What is a US Treasury Bond or Other Government Bond?

ByPrimary Researcher

Executive Summary

  • The phrase is often stated that all money is debt. The answer is that it depends upon whether the central bank is public or private.

Introduction

Federal government bonds are created when a country’s treasury issues what amounts to a savings account, but which is called a “bond.” When there is a private central bank, the treasury and central bank engage in a transaction that places a credit on the account of the central bank and a debit on account of the treasury. The private central bank then sells the “bond” or the savings account with the treasury. This creates another accounting transaction with the buyer’s bank account being debited, and the central bank’s account is credited. The exercise is ridiculous because a government with its own money creation ability does not need to “borrow money” from its citizens or from anyone else for that matter. Even though this process makes little sense, and the government could circumvent the entire process by just paying for goods and services (federal government spending) by creating a crediting those that it business goods and services from and “debiting” (I place the debit in quotations as the government issues currency, so it is not a debit in the normal sense) its own account, this inefficient method of issuing bonds and creating debt (where none is necessary to be created) continues. The bizarre outcome is that the government, following this design, pays interest to issue its own currency. Furthermore, even though private banks can only receive their money creation ability through the government, they can charge interest for this money. However, when the federal government creates money, it must pay interest to do so. It also must compensate bond traders (i.e., federal savings account traders) to purchase the bonds. The bonds go through a bidding process, which is again is entirely unnecessary and is part of the Rube Goldberg machine of federal debt. This ridiculous system where concentrated financial interests parasitize the government’s money-creation function is explained to the public as very good and logical, particularly by those who profit from the system or others that repeat what they are told. When people discuss the interest on the federal debt, this is what they are referring to. It may seem that taxpayers then pay this interest, but it isn’t.

It is unclear then how the federal debt is far less than what is expended by the government.