Understanding the Myth of U.S. National Debt: The Dollars, Debts, and Liabilities

In recent years, the U.S. national debt has garnered significant attention. With figures such as a total of 23 trillion in national debt, 75.8 trillion in total debts, and 128 trillion in unfunded liabilities, some financial experts have even claimed the U.S. is insolvent and unsustainable. However, these perceptions are often based on misunderstandings of the true nature of the U.S. economy and its financial system. This article will explore the complexities of the U.S. financial landscape and provide a clearer understanding of national debt, unfunded liabilities, and how they fit into the broader economic context.

The Dichotomy of U.S. National Debt

The key to understanding the U.S. national debt lies in recognizing that it is not merely a matter of borrowing and lending. It is often misguided to think of the U.S. national debt as a straightforward form of borrowing—it is instead a complex system of accounting and value creation.

Where Do Unfunded Liabilities Come From?

Unfunded liabilities refer to the obligations of the government that have not yet been funded by revenues or assets. These can include promises made to future beneficiaries, such as Social Security and Medicare. While these liabilities are substantial, they often stem from legislated programs rather than deficits or borrowing.

It's important to note that a significant portion of the national debt is not the result of borrowing but rather the creation of currency. In the modern monetary system, the government creates money by spending it into existence and taxing it back, thereby creating a form of debt that is not owed to anyone but is used as a measure of total spending.

The True Nature of National Debt

The concept of national debt as it is commonly understood—money borrowed by the government and owed to lenders—does not fully capture the reality of the U.S. economy. In reality, the government's ability to create money means that it does not need to borrow in the same way that private individuals or businesses do. Instead, the money in circulation is a reflection of the total value of government spending.

Let's break it down further. Imagine taking a piece of paper and folding it in half. On one side, write “National Debt,” and on the other, write “Created Money.” Realize that these are two sides of the same coin. For every dollar spent by the government, a dollar of national debt is created. This creates a scenario where the idea of owing this debt becomes somewhat nonsensical, as the U.S. creates the money it spends.

How Does the U.S. Create Money?

The U.S. dollar is created through the process of government spending. Every dollar spent by the government is essentially a promise to accept that dollar in exchange for payment of taxes. This is the cornerstone of how the U.S. creates and circulates money. When the government spends, it creates enough currency to cover the value of the spending, and when taxes are collected, the government reduces the circulation of that money.

Consider this simplified example: If the government were to spend one dollar, it would create a corresponding one dollar in national debt. However, this debt is not owed to anyone but serves as a measure of the total money in circulation. AT the same time, taxes would ensure that the money is re-circulated into the economy, thus "canceling out" the debt in a sense.

Debunking the Misconception

The U.S. government is not insolvent because the dollars it creates are not subject to the same constraints as private debts. The liability of the government is not owed to external parties but is a reflection of the total creation of value by the government.

Some argue that the U.S. needs to cut spending and reduce debt, but the reality is more nuanced. The key issue is not the amount of money created but how it is spent and the programs it supports. The U.S. could reduce its liabilities by reforming social security and Medicare, but this is a matter of public policy, not financial insolvency.

Conclusion

Understanding the nature of the U.S. national debt and unfunded liabilities is crucial for any discussion on fiscal policy. The U.S. does not owe this money in the traditional sense; rather, it is a measure of the value created by government spending. By focusing on the true nature of the financial system, we can better address the challenges facing the U.S. economy and design policies that truly benefit the nation's long-term sustainability.