Why is the National Debt of the United States Not a Problem?

Often, those who perceive the national debt as a non-issue are the ones causing it, while those who fear it are the ones who will bear the burden. In the coming year, the interest on the debt is projected to be $1.4 trillion, representing over a third of all taxes collected just to service it. This substantial annual expenditure will likely lead to a financial crisis. Moreover, the national debt plays a significant role in inflationary pressures, further exacerbating economic instability.

Government Spending vs. Debt

Contrary to popular belief, the connection between government spending and national debt is misconstrued. The U.S. government has the ability to create its own money for expenditure, rendering external financing via bankers and investors unnecessary. When the congressional budget is approved, the government creates the requisite funds, channels them to services, and thereby contributes to the foundation of the economy. This debt is formed through the purchase of Treasury bonds and bills by entities with personal cash, not through borrowing in foreign currencies.

Understanding U.S. Government Debt

It's crucial to recognize that the U.S. government’s debt, often referred to as Treasury bond sales, is not a borrowing operation. The government creates reserves in the banking system when it spends, and these reserves, if left unmanaged, would drive interest rates to zero. Bond sales serve to absorb these excess reserves, enabling the Federal Reserve to meet its overnight rate target. This daily coordination ensures that the target interest rate is achieved, maintaining the stability of the financial system.

The U.S. as a Currency Issuing Authority

The U.S. government stands as a unique entity in the global economic landscape, not because it merely issues its currency, but due to its status as the currency issuer residing separately from the private sector. The government's monetary sovereignty allows it to meet all obligations in its own currency, rendering it impervious to the influence of bond vigilantes. The national debt is essentially a reflection of savings in the form of Treasury bonds, denominated in U.S. dollars, the sole legal tender in which the government has monopoly authority to issue.

Debunking the Debt Myth

Understanding the nature of these bonds is vital in grasping the reality of the national debt. These bonds are purchased with dollars already in circulation in the economy. It's important to note that savings from the sale of these bonds tend to be anti-inflationary, given that inflation pressures are primarily driven by the velocity of spending on goods and services. Even when cost-push inflation occurs, such as with the petrol crisis in recent years due to geopolitical tensions, the impact is mitigated.

Conclusion

By comprehending the nature of government spending and debt, we can appreciate that the national debt is not a liability but rather a reflection of the nation's economic strength. The U.S. government's ability to issue its own currency ensures that it can pay off all maturing debts indefinitely without risking insolvency. Thus, the national debt, far from being a problem, is a tool within the government's arsenal to support and stabilize the economy.