What “National Debt” Really Means

Newman, Frank Neil. Freedom from National Debt. Minneapolis, MN: Two Harbors ; Distributed by Itasca, 2013. Print.


I have been busy to say the least, but as I have said in the past, I’ll never forget about this blog.  I have been studying and discussing as well as reading discussions on modern economics.  My goal is to write a formal essay with my overall understanding.  It is actually progressing rather nicely.  I have two more papers ready to be read, and I need to work hard to try and find a good source on The Fed.  I have to be careful, because there is a lot of speculation.  I will say, that my understanding of The Fed is not from good sources, and I know this because the information is not consistent.  Therefore, I will try to refrain from talking about The Fed.  Really, with the last two sources that I read, they both focused on The Treasury.  People that even worked The Treasury didn’t understand how The Fed has their money.  When The Treasury needed some money, it was provided in exchange for bonds by The Fed, and when those bonds expired, the account is credited closer to zero with the appropriate amount.  There is no transfer of money.  Again, this is based off of discussions rather than reliable texts.

So, what does national debt really mean?  The National Debt, that everyone is concerned about, is total outstanding treasury securities, that are held by either The Fed, private banks, or private investors.  Outstanding in this context means bonds that are issued and sold.  That means, the number you can keep track of by looking online, are the actual amount of bonds bought.  There maybe still some bonds on the market!  Treasury securities, or otherwise called Treasury Bonds, T Bonds, is a bond backed by the United States Government.  It is literally the safest USD asset on the market.  It is safer than money itself.  If someone is a billionaire, and they had cold hard cash, if banks were to go under, they may lose that money.  The Government has the resources of The Treasury and The Fed to provide a safety net for the Treasuries that are purchased.  Treasuries are safer than money.  Bonds in general have a lifetime associated with them.  So the text mentions one month, three month, one year, five years, to even thirty years.  In other words, if I buy a thirty year bond, I won’t be paid back with the interest until thirty years later.  By agreement, at certain time intervals, the interest on the bond changes in accordance to inflation and other factors.

That means, there are treasuries that have various lifetimes.  Which means, not all treasuries have to be repaid at once.  Only a fraction of the outstanding treasuries retire.  Once these treasuries retire, they are removed from the system.  However, treasuries are also printed.  What happens, as described by this text, is The Treasury will have a certain amount of money in their account at The Fed.  They use that money to pay off treasuries that are expiring, and then the rest is used for deficit spending.  That money, some economists theorize has a multiplier.  This means, that for every dollar that is deficit spent in the economy, since it passes through so many hands, it will wind up at around 2.5 dollars.  In any case, by the end of the day, the same amount of money that The Treasury spent on deficit spending and expiring treasuries, is put back into its account with the purchase of more bonds.  The Treasury receives money for the bonds that it issues.

At this point in the book, I was wondering about the interest.  It is common for investors once their treasuries expire, to take the interest and then reinvest the principle into treasuries again.  I started to think that the paid interest on bonds was expanding the money supply.  But there is something to take into consideration.  First, The Treasury can get bank money whenever they want by selling bonds to The Fed.  Second, The Treasury can control how many securities it is putting on the market.  Thirdly, by collaborating when The Fed they can manipulate interest rates on the bonds.  The Fed can declare what the overall interest rate is, affecting all interest rates in some what or another.  But that isn’t how The Fed manipulate bond interest.  The way that interest rates are determined on treasuries, is by an auctioning process.  The author did not go into great detail exactly how it works, because I suppose he didn’t want to overwhelm the reader, and it maybe extremely complicated just to determine interest rates.  I am inferring, that the overall supply of the bonds have an effect on the resulting interest rate.  Therefore, The Treasury while getting instant bank money from The Fed also manipulates the interest rates on the bonds by the remaining supply of treasuries available for investing.  Remember, the overall supply can be determined by The Treasury.  What this means, is that The Treasury can always be in a favorable position.  There is a specific example in the book, that directly addresses my issues with the bonds.  It has huge implications.  So I quote on page 49:

Interest payments do not affect the money supply.  Suppose The Treasury pays 100 dollars of interest from its Fed account (talking about interest on the treasuries).  That 100 dollars becomes cash flow to the holders of the treasuries.  If 20 dollars is paid back to the government as income taxes, investors will be left will 80 dollars increase in their bank accounts.  The Treasury then issues 80 dollars of new securities, with investors placing 80 dollars from their bank accounts to the treasuries, and The Treasury fully replenishes its account with The Fed from the 80 dollars from investors and 20 dollars from income taxes.

With people that don’t really follow the Modern Monetary Theory scene, this has huge implications.  It has been explained in the community, that it is required by law for The Treasury to be in the black, or negative.  Keep in mind it is technically true that The Treasury prints physical currency, but it does not create money electronically.  The Treasury can only print treasury bonds.  So, basically The Treasury exchanges money for bonds that it prints.  The government uses the money from The Fed to deficit spend.  Once the treasuries expire in The Fed account, money is credited, but obviously there is a perception that The Treasury prints faster than the treasuries retire.  This deficit spending, is one of the primary ways that the money supply expands, and since The Treasury is by law to be in the black, that debt is understood to never be repaid.  From what I gather in the community, the majority of the national debt is owned by The Fed.

I will get back to the thought I am about to say later, but that quote up above, shatters the perception in the MMT community.  The author, was the Associate as well as The Secretary of Treasury.  I think it is a very reliable source.  First, he has stated numerous times, that The Treasury would have positive accounts.  Second, he clearly says interest on bonds don’t expand the money supply.  The Treasury prints bonds to The Fed to pay interest, and in combination of taxes and issuance of new treasuries, the money is put back to the account with The Fed.  Thirdly, he uses taxes.  This is actually contested by a paper of economists that I have read.  They essentially say that in order for The Treasury to gain access to the money from printing securities, it has to send taxes to The Fed account.  With the perception that I had at the time, and the majority I would say of the MMT community, the taxes are essentially destroyed.  Simply because you are putting money into a deep black hole of negativity.

Well, it seems that The Treasury uses taxes.

Even though this particular source wasn’t 100 percent accurate, there was still some very valuable concepts discussed.  It goes to show the nature of learning economics.  There’s no pdf file that describes exactly how the economy works.  So when I navigate the information world on figuring out how the economy works, I try to find credible sources, and try to refrain from taking the word of other people.  I have already had instances where someone who seems to be more credible than me, is wrong in my eyes, simply from the readings that I have done.  A lot of people try to logically reason the process of the economy based upon assumptions that they know of the time.  What I have found out, is a lot of the time my assumptions are wrong.  The only way is credible sources.

I got distracted.

So another perception of the MMT world is that The Fed owns pretty much all or most of the national debt.  As of 2013, there was 11 trillion of national debt.  1.7 trillion was owned by The Fed, which means the rest, 9.3 trillion is owned by the private sector.  So that’s trumped.

So the begging question, what expands the money supply?

One thing that is not contested, and that is thoroughly understood, is that bank loans expand the money supply.  Banks create credit from nothing.  Issuance of loans turn the wheel of the economy, and expands the money supply, which allows an expansive amount of purchasing of national debt.  Finally, there is a huge black area of understanding that I have right now in the process of the economy.  What encompasses most of that blackness, is The Fed.  That’s my next project.  I want to find a good, credible book, on The Fed.  I have short papers to read as well, that have to do with overall economic policy, but I hope to one day solidify the process in my mind by reading a good book on The Fed and how it works.  As the author put it, if he ever wanted money The Fed had it and would give it to him.  How?  So I still have a ways to go, but I have learned a lot.

There is one more thing that I want to touch base on.  Foreign countries owning our debt (securities).  Our debt, is the safest USD asset, a treasury bond.  That bond, when it expires issues US currency.  US currency can only buy goods and services in the US.  If, these countries want to trade our currency for another, the person who bought all the US money, has the same problem.  Do I buy goods and services in the US?  Do I re-invest in the US?  Or do I trade currencies?  If he trades, then the person he traded with has the same problem.  Put simply, that money is going to be used to drive the US economy in one way or another.  It is good for us.  It isn’t true that China can demand on their debt and it will bring our entire economy to a halt.  The fact that China has trillions of dollars in US assets, means that’s trillions of dollars for us.

What is interesting is the author’s take on overall policy.  When the economy is slow and needs recovering, then it is good to print securities to pay for securities.  In fact, The Treasury has been printing securities to pay for securities since 1791!  It helps boost the economy.  When the economy is doing wonderful, he actually advocates for a more austerical philosophy.  You can think austerity as the traditional view of the economy, or another way to say it, a state’s budget.  A state can’t print their currency.  So a state, like Missouri which is where I live, can only spend money from state taxes that it collects.  Essentially that is what he was saying.  When the economy is hot, spend what you get in taxes.  When an economy is hot, The Treasury will manipulate securities to the point that more securities retire than printed, assuming The Government practices austerity, and that the economy is booming.  This results in a decrease of national debt.  Of course, there are other philosophies out there, but it is something to take note of and to think about.

For all who read this blog, I truly thank you.  I hope you learn something, and at the foremost, I hope it makes you think.  If you don’t agree, I just hope it made you think.  We all strive to be better and smarter people.  I hope you enjoyed your reading experience, and I hope you will continue to visit my blog.