National ‘debt’ is really an investment opportunity

The dollar amount of U.S. Treasury securities held by the public in September of this year is $30.1 trillion. There is another $7.3 trillion held by governmental agencies including the Social Security Administration and the Federal Reserve Bank. The question that needs to be asked is how we, and the government, should view these securities, as debt, or voluntary savings arising from a surplus of private sector money.

Traditionally, economists (of all stripes) have viewed money as a constraint, meaning its size was, if not fixed, still limited. To obtain money, the central government had to borrow, similar to what households had to do. Taxation and/or borrowing came before the government could make any expenditures. In the process of borrowing, the government incurred an interest expense that the government hoped to minimize. In the end, borrowed money (national debt) would, or at least should, be repaid.

Our view of how the macro economy worked should have changed in 1971 when then President Richard Nixon took the nation off the domestic gold standard. Prior to 1971, the monetary base in the U.S. was tied to our gold reserves, and while bank lending, or Fed open market operations could expand the money supply, it was still basically limited.

By taking the nation off the gold standard, money in the US was now no longer based on some underlying entity, in this case gold, but was now "fiat" money, money that had value because the government declared, in this case, the dollar, "Lender for all debts public and private." In short dollars were money because the government said so.

The simple act of taking the nation off the gold standard, had a profound (if poorly understood) impact on how both money creation and fiscal policy. Today, the money supply is truly unlimited, money is not a constraint in terms of what the federal government can do. What should act as a constraint on federal spending is the prospect of inflation caused by increased spending when the nation reaches full employment.

Banks can still make money when they make loans and the Fed can increase the money supply by open market operations (buying Treasury securities), but the bulk of money creation occurs when the government makes any expenditure. A government purchase of any size creates an amount of money of equal size. The Fed credits our account for the amount of a government expenditure, and that bank credit, by definition, is the creation of new money.

If it sounds simple, it is, but the consequences of the government being able to create any amount of money the government wants cannot be overstated. With the advent of fiat money, the government never needs to borrow money from the private sector. If that's the case, and it is, then why sell bonds?

The answer to that questions lies in the fact that endless money created (and spent) will lead to inflation, thus a very large portion of the money created must be removed from the economy. Money can be removed by taxation, or by borrowing it. In a world devoid of politics, taxation would be the idea method of controlling the amount of money the government creates (since multiple social objectives could be simultaneously met) but in our current political environment (where increased taxation is unpopular) the government chooses to borrow to remove money (spending power) from the economy.

Buying Treasury securities is not mandatory, its voluntary, in this sense it is no different from a bank offering to sell us a Certificate of Deposit (CD). A CD (or a savings account) is a liability of the bank, a Treasury security is a liability of the government, both can be redeemed at our discretion, although Treasury securities are the most secure way of saving of a portion of our income.

The benefit of saving money in Treasury securities is that the federal government can never go bankrupt since the federal government creates the very money it needs to redeem its debt instruments, the same cannot be said for banks or any private lender.

Generations of people save for retirement, eventually withdrawing their funds at retirement time, only for be followed by a younger generation saving for their eventual retirement, and yet we never worry over the private sectors ability to redeem their debt instruments. But, when it comes to the federal government and their debt instruments, talk of bankruptcy, or burdening future generations, is incessant.

For most, it's because they truly don't understand federal finance, therefore they see Treasury security sales as a threat. But, once properly understood, Treasury securities are a secure way of saving, a way of investing in our own nation, and should be encouraged as a viable financial option.