The U.S. Debt: Misconceptions and Reality
The U.S. government does not have the ability to file for bankruptcy, a concept that often confounds many people when considering the national debt. There is no specific bankruptcy procedure for the federal government, nor is there a supranational authority or court that could oversee and control the government's financial affairs for reorganization or liquidation purposes. It is a common misconception that bodies like the United Nations or the World Bank could oversee such processes.
Government Debt and Financial Stability
While the U.S. has over 21 trillion in debt, it is important to consider the broader economic context. The U.S. GDP stands at 27 trillion, and banks generally consider a mortgage healthy if it equals 4X to 5X the yearly income. This suggests that the U.S. can comfortably manage a debt of over 100 trillion before financial markets become overly concerned. The financial advice often attributed to personalities like Dave Ramsey, which suggests drastic action based on such fears, is often seen as misleading or even harmful.
Universal Credit and Borrowing Power
The U.S. government has the ability to borrow at the lowest interest rates on the international money markets for any maturity period, from overnight loans to long-term bonds. This indicates that the government remains one of the most popular and creditworthy borrowers. In this context, finding reasons to worry about the debt is often a matter of perspective rather than factual necessity.
Political Constraints and Financial Policies
The only true constraint or action that could potentially cause a U.S. default would be political in nature. For instance, the debt ceiling, while seen as a significant issue, is largely a political construct rather than a financial reality. The U.S. government has the constitutional authority to issue dollars and dollar-denominated assets, such as Treasury Bonds, provided it does not borrow in foreign currencies and maintains its currency as non-convertible and free-floating.
Understanding Government Spends and Taxes
Unlike private entities, the U.S. government does not have money in the sense that a household does. Instead, it spends by fiat - political will - to add net dollars to the money supply. Similarly, it taxes and imposes fees and fines to drain money from the money supply. This process is better understood through central banking and monetary operations. The term 'high-powered money' refers to the combination of Treasury deposits (per law) into a bank account and Fed deposits into the bank's reserve account.
When the U.S. government spends, it issues dollars, adding to the money supply as cash and reserves. Taxes act to reverse this process, deleting dollars from a person's current account and moving reserves to the bank's reserve account for settlement. This means that there is no need to 'recycle' taxes, as new dollars and reserves are issued each time the government spends. Therefore, federal taxes are not revenue, and the U.S. government does not need to have an income in the same way as a private entity.