The National Debt Doesn't Need Fixing

 | Mar 22, 2016 | 2:30 PM EDT
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What is the national debt? You hear about it all the time. It's always stated very ominously, as if to scare us and gin up national guilt. There are groups that are very well funded like "Fix the Debt" and the Peterson Foundation that pump out false and endless streams of propaganda about the debt.

The funny thing is, when it comes to the debt, that's the only thing we hear about: the debt. We never hear about national assets or the national income. If you walk into a bank and asked for a loan and you say to the loan officer, "Here are all my debts," the loan officer would say, "Thanks, now what about your assets and income?" No discussion of that is ever heard when it comes to the national debt. There's a "Debt Clock" in Times Square. Did anyone ever see an Asset Clock?

Most people don't understand what the national debt is, and it can (and is) easily construed to be a very scary thing like a time bomb that will one day go off. But to fundamentally understand what the debt is, you have to ask yourself, what is a dollar?

The answer to that is: The dollar is nothing more than a tax credit. Why do I say this? Simply because it's taxation that imparts value to the dollar. Since the government will only accept its own currency -- the dollar -- for payment of taxes, that's what creates demand for the currency. Taxation is at the root of how value is bestowed upon fiat money.

The national debt, therefore, is all the money the government has issued minus what was redeemed to pay taxes since the beginning of our republic, 1789. What's left over, that $19 trillion, are the dollars (tax credits) in the hands of the private sector, globally, that have yet to be redeemed for payment of taxes. They may never need to be redeemed.

Taking it one step further, the public holds most of that money in the form of Treasuries, meaning Treasuries are merely dollars that have a term and a coupon (maturity and interest payment).

That's the $19 trillion we always hear about. That's what the national "debt" is. It's dollars (tax credits) held by the public.

Once you understand this, you should realize that the national debt is not a debt at all. It's not something we owe in foreign currency. It's not something we owe in gold. It's not something we owe in real goods and services. Indeed, it's not something we owe at all, but rather something we own.

Furthermore, when you think about it, the growth in the debt is both normal (size of the economy has grown, population has grown, savings desires have grown, etc.) and it has also been a godsend. It rose from $8 trillion in 2007 to $19 trillion today and that additional $11 trillion in the hands of the public is largely the reason why the economy has recovered from the Great Financial Crisis. The government spent that $11 trillion into the economy and it floated pretty much everything.

As an aside, those 11 trillion of new dollars created didn't cause inflation nor did it cause the dollar to decline. In fact, the opposite occurred, showing that there is a very spurious correlation between money printing and inflation/currency debasement despite all the ranting and ravings we heard.

Back to what I was saying.

It's important to understand that we do not "borrow" to finance the debt. The debt is dollars, as I pointed out. Dollars spent into existence by the government. Everything was paid for.

If, as a nation, we were actually borrowing dollars to finance our debt, where did the dollars come from? Since dollars can only come from government spending (you don't print up dollars, I don't print them up, the Chinese don't print them up), they had to have been spent into existence in the first place before anyone had any to lend.

Think of a game of Monopoly. The money has to be distributed first before anyone can play. If you roll the dice and land on Chance or Community Chest and are asked to pay taxes, you are giving back money already distributed by the game. If you don't distribute the Monopoly money to everyone first, you can't play the game. Do we call the money that people are playing the game with a national debt? Of course not. So why do we call our money a national debt?

The sad part is, the debt fears and debt fearmongering are really unfortunate. It is totally based on misinformation or some cynical agenda. The worst thing we could do as a nation would be to "fix the debt." That would mean the government literally taking back those $19 trillion that are in the hands of the public. Those dollars would literally disappear. It would be a complete disaster. It would thrust the world into an economic "nuclear winter" of unprecedented proportions.

Yet that's exactly what we are trying to do. It's what some supposedly very "smart people" are proposing. I think something like only seven more states are needed to sign on to a constitutional convention that will move toward introducing a balanced-budget amendment. If that ever happens, and I personally think it will because of the misinformation and fearmongering surrounding the national debt, then life and society as we know them here in the U.S. will change for generations. And it won't be a good change.

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