Understanding the National Debt: Myths and Reality

What would be the result of paying off an entire country's national debt with one check? The answer might shock you, revealing that the national debt is, in fact, a critical component of the economy, much like money itself.

Consequences of Paying Off the Debt

Fetching a sun implodes on that day would truly be a day of reckoning. To pay off the national debt would require an astronomical sum of money, an amount equivalent to about 360000, considering that only a third of the population is working. Since the national debt is represented by Treasury securities, which are government-backed financial instruments akin to cash, the idea of completely extinguishing the debt is both daunting and impractical.

National Debt as Savings

The national debt is more than just a figure on a spreadsheet; it is the accumulated savings in the dollar economy. Essentially, Treasury securities are a form of savings that do not diminish due to inflation. Stocks, corporate bonds, and real estate are subject to various risks and market fluctuations, whereas Treasury securities are akin to bank accounts backed by the US government. Savings in the form of Treasury securities are critical to an economy that uses the dollar as a reserve currency.

Money Creation Through Debt

Money is created through debt, a concept that often confounds many people. For every dollar placed in a checking account, it is technically a liability for the bank. All the money in checking accounts is considered "debt" to the bank, but "money" or "short-term reserves" to the account holders. This complex interplay between debt and money underscores the necessity of the national debt as a form of savings.

Deficit Spending and Economic Demand

The national debt is often viewed as a burden, a cause of economic problems due to irresponsible government spending. However, this perspective is flawed. The national debt is precisely the savings that these instruments represent, providing security and stability to the holders. For instance, the US Social Security trust funds, the Federal Reserve, and foreign countries all hold Treasury securities, which are effectively savings in an account at the Federal Reserve.

Real-World Example: The Role of Deficit Spending

To illustrate the impact of deficit spending, consider a family that loses income due to a layoff. They receive food stamps, which is a form of federal spending. If they use this additional income to purchase necessities, such as food or an air conditioner, it forms part of the economic demand. Without the federal spending through these programs, the family and the HVAC technician would not have that extra income, resulting in less economic activity.

Interest Payments and the National Debt

Another common misperception is that taxpayers pay the interest on the national debt. However, this is not the case if the annual deficit is larger than the total interest payment. The interest is typically covered by the ongoing deficit, meaning it is not paid directly by taxpayers. Dividing the total interest paid annually by the total national debt gives the average interest rate for that year, which is often close to or less than the inflation rate. This means that the value of the national debt decreases due to inflation, effectively "handling" the debt with little financial burden.

Summary

The national debt is a fundamental part of the modern economy, acting as a form of savings and contributing to economic stability and growth. It is not a debt that needs to be paid back but rather a critical component of the money supply. Understanding this can dispel the myths surrounding the national debt and help policymakers make informed decisions that benefit the economy as a whole.