It’s sad when someone writes an article that is garbage, and other people who expose the garbage are themselves full of garbage. And still other people who expose the garbage in the first two are likewise full of garbage. And so on.
Let’s start with the initial article, which appeared as the cover story in the latest edition of Time magazine.
Below you can see an “impulse buy rack” at a supermarket checkout line where you grab some gum, a candy bar, a piece of beef jerky, a magazine — or whatever. Every company with products in the impulse buy rack must battle for consumer attention, especially today, because people waiting at checkout lines no longer glance at the magazine covers. Instead, they play with their smartphones. (Magazine circulation dropped 9.5 percent in the U.S. last year, and it continues to fall, because everything is now online.)
Hence the latest cover of Time magazine presents a number that grabs your subconscious attention. ($49,998! Is that something I can win? Something I can deduct from my mortgage? Is it the price of a new Toyota?)
 No American will ever have to pay a single penny on it.
 The U.S. government does not borrow one penny of its spending money.
 The $19 trillion is simply the amount that various interests (including the U.S. government) have temporarily deposited in their Federal Reserve savings accounts. When you deposit money in your bank account, the bank does not need to “pay you off.” The bank must give your money back when you ask for it, but that is not the same as the bank paying off a loan. Nor does anyone else need to “pay you off.” That’s why you will never have to pay one penny on the “national debt.”
 The $19 trillion is as much an asset as a “debt.” The Fed uses that $19 trillion to balance the reserves of all U.S. banks, plus some foreign banks. Bank reserves cannot be spent like regular money. Reserves are a numbers game that backs up the regular numbers game that is regular money.
The parasites don’t want you to understand this. The parasites are the financial powers and their toadies (pundits, professors, politicians, and so forth). The parasites are killing you with private debt (e.g. student loans) but they want you to be grateful that you’re not paying on the (fake) public debt. And they want you to submit when they steal Medicare and Social Security.
The author liar of the Time article is one James Grant, who publishes Grant’s Interest Rate Observer twice a month. In 2012 when Ron Paul was running for the U.S. Presidency, Ron Paul said that if elected President, he would nominate Grant (the liar) as his likely candidate for Chairman of the Federal Reserve to replace Ben Bernanke whose term expired in 2014.
Grant’s Time article is online, and naturally it’s full of nonsense. My comments are in blue…
America, we have a problem. We owe more than we can easily repay. (Not if you’re talking about the U.S. government.) We spend too much and borrow too much. (Not if you’re talking about the U.S. government.) Worse, we promise too much. We conjure dollar bills by the trillions–pull them right out of thin air. I won’t insist that this can’t go on, because it has. I only say that it will eventually stop.
Right away the red light comes on (at right, sitting beside my computer monitor). If the U.S. government can create infinite dollars out of thin air, as Grant says, and if those dollars are accepted worldwide, then how can the federal government have a debt problem?
As for the process of money creation eventually stopping, of course it will stop. Eventually there will be no USA. Eventually there will be no planet earth, because our sun will become a red giant. So what?
I don’t know the date, but I believe that I know the reason. It will stop when the world loses confidence in the dollars we owe. Come that moment of truth, the nation will resemble Chicago, a once prosperous polity now trying to persuade its once trusting creditors that it is actually solvent.
Nonsense. He says the U.S. government, which creates its spending money out of thin air, is like Chicago, which doesn’t. Then Grant contradicts himself. He says the U.S. government is not like Chicago.
The government is different from you and me (and Chicago). It has a central bank. The Federal Reserve is the government’s Monopoly-money machine. It materializes dollars.
So what’s the problem? And if Grant thinks that US dollars are worthless “Monopoly money,” he can send all his worthless dollars to me.
Then Grant contradicts himself again. He said the Fed creates the U.S. government’s money. Now he says no, Congress creates it.
Congress is the source of the Fed’s power. The Constitution is the source of Congress’s power. The parchment enjoins Congress to coin money and regulate the value thereof.
Actually the Constitution has no power at all. Human beings provide political power.
And now get this…
Dollars issue from the Fed’s computers in billowing digital clouds. The cost of producing them is only the energy expended on tapping the keys. The Fed emits these electronic greenbacks to attempt to control the course of economic events. It’s a heaven-sent monetary system for a big-spending government.
So what’s the problem? It’s the same system used by all governments that create their own money.
By the way, not all dollars are created by the Fed. Many dollars are created by commercial banks as loans. Many other dollars are created by the Federal government as Social Security benefits, for example, or to pay for wars and weapons.
Then Grant contradicts himself yet again. He has admitted that the U.S. government can create limitless dollars — but now he says that $13,903,107,629,266 of the “national debt” is “unmanageable” (his word).
Then comes this…
One can assume that the creditors trust the currency in which they expect to be repaid. I wonder why, and for how much longer.
How much longer? For as long as there is a USA.
Next, Grant says that only money backed by gold is “sound money.” Again I say that if Grant thinks that U.S. dollars are “unsound,” then he can send all his “unsound” dollars to me.
Sound money coincided with balanced budgets. Government borrowings climbed in wartime and subsided in peacetime. The pattern was disarranged by depression in the 1930s and war in the 1940s. It was broken by the Johnson Administration’s guns and butter and entitlements programs in the 1960s. Richard Nixon administered the coup de grâce on Aug. 15, 1971, when he announced that the dollar would derive its value from the say-so of the government. The Fed could print as many green bills as the traffic would bear.
Correct. So what’s the problem?
And by the way, the U.S. government did not borrow any money to fund its war efforts in WW I and WW II. Instead, the U.S. government sold savings bonds in order to control inflation. (See my explanation.)
Many applauded that sea change, then and later. Easy money rarely fails to please–at first. It buoys stocks, bonds and commercial real estate. House prices jump, and car sales zoom. Periodically, the buzz wears off. What remains is a hangover of debts and promises. The proliferating dollars facilitate heavy borrowing. Ultra-low interest rates mask the cost.
How many times do we have to say it? If the U.S. government can create infinite dollars out of thin air, and if those dollars are accepted worldwide, then WHAT’S THE PROBLEM?
There is a lot more to Grant’s article, but you have already heard the same trash a million times…
The Slate blog critiques Grant’s garbage, and is itself full of garbage.
My comments are in blue…
It does not matter how much money a country owes if it can easily meet its interest payments. (True.) So long as that is the case, bond investors are typically happy to continue lending money, and everything goes smoothly. Except that investors don’t lend money to fund the U.S. government. Investors deposit money in Fed savings accounts so investors can get interest.
It’s the same way you or I can carry a mortgage or credit card balance without triggering personal financial catastrophe, and without scaring away our bank. Do not compare the U.S. government, (which can create limitless money) with private individuals (which cannot). The United States has managed to shoulder at least some debt continuously without major incident ever since 1835. Currently, interest on the debt only takes up about 6 percent of the federal budget. That’s $240 billion a year, which the Fed creates out of thin air. The government creates almost ten times that for the Pentagon, for military contractors, and for the endless wars. And don’t forget the trillions created for Wall Street bailouts. As a percentage of GDP, the national debt is lower than any time since the 1970s. For the USA, the public debt-to-GDP ratio is meaningless. However the private debt-to-GDP ratio (e.g. student loans) is catastrophic, and will eventually destroy the USA. In the future, we will only have to pay down enough debt to make sure our interest payments remain sustainable, as they are today. We will never have to eliminate the whole balance.
We never have to “pay down” any of the public debt at all. And how could our interest payments not be sustainable? Besides, the Fed, not the market, sets the interest rate for the T-securities that he Fed sells. The secondary market for T-securities sets the interest rate for secondary T-securities, but that is own market, and has no effect on the U.S. government’s ability to create money.
Erasing the whole debt, or even a significant chunk of what the U.S. now owes, would be a waste of resources, especially at a moment when the economy is underperforming its potential. Every dollar we spend paying down our obligations could, theoretically, be used on something more productive that would grow the economy long term, like fixing our infrastructure, or making sure we have a functioning health care system. Faster growth would, of course, shrink our debt as a share of the economy. Cutting spending to pay off debt, on the other hand, could slow growth, and leave us right back where we started.
True, but even if we wanted to “pay off the debt,” we would simply give investors’ money back to them, plus interest. No problem.
To be sure, sovereign debt can become a problem if investors suddenly decide it looks like a nation might default. This is a grave concern for a country like Greece, which does not control its own currency. Thankfully, the United States has the near magical ability to print dollars. There is no danger that we will run short of dollars. Rather, the only potential problem is that one day, we will print so much of our currency that it will create excessive inflation, our debts will become worthless, and the bond markets will strike.
The “near magical ability to print dollars” is not enough. Most governments have this same magical power. However no government’s money is as widely accepted as is the U.S. government’s money. This wide acceptance of the dollar is what makes the U.S. government so powerful.
If a nation has a trade deficit, and if that nation’s currency is not widely accepted, then sooner or later that nation will have to borrow money in foreign currencies, in order to keep buying imports. Then the nation will have a national debt problem. This will never happen to the USA, since the USA does not need foreign currencies. The USA does everything in dollars, at home and abroad.
Then Slate falls into total error…
The U.S. can currently borrow money for 20 years at historically low rates. Why not 200 years? Or 2,000? James Grant in Time magazine cautions that, one day, rates may rise, and the U.S. will have to refinance its debts at higher rates. (“At 4.8%, the rate prevailing as recently as 2007, the government would pay more in interest expense–$654 billion–than it does for national defense,” he notes.) This is a possibility, sure, though right now the world appears to be indefinitely stuck in a low-interest rate trap.
No! Wrong! The U.S. government will never have to “refinance its debt.” When you buy a T-security, you are guaranteed to be paid interest when the T-security matures. The Fed creates the interest money out of thin air. There is no need to ever “refinance” T-securities, or “refinance” the money deposited in Fed savings accounts.
Rising health care costs could also potentially force us to borrow a slightly uncomfortable amount in 30 years, though projecting trends that far out is always a guessing game.
Wrong. Health care costs have no connection with the interest rate that the Fed offers on T-securities, since the U.S. government does not borrow its spending money.
There’s more in the Slate article, but it says nothing new.
Now comes Forbes, which says that Time and Slate are full of garbage. However Forbes itself is full of garbage…
Time insists that every US citizen owes $42,000 and change to cover the national debt. This is true: if that debt needed to be paid off that is what the average payment per citizen would have to be. The debt doesn’t need to be paid off immediately, but it is indeed true that this must be paid off over time.
NO! WRONG! Investors’ deposits at the Fed are never “paid off,” and don’t need to be. They are deposits. Banks pay interest on deposits, but banks don’t “pay off” deposits.
Our children are certainly going to have to pay some taxes to pay that interest.
NO! WRONG! No one will ever have to pay a penny on those Fed deposits. Moreover, the money used for U.S. government spending, and for paying interest on T-securities, does not come from taxes. It is created out of thin air.
It isn’t all that important in terms of a debt burden. There’s quite a lot more wriggle room before it becomes a serious macroeconomic problem and even more before the prospect of a debt spiral turns up. However, there is still an important point to be made here, which is that Milton Friedman was right, we need to starve the beast.
NO! WRONG! Deposits at the Fed will never become a problem. As far as “starving the beast,” we need more government spending, not less.
In short, that there is a $13.9 trillion national debt proves that politicians are fiscally incompetent spendthrifts. Thus don’t let them have any more money as they’ll just waste it. Useful to be reminded of that at times, so Time is correct, even if not quite about the details of the importance of the matter.
Really? No more trillions for Wall Street bailouts that Forbes loves? No more trillions for the Pentagon, for weapons makers, and for endless wars?
Forbes is full of shit. Next, Think Progress jumps into the fray, but it too is full of shit. I won’t go into it, because this post is already long.
Why can’t these morons stop bullshitting?