Can the NATIONAL DEBT be demystified?

[Swammerdami]

Lumpen, you keep asking the same question over and over. I'll repeat the answer one more time.

When the federal government spends $1 trillion more than it takes in from taxes, its debt increases by $1 trillion. (Don't listen to confusers; listen to me! :-) ) Strictly speaking it borrows, say $10 trillion, to redeem $9 trillion maturing debt while getting an extra $1 trillion for its deficit spending.

If the government spends $1 Trillion LESS than it takes in from taxes, it might borrow only $8 trillion, again redeeming $9 trillion in old debt. (However 1998-2001 was the last time U.S.G. was in surplus, and that surplus was quickly spent on Bush's Iraq adventure.)

Are we clear so far? Can we move on?

The United States has issued various kinds of money over the years — if you're an oldster you may recall when most dollar bills were labeled "Silver Certificate" and could be redeemed for silver at more than face value. But since 1971 the only legal-tender banknotes printed in the U.S. are "Federal Reserve Notes." (If you stumble on a 55-year old silver certificate, it will have some numismatic value, but the U.S. Treasury will no longer redeem it for silver.)

The best way to understand the details of money creation in the United States is to ignore that most of the Fed Reserve Board is appointed by the President (with Senate consent) and to treat the FedRes as an independent bank. Pretend you don't know that the FedRes is heavily regulated, and donates its profits to the U.S. Treasury. (There's an example of U.S.G. revenue that doesn't come from taxes, but that, and the profits due to coin seigniorage are insignificant for our purpose.)

When the U.S. government spends money it writes a check on its account at a Federal Reserve Bank. AFAIK, those accounts come with no overdraft protection. When Treasury runs out of money in its account, it BORROWS more money by auctioning bonds, notes or bills. It does NOT print its own money (and hasn't since 1971). The money it borrows is digital money created by FedRes and remember that we are treating that Bank as a private bank INDEPENDENT of U.S. government. That "money" largely takes the form of computer records, not paper. Some customers will want paper money (pictures of Benjamin Franklin) to pay their hookers or cocaine dealers, but that is IRRELEVANT.

(In earlier posts, I've touched on "Quantitative Easing" and how that enables the FedRes and Treasury acting in concert to create a form of fiat money, but we'll get back to that after we're sure we understand the foregoing.)

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I'm making allowance that your speculation about "printing" money could be true, though there doesn't seem to be any proof of it. But even so it's still the case that virtually all the debt is paid by means of still more debt. So new lenders are assured of being repaid by the promise of still more borrowing from future lenders, who in turn will be paid by still more borrowing, more future lenders, on and on into perpetuity. With no assurance that any new wealth will be created, nothing new invested into future benefit from which to pay the interest or repay the principal -- only promises of repeated future borrowing, like a drug addiction which has to keep being reinforced with ongoing doses continually without end. Or a stock market speculator who keeps borrowing more in order to buy more and more.

What part of this is an overstatement?

Long-term debt is not of necessity a problem. (In Switzerland, 100-year mortgages are not uncommon.) Creditors will extend credit if they see ability to meet interest payments. In that regard, you are correct! Borrowing for investments that will provide growth (e.g. bridges and highways, education, healthcare) is more likely to be payable in future than borrowed money that's splurged on hookers and blow!

An obvious rule of thumb is: If debt is growing no faster than growth, then it is contained.

U.S. Treasury debt is growing FASTER than economic growth. It IS logical to be concerned. But first let's all agree on the mechanics of debt.

[Swammerdami]

I think we're finally in agreement that the REAL question of the thread is:
Will the mounting federal debt have adverse consequences?

With no assurance that any new wealth will be created, nothing new invested into future benefit from which to pay the interest or repay the principal -- only promises of repeated future borrowing, like a drug addiction which has to keep being reinforced with ongoing doses continually without end. Or a stock market speculator who keeps borrowing more in order to buy more and more.

What part of this is an overstatement?

Long-term debt is not of necessity a problem. (In Switzerland, 100-year mortgages are not uncommon.) Creditors will extend credit if they see ability to meet interest payments. In that regard, you are correct! Borrowing for investments that will provide growth (e.g. bridges and highways, education, healthcare) is more likely to be payable in future than borrowed money that's splurged on hookers and blow!

An obvious rule of thumb is: If debt is growing no faster than growth, then it is contained.

U.S. Treasury debt is growing FASTER than economic growth. It IS logical to be concerned. But first let's all agree on the mechanics of debt.

Fred @ StLouisFed.Org is a great source for graphing financial indicators. Click the link to see 60+ years of interest and inflation rates. It's easy to add (or remove) indicators to this graph.

Three interest rates are shown; by increasing rate these are (Blue) overnight rate among chartered federal banks, (Green) 10-year Treasury yield, (Cyan) 10-year Baa Corporate yield.

Finally, a (Red) line is inflation. Prior to the 2008-2009 credit crisis, inflation was significantly higher than an interest rate only during the Nixon-Carter stagflation of the 1970's. On the chart you can see how this was defeated by taking FedFunds to 19%. That rate is now Zero.

In the lower left of the graph, see a slider icon near '1955'. Slide it up to 2005 or so. See how the (Corporate Minus Treasury) differential got to 5.5% during the 2008-2009 crisis, and to nearly 3% with early Covid fear. I've added a fifth line (Violet) mortgage-backed securities held by FedRes. (This can be considered a form of spending that doesn't show in the Federal spending pie-chart. It rose from zero to $1 Trillion during the Obama recovery, and has gone to $2 Trillion with Covid. Total FedRes balance sheet has increased by $4 Trillion during Trump Administration.

But so what? The graph may be instructive, but it doesn't predict the future. Many players want to see stable prices and continued business profits; the FedRes will do its best to accommodate them. The euphoria may shatter if some external shock leads to steep price hikes in essential raw materials. There would also be trouble if foreigners lost interest in collecting dollars, but what are they going to ask for instead? Bitcoins?