How I learned to stop worrying and love the national debt

What is the national debt and does it matter? The national debt is the sum of all outstanding US treasury bonds. What is a bond? It is a promise to pay back a certain amount of money at a certain time (you can’t “call in debt” on a bond; payments are made at a non-negotiable time). A bond is also an asset. I can buy bonds and put them in my investment account. For instance, when I buy shares of the fund called TLT, the government owes some of the national debt to me. Citizen savings and national debt are literally the same thing.

The federal government can always pay its debt. There is no “solvency” issue. The national debt is owed in dollars and the federal government has the power to create dollars. It is literally impossible for the federal government to “run out of dollars.” Reddit can not run out of upvotes. Facebook can not run out of “likes.” It is the same thing with the government and dollars. When I buy government bonds, the federal government owes me dollars. It can create them at zero cost to itself.

Spending, taxation, and borrowing are tools. We should use those tools intelligently. Spending satisfies needs like maintaining infrastructure and caring for the elderly. Borrowing (selling bonds) satisfies other needs like a safe place to store currency in the long term. Taxation satisfies another need by keeping inflation manageable. There’s no need for them to match exactly; they can be adjusted independently on their own merits. Federal spending by generating money without an equal tax/bond will not inherently cause inflation.

FRED data here, here, and here

We have bipartisan consensus on this idea that “national debt matters.” It’s one of the few things we seem to agree on, but it’s totally wrong! When the national debt grows, it means citizens are saving their money as bonds. Inflation matters. Taxes matter. Production of goods matters. Choosing to default on debt would matter. The specific number in the “debt” column in the computer? It’s totally irrelevant.

Right now, we are at the most materially productive time in history. That is true in the USA. People think “we don’t make stuff any more.” We do. Manufacturing productivity is higher than it has ever been. Goods shortages are not a realistic concern, but a lack of demand is a huge concern. That’s why printing a bunch of money (quantitative easing) did not result in inflation. We can print more money. We can borrow more money. The issue is synchronization of money production and goods production. That can’t be addressed by “balancing the budget.”

P.S. But what about Weimar Germany? Back before World War 2, Germany had a lot of debt. They tried to print their way out of it. The German currency became worthless. Wouldn’t that happen if the US monetized the National Debt? No! The USA owes dollars, and prints dollars, and is very productive. The Weimar Republic owed gold, but couldn’t print gold (obviously) and its productivity was crippled. Germany tried to print Deutschmarks to buy gold to pay the debt. At the same time, the German economy was almost shut down by massive strikes and civil unrest. There were a lot more Deutschmarks chasing fewer goods (and much less gold). That is a recipe for inflation.