QUORA: ‘Could someone explain America’s debt system to an idiot? How can we be in debt with ourselves?’

QUORA: ‘Could someone explain America’s debt system to an idiot? How can we be in debt with ourselves?’

I posted this answer:

The term “America’s debt system” is vague. Let’s define the terms. By “America’s debt system” I’ll assume the question refers to government debt. 

Government debt is not being “in debt to ourselves”. The government is a distinct entity in and of itself. There is no “we” and no “ourselves”. When the government takes on debt, it borrows money from lenders who supply the cash in good faith that they will be paid back. The debt (bonds) is held by private pension funds, mutual funds, individuals, and sometimes other governmental entities. These lenders’ financial health depends on the soundness of the debt, known as the “full faith and credit of the United States government.” 

The issue is complicated at the federal level by the fact that the federal government has an institution that can print money, the Federal Reserve. The government can borrow from the Federal Reserve, which then holds the debt in its own account. This creates the illusion that the government owes money to itself. But it’s just that--an illusion--because the Federal Reserve ultimately sells the bonds to investors. So the lender is still a separate agent who expects to be paid back. 

When the government takes on debt, we are not in debt to ourselves. There is a debtor, and there are the creditors. Those who claim otherwise are rationalizing away the moral and legal obligation the government owes to its lenders to honor its promise to pay them back.

Related Reading:

Massive Inflation May Be Coming, Because the US Government Has Cornered Itself into a Fiscal End Game by Antony Davies James R. Harrigan for FEE

 

For years, we have warned that continued deficit spending would paint the Federal Reserve into a corner wherein monetary policy would become a slave to fiscal policy. To avoid government default, confiscatory taxes, government shutdown, or a combination of all three, the Federal Reserve has reached a point wherein it has little choice but to monetize federal deficits. Sooner or later, we will all pay the price in the form of massive inflation.

Bond giant Gundlach blasts ‘failed’ and ‘broken’ Federal Reserve by CHRIS SLOLEY

 

The Federal Reserve is presently acting in blatant non-compliance with the Federal Reserve Act of 1913. An institution violating the rules of its own charter is de facto admitting that said institution has failed and is fundamentally broken.

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central by John Tamny