Mike Norman is an MMT fan with a comment on the so-called “national debt.” My own comments below are in blue.
Mike Norman: 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.
E.H.: There are several reasons why people harp on the “national debt crisis” hoax (which, amazingly, is even more ubiquitous than the “six million” hoax)…
 To justify austerity, which widens the gap between the rich and the rest.
 To justify the private debt crisis. (“If you think student loan debt is bad, just think about the national debt!”)
 To justify a sales pitch for gold certificates, or whatever else you are selling. (“This is your only protection from the imminent collapse of the dollar!”)
 To justify your attack on…whatever. (Liberals and conservatives both use the national debt hoax to attack each other).
 To sound cool and “hip.”
Mike Norman: There are groups that are very well funded like “Fix the Debt” and the Peterson Foundation that pump out endless streams of false propaganda about the debt.
The funny thing is, when it comes to the debt, all we ever hear about is the debt. We never hear about national assets or the national income. If you walk into a bank to ask for a loan, and you tell 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?
Mike Norman: Most people don’t understand what the national debt is. They think it is like a time bomb. To understand what the debt is, you have to ask yourself, what is a dollar? A dollar is nothing more than a tax credit, 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.
E.H.: Wrong. This is the MMT “taxes drives money” mantra, and it is false. The truth is that even if all taxes were lowered to zero, you would still want and use dollars. What imparts value to a dollar? Taxes are only a small part of it. Government laws are another part. The main part is psychological. Dollars are supported by habit, custom, and social convention.
I wish the MMT people would mature past this, but I guess it’s like wishing they would mature past their “jobs guarantee” nonsense. It’s not going to happen.
Mike Norman: 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 in 1789. What’s left over, that $19 trillion, are the dollars 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.
E.H.: That’s one way of putting it. Each year the U.S. government creates about $4 trillion out of thin air, and taxes back about 88% of that. Some of the remaining 12%, year after year ($480 billion), is deposited in Fed savings accounts via the purchase of T-securities. That $480 billion is the deficit. What the real economy needs is a deficit three times larger than that.
Mike Norman: 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.
E.H.: Actually about 40% of the Fed deposits are put there by the U.S. government itself. Thus, at least 7.6 trillion is what the U.S. government owes itself. So where is the “crisis”?
Mike Norman: 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.
E.H.: Most owners are American, but some are foreigners (e.g. China). There are pie charts that show who has what money on deposit at the Fed, but they they are all different, and therefore all questionable. In any case, the “national debt” is simply the amount of money that various parties have on deposit at the Fed. And remember, money isn’t physical. Dollars can be created with computer keystrokes. Dollars are limitless.
Mike Norman: 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.
E.H.: You call this a “recovery”? Yesterday I lost my medical insurance. Obamacare has made insurance so expensive that the company I work for will no longer pay its portion. Therefore my benefits have been terminated. If I develop a serious illness, I will be finished. Thanks Obama.
We could have universal health care free, paid by the federal government, but the federal government is “bankrupt.” Besides, universal health care would be evil “socialism” (or so think most people).
Mike Norman: As an aside, those 11 trillion of new dollars created didn’t cause inflation, nor did they 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.
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 whoops (you don’t print up dollars, I don’t print them up, the Chinese don’t print them), they had to have been spent into existence in the first place before anyone had any to lend.
E.H.: Be careful. Dollars are also created by banks as loans. Many people erroneously think that all dollars are created by banks as loans. Hence they erroneously think the “national debt” is owed to banks.
Mike Norman: 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 debt fears and debt fear-mongering 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.
E.H.: Most people think of the “national debt” as a personal loan; i.e. money that was borrowed to fund the U.S. government. And since most people pretend that money is physical and limited (even though they know it isn’t), they wonder where we will ever get the money to “pay it off.”
Mike Norman: Yet “fixing the debt” is 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.
A balanced budget amendment has to do with the federal deficit, not the “national debt.” It would not be possible for the U.S. government to have a balanced budget. Not for very long anyway. The U.S. economy would implode. Supposedly the U.S. government had a surplus for four years…
I’m skeptical of these supposed “surpluses.” If they were true, then the U.S. government sucked $559 billion out of the U.S. economy over a span of four years. That would have killed us.
To use Mike Norman’s analogy with the Monopoly board game, each fiscal year the U.S. government hands out $4 trillion – but not all at once. If each year the U.S. government took back all that money in order to have a balanced budget, the game could not continue. Some of the money must be left in the game at all times. That’s the federal deficit.
It’s all very simple, but the average person’s refusal to understand is why I no longer have medical insurance.