in the future, and that is what I’d like to see our policymakers address. Not baseless fears of government insolvency.

  5. Great piece, Dan. The challenge with the analogy to Prez. Cheese is that there is no international consideration. Its just Prez Cheese isolated inside the Chuck. E. Cheese. What would happen if there was another restaurant across the street that traded with Chuck E Cheese and exchanged their dollars for tickets?

    I wonder why no politician has successfully adopted the platform counter to the “we can’t bankrupt our future generations” fear mongering and gained traction. You’d think people would be relieved to learn the truth which is far rosier than the thought of being indebted physically.

    Is a good analogy when a company issues its own shares as currency to fund an acquisition? For example, instead of using cash or debt, a public company may use its own shares, so the true cost is born by shareholders in dilution of shares outstanding. Is this analogous to what happens to fiat currency holders when the US government issues more deficit spending?

    Great thread between you and Craig, btw! Thanks again.

    1. The foreign entity trying to acquire tickets would only be able to use them to purchase goods and services traded in the land of Prez Cheese. It wouldn’t pose a problem, that’s just international trade. Voluntary international trade occurs when there exists relative advantages between two nations, and benefits both nations. Domestic entities who acquire tickets would have the same use for those tickets, as well as paying taxes.

      I think the reason fear mongering works is because people respond to it, it riles people up and scores points in the voting booths. Look at the tea party movement, I don’t know if that gets off the ground without irrational fears over national bankruptcy, hyper-inflation, and/or Chinese takeovers.

      I wouldn’t say companies issuing shares is a good analogy to sovereign nations issuing currency. Even w/ companies, the shareholders don’t typically suffer. If company ABC is worth a million and has a thousand shares, the share price is $1000. If that company issues a thousand more shares and sells them at market price of $1000 each, then the company now has an extra million in cash holdings and is worth $2M and has 2 thousand shares, the share price is still $1000.

      A sovereign nation can use fiscal policy and deficit spending to recover wasted output that results from unemployment, effectively increasing economic output. Inflation is an increase in prices, or a loss in the purchasing power of each unit of currency. When total economic output is flat, and the money supply goes up, prices go up as well. When an increase in money supply results in an accompanying increase in economic output, as I (and many others) expect would be the case w/ more tax cuts and deficits, then prices won’t go up as much or possibly even at all. At the end of a day, a nation is only as wealthy as its economic output.

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