Frank Newman, former Deputy Secretary of the US Treasury, talking about the US national debt. The US national debt is nothing more than the sum of outstanding Treasury bonds. People often think of the national debt as if it were a credit card loan, but this is wrong. The federal budget works nothing like a household budget, and the national debt works nothing like a household debt.
A Treasury security (like a bond, bill, or note) is an asset that an investor can hold to earn interest. It is functionally equivalent to a savings account (specifically a Certificate of Deposit): you give up dollars today, you get them back after a fixed amount of time, plus interest.
And they get created and paid back exactly the way a savings account does at a bank. If you purchase a CD from your bank, the bank debits your checking account, and credits your savings account. When the CD matures, the bank debits this savings account, and credits your checking account. Same with a Treasury security. If you buy one, the government (specifically the Federal Reserve) will debit your bank account, and credit a “securities account” in your name. When the bond matures, the Fed will debit the securities account, and credit your checking account.
It’s true that we need to pay *back* the debt. And we do this, every single day: as bonds mature, the Fed debits the securities accounts, and credits people’s checking accounts. And then, frequently, new bonds are sold to other people, whoever would prefer to hold their savings in bond form rather than deposit form.
What we never need to do is pay *down* the debt, ie to reduce the amount of Treasury bonds in circulation. (This would be accomplished by not issuing new bonds as old ones are paid back) This is simply not necessary, and we have only even done it on a very select few times throughout our nation’s history.
It’s also NEVER necessary to raise taxes based on the size of the debt, so long as we have a floating exchange rate and the debt is only denominated in the currency we issue. Given those circumstances, the ONLY reason we would *need* to raise taxes is to reduce private sector spending in order to control inflation. But if inflation isn’t a worry, then there is no need to raise taxes, no matter how large the debt is, no matter what the interest payments are, etc.
Watch the whole video here: https://vimeo.com/41449585
Read Frank Newman’s book, The Six Myths That Hold Back America: https://www.amazon.com/Myths-that-Hold-Back-America/dp/098398851X
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