The national debt surpassed $16 trillion for the first time yesterday and you may hear a lot of people talking about how this is a disaster waiting to happen or construing it as something really terrible and horrible, so I wanted to give you some facts and information about what that “debt” really is so that you are well informed and can talk about it intelligently.
First it’s important to understand that the U.S. is not on a gold standard or some system of convertibility such as a fixed exchange rate or something, so there is nothing “backing” the U.S. dollar. What gives the dollar value is the fact that it is the only thing accepted by the government for the payment of taxes and since most people need dollars to satisfy some tax liability this creates demand for the currency. Furthermore, dollars circulate widely and are used as a “unit of account” or means of exchange because our economy doesn’t transact in barter, but rather, we use currency because it’s simpler and easier.
Since there is nothing backing the dollar the act of spending by the government merely involves electronically crediting bank accounts with dollars (or debiting them, when it collects taxes) and there is no limit to the degree that it can do this. All dollars in the world today, whether they be held by individuals, firms or foreigners (and even foreign nations) are created when the government spends and that is the ONLY way that dollars can come into existence. Furthermore, in order for the non-government (you, me, businesses, rest of the world, etc) to have dollars in our pocket or bank account the government has to spend more than it taxes. If it did the opposite—tax more than it spent—then all dollars in the world would soon disappear.
The $16 trillion national “debt” is not really a debt, but merely the sum total of all dollars spent minus all taxes collected over the past 234 years. In other words, $16 trillion of net dollars have been created in the past 234 years and they are floating around out there in the global economy. There are all kinds of reasons that the government spends, but the main reason is that people, firms and foreign nations desire to hold dollars so they end up selling their goods and services and labor to the government in order to accumulate and “have” dollars. This is really what creates deficits, not some arbitrary decision by the government to spend such and such, but rather, the desire by people to “net save” in the government’s unit of account, namely, the dollar.
While the $16 trillion may be a debt or liability to the government, it is not a liability it can never meet because it is denominated in its own currency. And what kind of liability is it, really, because as I said before it is not redeemable for gold or some other currency on demand? Well if you look at a dollar bill it says right on it, “This note is legal tender for all debts, public and private.” And in that promise, it’s the “public debt” part that really is the most important because it’s basically the government promising you that it will accept its paper for the payment of tax liabilities (public debts). So, again, it’s not a promise it can’t keep. Not to worry.
Now we have established that the debt of the government ($16 trillion, whatever) represents a debt or promise that the government has absolutely NO PROBLEM satisfying or keeping, but remember, for every debt (liability) there is a credit (asset). Then who holds the asset side? That’s us, the people. The government’s debt equals the private sector’s asset. The $16 trillion of dollars spent in excess of taxes collected reside with the public and the public holds these dollars, mostly, in the form of Treasury securities that are like government savings accounts or CD’s (Certificates of Deposit). If the government were to “balance” its books or eliminate its debt, it would have to take back, probably through taxation or some other confiscatory measure, those $16 trillion that the public holds. That would reduce the public’s wealth by $16 trillion. That is the ONLY way that the government can eliminate its debt. Would that be a good thing? Hard to see how it would, yet that’s what people are calling for.
So that’s it, an explanation of the government “debt.” And the next time someone tries to scare you about this or point to that Debt Clock in Times Square, you ask them where the Asset Clock is. There is none, but there should be, because for every liability there is an asset. It’s just basic accounting. The fact that there is never a discussion of the asset side of the balance sheet is proof that the fear mongers who talk about the debt are either ignorant or intentionally trying to manipulate you into believing something that is not true.