The Myth of the Connection Between Public Federal Debt and Government Spending
Executive Summary
- It is common to assert that the US government must go into debt to fund deficits.
- This is ludicrous and illustrates a lack of understanding of the government’s ability to create money.
Introduction
The myth of how the government funds itself with debt provided in the following quotation.
“You’re not likely to be shocked to learn that the United States government doesn’t have enough dough on hand to pay its bills. Taxes just can’t cover their various obligations, and simply printing the money would lead to out of control inflation. It has to borrow the money to pay for national defense, payroll, not to mention the interest payments on its trillions in existing debt. By buying a treasury-issued bond, you could become one of the scores of lenders literally keeping the government’s lights on.”
Source: Wealth Simple
https://www.wealthsimple.com/en-us/learn/government-bonds
That is false.
First, the US government does not “need” to issue debt. It issues debt because that is the arrangement between the Treasury and the private banking controlled Federal Reserve. Obviously, the government creates money. So why would it need to borrow it? The US government also does not cover obligations with taxes. The following quote explained what really happens with taxes and spending.
“Government fiat money necessarily means that federal spending need not be based on revenue. The federal government has no more money at its disposal when the federal budget is in surplus, than when the budget is in deficit. Total federal expense is whatever the federal government chooses it to be. There is no inherent financial limit. The amount of federal spending, taxing and borrowing influence inflation, interest rates, capital formation, and other real economic phenomena, but the amount of money available to the federal government is independent of tax revenues and independent of federal debt. Consequently, the concept of a federal trust fund under a fiat monetary system is an anachronism. The government is no more able to spend money when there is a trust fund than when no such fund exists.”
Source: Mosler Economics
An Unending Stream of False Information on This Topic
A large number of institutions have websites and publications that provide false information to the public and policymakers about the “dangers” of public deficits and debt. These include the Heritage Foundation and the CATO Institute. The following quote is a perfect example of the information contained in these types of articles.
“Governments collect revenue and issue debt to fund public expenditures. Over the long run, revenues will need to be raised, or currency devalued, to pay for current debt issuance. Therefore, issuing debt to pay for current expenditures is a tax on either future taxpayers or those saving money to spend in the future.”
Source: Heritage Foundation
This is also entirely false and the Heritage either does not know or is pretending not to know that the government issues its own currency. Secondly, the federal government does not use tax receipts to pay for anything. Taxes are a way of reducing the buying power of the citizens. As the government wants o also spend, if it did not remove “excess” buying power from the citizens, the currency would inflate. What Heritage leaves out entirely is that the only reason the federal government has to issue debt, is because it gave up its right to create money to a private bank called the Federal Reserve. A government that controls its own central bank has no need for debt. The fact that tax revenues are not used to pay for anything is explained by Warren Mosler who points out that the IRS and the Treasury barely talk to each other. The IRS’s job is to collect “revenue.” However, nothing is done with the money after collected. It is just a debit on the tax payer’s bank account and a credit on the federal government’s bank account.