# Can the NATIONAL DEBT be demystified?

#### Lumpenproletariat

##### Veteran Member
I need an answer to this question:

How is the principal on the National Debt paid back? (not the interest)

What am I missing?

Doesn't the PRINCIPAL have to be paid back just as the INTEREST is?

Every year the current interest is paid back and is stated in the Federal Budget Pie Chart. Simple.

But doesn't the PRINCIPAL also have to be paid back, every year? I.e., the current principal due to the lenders? Why isn't there also a place in the Federal Budget pie chart indicating payback of the current principal due to the bondholders?

Why is it so easy to find where the money comes from to pay the current interest, but there's nothing to show how the PRINCIPAL is paid? i.e., where the money comes from? Isn't the current principal paid also, to the lenders, just as the interest is?

(Does the above image show? not sure if these show on all screens -- someone advise me if it's a blank.)

Maybe there's a "roll over" of some kind, where the new lending replaces or pays back for the previous lending. And yet, all the new borrowing/lending, or the current federal deficit, is used to pay for the current federal budget, not to pay back principal due to the lenders from years earlier.

So, what am I missing? I can remember as a kid cashing in a $25 bond, given to me by my grandma, and I was paid not only the interest, but the entire principal + interest =$25.00. Those bondholders are paid back not just interest (which is shown in the pie chart), but also the principal. So, where is this payback shown somewhere, and where does the money come from? For the interest payment the money comes from the current total government revenues (tax revenue + new borrowed money). So, where does the money come from to pay the principal which must also be due and must be paid in order to not default to the individual bondholder?

I am very annoyed at the difficulty of finding an answer to this question. It's so easy to explain how the interest is paid, and paying the interest is a common topic. Yet paying back the principal is never discussed anywhere. It's as though somehow it's not ever paid, and is just out there, in Limbo, as an eternal debt that is never paid back. And yet that doesn't make sense.

What is the explanation for this?

I asked this question once at the Reddit site. The first response was from some expert who supposedly understood everything, and he rattled off a barrage of national debt talking-point facts. But when I responded and asked specifically how the PRINCIPAL is paid back, he disappeared.

I know that the total national debt -- now around 25 trillion -- is not all the annual deficits going back to 1776, all added up and totaling 25 trillion. No, most of that past borrowed money has been paid back, to the lenders. It's not true that the lenders all the way back to the beginning have never been repaid. That's ridiculous. Somehow most of them were paid back. So, where did the money come from? Why is this not shown in the pie chart like the interest payment is?

#### skepticalbip

##### Contributor
The principle is constantly being paid back and new debt constantly assumed. The debt is like the amount that someone that does not know how to handle money constantly carries on their charge card. They are constantly paying back the balance plus interest but borrowing more to keep the balance close to the limit.

Example:
Buy a treasury bill and the treasury has taken on the debt. You have lent them the purchase value of the bill. When you redeem the bill, the treasury has repaid that debt plus the interest. But in the meantime others and/or yourself are buying new treasury bills so lending the treasury money. The cycle continues.

#### Lumpenproletariat

##### Veteran Member
The principle is constantly being paid back and new debt constantly assumed.

Isn't that also true about the interest (constantly being paid)? which is shown in the pie chart? The new debt being assumed is paid out for the current budget items, including interest due. But how is it going to pay back previous principal due? What am I not seeing?

The debt is like the amount that someone that does not know how to handle money constantly carries on their charge card. They are constantly paying back the balance plus interest but borrowing more to keep the balance close to the limit.

Example:
Buy a treasury bill and the treasury has taken on the debt. You have lent them the purchase value of the bill. When you redeem the bill, the treasury has repaid that debt plus the interest.

But has repaid it from where? Is it paid out of current total revenue (tax revenue + borrowing)? The interest is paid from current total revenue, and is shown in the pie chart. Why isn't the payment of principal to the lenders also shown in the pie chart?

But in the meantime others and/or yourself are buying new treasury bills so lending the treasury money. The cycle continues.

But in the case of the cycle of paying the interest, we see where the money comes from to pay that interest -- i.e., from the current total revenue (tax + borrowing). We see in the pie chart that the interest is paid from this current total revenue along with all the other budget items. So why isn't the payment of PRINCIPAL also shown in the pie chart? Is it actually there in the pie chart somewhere and I can't see it? It's a much larger figure than the interest payment.

Thanks for responding. Do you see what I'm missing? I'm assuming both interest and principal are paid to lenders, with no essential difference between the two. For both there has to be a source where it comes from.

Is there a fundamental difference between paying back the principal and paying the interest to the lenders? I'm not seeing it.

#### skepticalbip

##### Contributor
You are asking what the creator of that pi chart means? I don't even know if the creator knew what he was doing. I would assume that what the treasury means by payments "servicing the debt" would be analogous to the payment someone makes on their credit card debt (interest + a percentage of the debt) and, for the treasury, it comes from the government's source of income, primarily taxes and borrowing with some printing of fiat currency (inflation).

ETA:
Venezuela went heavy on printing fiat currency (the tax base had been destroyed, their oil industry failing, and they couldn't borrow) causing run-away inflation making the Bolivar almost worthless.

#### Lumpenproletariat

##### Veteran Member
You are asking what the creator of that pi chart means? I don't even know if the creator knew what he was doing. I would assume that what the treasury means by payments "servicing the debt" would be analogous to the payment someone makes on their credit card debt (interest + a percentage of the debt) and, for the treasury, it comes from the government's source of income, primarily taxes and borrowing with some printing of fiat currency (inflation).

If it's (partly) from taxes and borrowing, it should be shown in the pie chart, like the interest payment is shown, as part of the federal budget.

So your answer in effect is that it's some kind of money creation like simple "printing" of currency. I.e., the same as printing bills like the Germans did in the 1920s, and this is the source of money to pay back the principal?

I thought they didn't do this (not since Lincoln in the 1860s). I thought they just ran up some debt (owed to the lenders) and then repaid it + interest, though always borrowing still more so there's always net debt continuing, but still paying it when due, and continually owing more which is due later -- so still any part of it gets paid back to the lenders when it's due, paid from new debt or new tax revenue, without "printing" it. BUT, then there needs to be a source from which to make the payments -- and there is no such source? there's only "printing" of money somehow?

So you're saying there's no source except to just "print" it as needed, like the Germans paid their debt in the 1920s. I thought that had been rejected (in advanced countries) as a way to pay for anything. I hope that's not the explanation. I hope they are not simply "printing" money like running the printing presses to pay however many billions or trillions are currently needed. I think almost everyone assumes that's not how they do it.

ETA:
Venezuela went heavy on printing fiat currency (the tax base had been destroyed, their oil industry failing, and they couldn't borrow) causing run-away inflation making the Bolivar almost worthless.

That's why hopefully this is not how the U.S. repays the principal.

I think somehow the principal is really paid, without simply "printing" the money. And the total debt increases as more and more is borrowed, but then it has to be paid back later -- and how is that done?

I hope there's an explanation how the principal is paid, so there's no default, and yet not by "printing" it the way the Germans did in the 1920s.

It can't be from tax revenue and new borrowing, because in that case it would be shown in the pie chart. Those pie charts cannot just be someone's fantasy. I assume they're reliable, showing what percent of the budget goes to each category of spending.

#### skepticalbip

##### Contributor
You are asking what the creator of that pi chart means? I don't even know if the creator knew what he was doing. I would assume that what the treasury means by payments "servicing the debt" would be analogous to the payment someone makes on their credit card debt (interest + a percentage of the debt) and, for the treasury, it comes from the government's source of income, primarily taxes and borrowing with some printing of fiat currency (inflation).

If it's (partly) from taxes and borrowing, it should be shown in the pie chart, like the interest payment is shown, as part of the federal budget.

So your answer in effect is that it's some kind of money creation like simple "printing" of currency. I.e., the same as printing bills like the Germans did in the 1920s, and this is the source of money to pay back the principal?

I thought they didn't do this (not since Lincoln in the 1860s). I thought they just ran up some debt (owed to the lenders) and then repaid it + interest, though always borrowing still more so there's always net debt continuing, but still paying it when due, and continually owing more which is due later -- so still any part of it gets paid back to the lenders when it's due, paid from new debt or new tax revenue, without "printing" it. BUT, then there needs to be a source from which to make the payments -- and there is no such source? there's only "printing" of money somehow?

So you're saying there's no source except to just "print" it as needed, like the Germans paid their debt in the 1920s. I thought that had been rejected (in advanced countries) as a way to pay for anything. I hope that's not the explanation. I hope they are not simply "printing" money like running the printing presses to pay however many billions or trillions are currently needed. I think almost everyone assumes that's not how they do it.

ETA:
Venezuela went heavy on printing fiat currency (the tax base had been destroyed, their oil industry failing, and they couldn't borrow) causing run-away inflation making the Bolivar almost worthless.

That's why hopefully this is not how the U.S. repays the principal.

I think somehow the principal is really paid, without simply "printing" the money. And the total debt increases as more and more is borrowed, but then it has to be paid back later -- and how is that done?

I hope there's an explanation how the principal is paid, so there's no default, and yet not by "printing" it the way the Germans did in the 1920s.

It can't be from tax revenue and new borrowing, because in that case it would be shown in the pie chart. Those pie charts cannot just be someone's fantasy. I assume they're reliable, showing what percent of the budget goes to each category of spending.

You seem rely entirely too much on the pi chart to understand, and seem to assume that it is absolutely correct and fully explains federal finances.

The overwhelming percentage of "debt service" is from taxes and borrowing. The Fed works to keep inflation below 3% so that, in no way, could be a significant part of "debt service".

And you are wrong about the U.S not printing fiat currency since Lincoln. The U.S. went off the silver standard during Kennedy's administration so the value of the currency is now only backed by "faith" in the U.S. During the Eisenhower administration we were on the silver standard and the currency was backed by precious metal... During that time a 3% inflation rate would have freaked out financial markets.

#### Lumpenproletariat

##### Veteran Member
No "principal"?

I have just been told that there is no principal paid to the bondholders. Is that correct? That changes everything.

But then how is a treasury bill profitable? All you get is 1 or 2 or 3% annual interest over many years? Does it keep going as far into the future as you want to keep just getting the interest? It could take 20 or 30 years to get back the "principal" then? Why wouldn't a cd account be more profitable?

So that's all the "national debt" is? Just paying back the interest on those bonds which never "mature" but just pay back a small % of interest every year?

Is that all it is?

So, where does that $1000 come from? It's not shown in the pie chart, so it's not paid from the total revenue (tax revenue + new debt). So where does it come from? [my emphasis] Or, could it be that it is part of that "interest on the debt" section of the budget? in which case that "interest on the debt" label is incorrect? I've been assuming that "interest" means literally "interest" and not anything else. But if it's both interest AND principal, then that "interest on the debt" part of the budget is mostly principal rather than interest, and it's mislabeled. That "principal" does have to be paid out of some source, does it not? You are correct: Nobody writes "interest" to denote "interest plus principal." Two questions for you before proceeding: (1) You write "It's not shown in the pie chart, so it's not paid from the total revenue (tax revenue + new debt)." Please link to your pie chart. No, I do NOT want the "revenue pie chart"; I want to see the pie-chart YOU refer to that is labeled "total revenue (tax revenue + new debt)." OK, I'm not using the "pie chart" as a source for anything, except that it's supposed to show the entire budget, which has typically been 4 to 5 trillion in recent years. I.e., it shows all the spending, which almost always exceeds the tax revenue. So the "pie chart" shows where all the spending goes -- right? And every year this spending exceeds the tax revenue. Except about 1997-2000 we had some balanced budget years, so in those years the spending, shown in the chart, was about the same as the tax revenue, so no deficit. But the spending, which all has to be paid from something, is all shown in that chart. It's paid from the tax revenue + the new debt = bonds sold, and that new debt is PRINCIPAL, or extra revenue available to be spent, which has to repaid later along with interest added and also to be paid later. That interest is shown in the pie chart, or is part of the spending. The reason that sector of the chart is shown is that it's something paid, as part of the budget. However, there is no PRINCIPAL on the debt shown anywhere in the chart, meaning that principal is NOT paid from the total revenue, because everything shown there is the current budget which is paid from the total revenue, which has to be tax revenue + new debt. Right? The tax revenue alone does not pay the whole budget, because of the deficit. So the rest has to be paid from the new debt -- right? The total spending has to come from the tax revenue plus the new debt (deficit). (Of course a surplus year could mean there's some new issuing of bonds which might then go toward paying a future deficit or something -- that's a minor detail. There's hardly ever any surplus.) (2) What is your REAL question? Are you thinking of buying such bonds? Are you interested in accounting details? Or are you trying to understand the big picture of government finance? Only the latter, especially the nature of the debt per se -- the principal and interest. I'm missing something if the principal (from earlier debt) is actually paid, separately, in addition to interest which is paid, and yet it's not part of the total spending (budget) as shown in the pie chart. Where is it paid from? All the charts say the same: they divide the budget up into categories -- and most of them show the "interest" category (or they combine that with another category, but it's always there). But there's never any "principal paid on the debt" category. I don't believe any theory saying that the charts are meaningless or contradict each other, someone makes it up or they're fiction, etc. I assume they're generally correct. It's standard for the "interest" section to be shown (or included in a section shown), and yet no "principal on the debt" is ever shown. I want the explanation for this (where is the principal paid from?). So far I can only assume that the principal is not paid separately but is somehow part of the "interest on debt" shown. Maybe this "interest" section of the chart really refers to much more than the 2 or 3% interest. Or perhaps there's spending not shown as part of the budget. But why would that be? If "interest" on debt is included as part of the budget, why wouldn't "principal" also be included? Are they not paid from the same source? Doesn't the principal (from earlier debt) have to be repaid from the same sources as the interest is paid from? i.e., from total revenue for that year, which is the tax revenue + new debt? Again: You see the gray "interest" section on the right. So "interest" paid is part of the budget, or the total spending. But there's never any "principal on the debt" section shown. Doesn't the total spending shown have to equal the total revenue (tax revenue + new debt)? Or here are several other pie charts: https://www.google.com/search?q=fed...VTKH0KHa3SDk4Q_AUoAXoECBwQAw&biw=1222&bih=756 #### Swammerdami ##### Squadron Leader Staff member Hi, Lumpenproletariat. What you are missing — although part of your answer shows that you are aware of it — is that NEITHER borrowing NOR repayment of principal is shown on the pie charts. Let's work through an example. Suppose that in one year the government redeems$3 of bonds, pays $1 in interest, and spends$11 in other ways. Total of out-going money = $3 +$1 + $11 =$15 . . . . BUT ONLY $12 appears on the Spending Pie-chart. (Bond redemption is not shown.) In the same year suppose the government receives$9 in tax revenue and borrows $6. Total of in-coming money =$9 + $6 =$15 . . . . BUT ONLY $9 appears on the Revenue chart. (Borrowing is not shown.) In this example year, government paid$1 in interest, $3 in principal payments, and received$6 from new borrowing BUT ONLY the $1 interest appears on the pie-charts. In this example total debt increased by$6 - $3 =$3. Does this make sense?

I tried to say the same thing earlier ...
The answer is very simple, I think. If you look at the total Spending (pie-chart) and subtract the total Revenue (pie-chart), the difference, if positive, is the increase in government debt. If the government repaid more principal than its additional borrowing then this difference would be negative. So you can determine the number you seek that way.

You see the same thing on business income sheets or Form 1040. Interest paid or received may be an expense or income, but changes in principal go unmentioned.

It may seem odd — interest and principal payments have similar character — but that's the way it is. (With effort I think you can Google up details of Treasury debt issues and retirements if you really need them.)
... but perhaps it will be clearer with the arithmetical example.

OK, I'm not using the "pie chart" as a source for anything, except that it's supposed to show the entire budget, which has typically been 4 to 5 trillion in recent years. I.e., it shows all the spending, which almost always exceeds the tax revenue. So the "pie chart" shows where all the spending goes -- right?

And every year this spending exceeds the tax revenue. Except about 1997-2000 we had some balanced budget years, so in those years the spending, shown in the chart, was about the same as the tax revenue, so no deficit.

This is correct EXCEPT that bond redemptions (i.e. principal payments) are NOT included as "Spending."
So (spending minus revenue) = change in debt.

Look at the chart at the bottom left of this pdf report from the U.S. Treasury, and see a chart "Marketable issues vs Marketable redemptions." Look at FY2018. You will see that there was a bit less than $10 trillion in "marketable issues" and a bit less than$9 trillion in "marketable redemptions." So debt increased by $1 trillion that year. The$10T in issues does NOT appear as revenue. The $9T in redemptions does NOT appear as spending. The only trace left on those pie-charts is the increase in debt ($1T) which manifests as Total_Spending Minus Total_Revenue.

(Note, by the way, that in an alternate universe where Principal payments WERE included on the "Spending Pie-Chart" that piece of the pie would totally dwarf all the other pie pieces put together!)

This is the same answer I and others have already given in the thread. Tell me my patience has been rewarded!

One important caution. If I borrow $1 for a week (interest-free to keep it simple), and repay it every Friday by borrowing another$1, my total debt will be exactly $1 at any point. BUT accounting will show me with 52 weekly loans in the year, so$52 of debt issuance and $52 in redemptions for that 52-week year! Bear that effect in mind when you look at the totals for "GAS" debt or you will gasp in horror! #### Lumpenproletariat ##### Veteran Member What you are missing — although part of your answer shows that you are aware of it — is that NEITHER borrowing NOR repayment of principal is shown on the pie charts. Let's work through an example. Suppose that in one year the government redeems$3 of bonds, pays $1 in interest, and spends$11 in other ways. Total of out-going money = $3 +$1 + $11 =$15 . . . . BUT ONLY $12 appears on the Spending Pie-chart. (Bond redemption is not shown.) In the same year suppose the government receives$9 in tax revenue and borrows $6. Total of in-coming money =$9 + $6 =$15 . . . . BUT ONLY $9 appears on the Revenue chart. (Borrowing is not shown.) In this example year, government paid$1 in interest, $3 in principal payments, and received$6 from new borrowing BUT ONLY the $1 interest appears on the pie-charts. In this example total debt increased by$6 - $3 =$3. Does this make sense?

I tried to say the same thing earlier ...
The answer is very simple, I think. If you look at the total Spending (pie-chart) and subtract the total Revenue (pie-chart), the difference, if positive, is the increase in government debt. If the government repaid more principal than its additional borrowing then this difference would be negative. So you can determine the number you seek that way.

You see the same thing on business income sheets or Form 1040. Interest paid or received may be an expense or income, but changes in principal go unmentioned.

It may seem odd — interest and principal payments have similar character — but that's the way it is.

(With effort I think you can Google up details of Treasury debt issues and retirements if you really need them.)
... but perhaps it will be clearer with the arithmetical example.

. . .

Look at the chart at the bottom left of this pdf report from the U.S. Treasury, and see a chart "Marketable issues vs Marketable redemptions." Look at FY2018. You will see that there was a bit less than $10 trillion in "marketable issues" and a bit less than$9 trillion in "marketable redemptions." So debt increased by $1 trillion that year. The$10T in issues does NOT appear as revenue. The $9T in redemptions does NOT appear as spending. The only trace left on those pie-charts is the increase in debt ($1T) which manifests as Total_Spending Minus Total_Revenue.

(Note, by the way, that in an alternate universe where Principal payments WERE included on the "Spending Pie-Chart" that piece of the pie would totally dwarf all the other pie pieces put together!)

This is the same answer I and others have already given in the thread. Tell me my patience has been rewarded!

You're a good sport.

One important caution. If I borrow $1 for a week (interest-free to keep it simple), and repay it every Friday by borrowing another$1, my total debt will be exactly $1 at any point. BUT accounting will show me with 52 weekly loans in the year, so$52 of debt issuance and $52 in redemptions for that 52-week year! Bear that effect in mind when you look at the totals for "GAS" debt or you will gasp in horror! OK, you have answered how the "principal" is repaid later -- i.e., it's from the new debt which will similarly be repaid later by still further new debt, and so on, until eventually, in 10 or 100 or 1000 years from now, someone has to get shafted. These annual repayments now are in the range of 10 trillion, each year -- give or take. 10 trillion goes out, replaced by another 10 trillion (hopefully) coming in. And the interest is paid from current tax revenue, like the rest of the budget items. But what about the annual budget deficit? Where is that paid from? Is that also paid from the new debt, like the redemptions (repayments of principal) are? I.e., if the budget is hypothetically 5 trillion (paying for military, health, welfare, etc.) and the tax revenue is only 4 trillion, is that extra 1 trillion also paid from the new debt being issued? Do they have to issue an extra 1 trillion to pay the deficit, which they otherwise would not do? I have more to ask later, if you want to keep at it. But I first want to be certain on the above points. #### Swammerdami ##### Squadron Leader Staff member But what about the annual budget deficit? Where is that paid from? Is that also paid from the new debt, like the redemptions (repayments of principal) are? Yes. The ($10 trillion minus $9 trillion) in the 2018 example WAS the budget deficit that year. #### Wiploc ##### Veteran Member But what about the annual budget deficit? Where is that paid from? Is that also paid from the new debt, like the redemptions (repayments of principal) are? The United States has its own fiat currency. So a deficit doesn't necessarily have to be "paid" from anywhere. To smooth out the business cycle, we're supposed to run deficits during recessions and surpluses during booms. We like a little inflation, so those shouldn't cancel each other out; our surpluses should be smaller than our deficits. A deficit that is "paid for" by borrowing wouldn't be able to do the job of softening a recession. So, sometimes, and to some extent, deficits don't get "paid for." #### Lumpenproletariat ##### Veteran Member But what about the annual budget deficit? Where is that paid from? Is that also paid from the new debt, like the redemptions (repayments of principal) are? The United States has its own fiat currency. So a deficit doesn't necessarily have to be "paid" from anywhere. Why not? Swammer above just said the deficit was paid, from the new debt, or new bond issues. At least for 2018: But what about the annual budget deficit? Where is that paid from? Is that also paid from the new debt, like the redemptions (repayments of principal) are? Yes. The ($10 trillion minus $9 trillion) in the 2018 example WAS the budget deficit that year. Meaning that budget / all those budget items were paid for with enough new debt money to cover the deficit, or the amount not covered by tax revenue. Isn't this true every year, for every deficit? Isn't it always covered completely by new debt money? The term "fiat" doesn't change that, does it? Doesn't it come from issuing new bonds, regardless whether someone calls it "fiat" money? And presumably that debt is repaid, every dollar of principal and interest, to the bondholders. And if it's paid, then it has to be paid FROM somewhere. There has to be some source from which it's paid. Which has to be more debt -- right? And all the budget items are paid for with something, though the tax revenue is less than the total budget. So how is that extra trillion or half-trillion $$deficit paid? Isn't it from the new debt issued / new bonds = latest debt increase? There seems to be a suggestion that some of the budget, or the debt is paid by "printing" dollars, essentially the same as running the presses to print bills, like the Germans did in the 1920s, and this is called "fiat" money which is not debt money. But isn't that false? Isn't it the case that the last time the U.S. issued money that way was in the 1860s, in a very rare case to fund the Civil War, when Lincoln rejected the demands of banks which demanded too much interest? Hasn't all other war funding since then been done by BORROWING the money, rather than "printing" it? And except for war debt, isn't it the case that there was no deficit until 1931? even if you call it "fiat" money, wasn't it all paid for by taxes or by borrowing (for war)? and since 1931 we've been running the repeated annual deficits virtually every year? To smooth out the business cycle, we're supposed to run deficits during recessions and surpluses during booms. But that's 90% myth, isn't it? We've had many "boom" years but NO SURPLUSES (or virtually none) since 1931. In the late '90s we had a few balanced budgets but virtually no real surpluses. When did the U.S. have "surpluses during booms" except before 1930? Hasn't it really been deficits during both recessions and booms? We like a little inflation, so those shouldn't cancel each other out; our surpluses should be smaller than our deficits. How about ZERO surpluses -- is that small enough? Even before 2020 we had several trillion-dollar deficits, give or take, but what surpluses have we had? Virtually none. We've had some huge deficits vs. some modest deficits vs. a few rare balanced budgets. We need to stop kidding ourselves that deficits are partly offset by surplus years. More than 50 years ago there were 3 or 4 modest surplus years, but otherwise surplus years are non-existent, despite several "boom" periods. So, sometimes, and to some extent, deficits don't get "paid for." What does that mean? that welfare and military etc. were not paid what the published budget says they were paid? They were all sliced down 10% lower, as needed to eliminate the deficit? No, the whole budget is always paid, from somewhere. Assuming Swammerdami is correct, all the debt is paid when due, and all the budget funding not paid by tax revenue was paid by new debt (except in the 1860s when some of the budget was paid for by "printed" money not borrowed -- (and maybe earlier also?)). Is there any exception to this? So in summary it seems the following are the basic facts about the debt: Currently the debt money is increased about 10 trillion$$$ per year, but is repaid by a similar amount (maybe a trillion less) each year, so the net debt increases in the range of a trillion or so each year -- though just now it's increasing faster than this because of the pandemic.

Increasing debt is used to pay the annual deficits, which have to be paid -- not by "printing" money but by borrowing only.

And even though the Fed plays various games, it's not correct to say that it "prints" money like Lincoln did for a short time in the 1860s. Whatever it does to create more money, it's always by some new form of debt increase, which all must be repaid from still more debt in later years which has to keep increasing in perpetuity.

Is that correct? Is any of that not accurate? Is any of it exaggerated, or distorted?

#### Swammerdami

##### Squadron Leader
Staff member
The definition of "fiat money" is somewhat ambiguous, so I won't take sides in that subdebate. Here are my comments:
The United States has its own fiat currency. So a deficit doesn't necessarily have to be "paid" from anywhere.

The U.S. has central-bank money, slightly different from fiat currency historically. The Treasury mints fiat coins; but it borrows paper and digital money in the debt market. It is the FedRes which issues money, backed by member bank cash(*) on deposit, very high quality debt paper or even, in tiny amount, the precious metal. (* - bank cash is itself FedRes money, so there is recursion there: FedRes money is backed by FedRes money.) Forcing the government to borrow money, even if it's just fiat money, is thought to be preferable to simply printing unbacked money, which would tend to cause inflation.

But today, "MMT" is a fait accompli; the FedRes is openly bragging about buying, not only unlimited amounts of Treasury debt, but even commercial debt of investment(?) grade! So yes, if one government entity buys up any excess Treasury debt, planning to let it roll over in perpetuity, the American dollar is equivalent to fiat currency.

To smooth out the business cycle, we're supposed to run deficits during recessions and surpluses during booms. We like a little inflation, so those shouldn't cancel each other out; our surpluses should be smaller than our deficits.
Yes, Clinton and the Democrats famously balanced the budget in the 1990's and even took the account into surplus. It turned out not to help: When the GOP came to power, they started a costly war and made deep tax cuts — with a purpose to use up the Clinton surplus and thereby serve a Starve the Beast agenda. But yes, throughout 19th and 20th centuries, U.S. federal debt was contained. Recall that the greenbacks Lincoln issued during the Civil War were eventually redeemed (for gold) at 100 cents on the dollar.

The 21st century is a different matter. With the Rs deliberately increasing the debt — hoping to stifle public investment — Ds cannot invest without also running high deficits. It's almost a game of chicken. Many other countries are also increasing debt rapidly, especially during this pandemic.

A deficit that is "paid for" by borrowing wouldn't be able to do the job of softening a recession. So, sometimes, and to some extent, deficits don't get "paid for."
Ideally the net debt should grow at a rate no higher than the economic growth rate, but that is a lost cause. So one is led to wonder: Will MMT continue to "work" over the coming decades? Some investors are concerned about the long-term future of central-bank ("fiat") currencies and are diversifying into Bit-coin and precious metals.

So what will the future bring? Shouldn't investors be demanding higher interest on long-term bonds? The U.S. government generally defers to Wall St., and banks want a strong dollar, so in the short term expect the dollar to be propped up. Longer term? Who knows.

#### Wiploc

##### Veteran Member
Originally Posted by Wiploc

Originally Posted by Lumpenproletariat

But what about the annual budget deficit? Where is that paid from? Is that also paid from the new debt, like the redemptions (repayments of principal) are?
The United States has its own fiat currency. So a deficit doesn't necessarily have to be "paid" from anywhere.
Why not?

A very strange question. One that suggests our viewpoints may be so different as to preclude communication. Nonetheless:

Suppose you have ten dollars. You take in nine more, and spend ten. So now you have nine where you had ten before. How did you "pay for" that extra dollar that you spent?

I keep putting it in quotes because I don't really understand it. You gave the dollar to the man who sells hot dogs. So how do you pay for it? You handed him the dollar. You paid the dollar for a hotdog. Why should you now have to pay for the dollar that you just paid?

It's very weird.

But I assume this is a linguistic thing, terminological, and that what you're asking is something like, how do you enter the transaction in your books?

You credit cash on hand. That "pays for" the dollar you spent.

If you didn't actually have the dollar, but instead had to borrow it from Jane? Then you credit your debt to Jane.

But that's because you don't have fiat money. You actually have to get your dollars from somewhere; you can't just make them up.

Swammer above just said the deficit was paid, from the new debt, or new bond issues. ...

Which is why I spoke up.

But what about the annual budget deficit? Where is that paid from? Is that also paid from the new debt, like the redemptions (repayments of principal) are?
Yes. The ($10 trillion minus$9 trillion) in the 2018 example WAS the budget deficit that year.
Meaning that budget / all those budget items were paid for with enough new debt money to cover the deficit, or the amount not covered by tax revenue.

Isn't this true every year, for every deficit?

No.

It's more complex than this, but assume that inflation is caused by, and is proportional to, the amount by which government outspends its revenue. If we borrowed enough to make up that difference, there wouldn't be inflation.

Government spending causes inflation. Taxation (etcetera) causes deflation. So long as taxes and spending are balanced, we don't get either inflation or deflation.

And yet, as you point out, we almost always get inflation. The implication is that we almost always spend a little more than we bring in.

Borrowing money has the same anti-inflationary effect at taxing it. So, if we borrowed enough to cover all of our spending, we wouldn't have inflation. And we do have inflation.

That's a good thing; we like a little inflation. My point is that we have it, almost always. Which means that, as a general rule, we spend more than we bring in from taxation and borrowing.

Let me stress, again, that the situation is more nuanced than this, complicated by, the business cycle, transaction speeds, confidence in the government, expectations about inflation, economic growth, fluctuations in the money supply, Brownian motion, extraordinary delusions and the madness of crowds, and doubtless other things I don't know about. But the underlying principle remains.

Isn't it always covered completely by new debt money?

No.

The term "fiat" doesn't change that, does it?

Yes. If our money was backed by gold (or whatever) then, over the long term, we couldn't spend more than we brought in.

Doesn't it come from issuing new bonds, regardless whether someone calls it "fiat" money?

Most, maybe, but not all.

And presumably that debt is repaid, every dollar of principal and interest, to the bondholders.

Money is fungible, but there's a sense in which we never paid off our debt from World War II. And we never will. Instead, we just inflated it down to where it's negligible.

And if it's paid, then it has to be paid FROM somewhere. There has to be some source from which it's paid. Which has to be more debt -- right?

It doesn't have to be, no. It usually is, of course. If we just paid off our debt by printing money, then money would become nearly worthless.

But, no, it doesn't have to be. And usually a bit of it isn't. Thus a persistent inflation.

And all the budget items are paid for with something, though the tax revenue is less than the total budget. So how is that extra trillion or half-trillion $$deficit paid? Isn't it from the new debt issued / new bonds = latest debt increase? Mostly, yes, but not all. There seems to be a suggestion that some of the budget, or the debt is paid by "printing" dollars, essentially the same as running the presses to print bills, like the Germans did in the 1920s, and this is called "fiat" money which is not debt money. But isn't that false? We exercise restraint, so we don't get runaway inflation. But we prudently arrange to have a little inflation. Isn't it the case that the last time the U.S. issued money that way was in the 1860s, in a very rare case to fund the Civil War, when Lincoln rejected the demands of banks which demanded too much interest? I assume that spending a little more than we bring in is usual. Hence inflation. To smooth out the business cycle, we're supposed to run deficits during recessions and surpluses during booms. But that's 90% myth, isn't it? We've had many "boom" years but NO SURPLUSES (or virtually none) since 1931. In the late '90s we had a few balanced budgets but virtually no real surpluses. When did the U.S. have "surpluses during booms" except before 1930? Hasn't it really been deficits during both recessions and booms? I don't think it's at all a myth. We're supposed to run surpluses in good times. The fact that we don't do what we're supposed to in no way suggests that we aren't supposed to do it. We like a little inflation, so those shouldn't cancel each other out; our surpluses should be smaller than our deficits. How about ZERO surpluses -- is that small enough? Too small. Even before 2020 we had several trillion-dollar deficits, give or take, but what surpluses have we had? Virtually none. And you're okay with that? We've had some huge deficits vs. some modest deficits vs. a few rare balanced budgets. We need to stop kidding ourselves that deficits are partly offset by surplus years. More than 50 years ago there were 3 or 4 modest surplus years, but otherwise surplus years are non-existent, despite several "boom" periods. "I smoke twenty packs a day and it hasn't hurt me yet. You need to stop kidding yourself about smoking being harmful." So, sometimes, and to some extent, deficits don't get "paid for." What does that mean? that welfare and military etc. were not paid what the published budget says they were paid? They were all sliced down 10% lower, as needed to eliminate the deficit? No, the whole budget is always paid, from somewhere. Whatever you say. Assuming Swammerdami is correct, all the debt is paid when due, and all the budget funding not paid by tax revenue was paid by new debt (except in the 1860s when some of the budget was paid for by "printed" money not borrowed -- (and maybe earlier also?)). Is there any exception to this? If we stipulated that you were totally right as a matter of history, that would still leave the obvious possibility that next year, or some other year, the deficit would not be exactly offset by borrowing. So in summary it seems the following are the basic facts about the debt: Currently the debt money is increased about 10 trillion$$$per year, but is repaid by a similar amount (maybe a trillion less) each year, so the net debt increases in the range of a trillion or so each year -- though just now it's increasing faster than this because of the pandemic. Increasing debt is used to pay the annual deficits, which have to be paid -- not by "printing" money but by borrowing only. If you said that that's how we do it in practice, I'd be skeptical, but I'd grant the possibility. But, since you say it has to be paid in that manner, you're just wrong. And even though the Fed plays various games, it's not correct to say that it "prints" money like Lincoln did for a short time in the 1860s. Whatever it does to create more money, it's always by some new form of debt increase, which all must be repaid from still more debt in later years which has to keep increasing in perpetuity. Is that correct? Is any of that not accurate? Is any of it exaggerated, or distorted? I think you overstate your case. #### Swammerdami ##### Squadron Leader Staff member Two issues are being conflated: The mechanics of government debt, and the possible effect of that debt on inflation. Lumpenproletariat has asked about the mechanics. As for inflation, whatever the future holds, inflation is very low right now and has been since 1991, the last year that U.S. annual inflation exceeded 4%. A large majority of economists agree that low inflation is BETTER than zero inflation or, worse, deflation. The FedRes sets 2.0% inflation as a deliberate target, and since 1992, inflation (as measured by CPI) has averaged less than 2.3%. Some economists now advocate a slightly higher inflation target, 3% or 4%. Inflation has averaged 3.5% since the election of FDR. Yes, over a century 3.5% inflation will compound and "destroy almost 97% of the dollar" — this is a frequent meme among the gold bugs on YouTube but it is gibberish. 2% inflation is GOOD. 3% or 4% inflation might be even better in present-day financial conditions. The danger is much higher inflation possible in the future and NOT inflation at present levels. Finally, whether you choose to call our central-bank money "fiat" money or not, the simple fact is that, with the exception of coins and postage stamps, the U.S. government (excepting FedRes) does NOT create currency; it BORROWS what it needs. Increasingly, because of QE ("Quantitative Easing"), that debt paper is purchased by FedRes with money it creates but let us do not confuse that fact with the question of mechanics OP asks about. Thanks in advance! #### Wiploc ##### Veteran Member Two stipulations: 1. Mr. Swammerdami knows much more about economics than I do. 2. I know nothing at all about the question asked in the OP. - Now, to the other matter: F=MA. Force equals mass times acceleration. That's a thing. Energy equals mass times the speed of light squared. That's a thing. Those are equations. They work. They are laws. But if we say that expenditures equal revenue plus borrowing, that's not a law. It can be true, but it doesn't have to be. If it is true, it may be coincidence. Or it may be done deliberately. But there is no law of economics or accounting that makes it always true. And sometimes it is not true. If Mr. Swammerdami tells me I'm wrong about this, I'll have to take that under advisement. Until then, I believe I'm clarifying where he appeared to misspeak. #### Swammerdami ##### Squadron Leader Staff member ... Mr. Swammerdami ... But if we say that expenditures equal revenue plus borrowing, that's not a law. It can be true, but it doesn't have to be. If it is true, it may be coincidence. Or it may be done deliberately. But there is no law of economics or accounting that makes it always true. And sometimes it is not true. Please just call me Swammi Expenditures PLUS savings equal revenue plus borrowing, but government savings, depending on definition, are very small. And details matter: Do we wish to combine SocSec with the rest of Government or treat it as a separate entity? Federal government's financial statements DO show coin seigniorage BTW; it is a very tiny amount which, I think, is subtracted from borrowing. The question remains: Is there a significant amount of government expenditure not covered by revenues or borrowing? Assuming money the Treasury owes to FedRes is considered "real debt" — — then I don't think so. #### Wiploc ##### Veteran Member Is there a significant amount of government expenditure not covered by revenues or borrowing? Assuming money the Treasury owes to FedRes is considered "real debt" — — then I don't think so. But there could be, right? The reason that expenditures PLUS savings roughly equal revenue plus borrowing, is because that is our current practice. We do that on purpose, by choice. We don't have to keep those balanced. We do it because we have restraint, and because we like the results. Do I have that right, Swammi? #### Wiploc ##### Veteran Member #### laughing dog ##### Contributor It appears that the OP author is under the impression that when bonds come due, the holders are paid from current revenues. When the federal government runs a budget surplus, that is what is done. When the federal gov't runs a budget deficit, the debt that comes due is refinanced and the holders of the debt coming due are paid from the refinancing. Since the refinancing is not an adding to the level of the debt, it is not shown as additional revenue. This link - https://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm - is a useful source. For historical data on US debt, etc...m, https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm is a good source. #### Lumpenproletariat ##### Veteran Member So U.S. debt is paid from additional debt (future lenders) -- Right? Or past debt is paid by current lenders. The United States has its own fiat currency. So a deficit doesn't necessarily have to be "paid" from anywhere. Why not? A very strange question. . . . Nonetheless: Suppose you have ten dollars. "have" it from where? You mean simply that you have, or the government has, money that it borrowed earlier. Which now it can spend. Right? You take in nine more, and spend ten. So now you have nine where you had ten before. How did you "pay for" that extra dollar that you spent? No, there was no "pay for" in the question. The question was where it was paid FROM. You said it's not paid "from" anywhere. I keep putting it in quotes because I don't really understand it. You gave the dollar to the man who sells hot dogs. So how do you pay for it? You handed him the dollar. You paid the dollar for a hotdog. Why should you now have to pay for the dollar that you just paid?It's very weird. No, the dollar had to come "from" somewhere. If he was asked where he got that dollar, the answer might be that he earned it somewhere, or that he stole it, or borrowed it, etc. What's wrong with asking where the dollar came "from"? or where the guy paid it "from"? He must have had some source of the money he's paying. We can't ask what the source is? What's "weird" about asking for the source "from" which the dollar was paid? or from what "source" the government pays the budget which exceeds the tax revenue? The simple answer seems to be that the deficit is paid out of borrowed money, maybe borrowed earlier. But I assume this is a linguistic thing, terminological, and that what you're asking is something like, how do you enter the transaction in your books? You credit cash on hand. That "pays for" the dollar you spent. No, it's not about how to record the transaction. It's about where the money came "from" -- the guy buying the hot dog either earned it earlier, or stole it, or borrowed it, etc. That's the answer. If you didn't actually have the dollar, but instead had to borrow it from Jane? Then you credit your debt to Jane. No, in that case the answer is that it was borrowed from Jane. It's not about recording the transaction. What's wrong with just saying it was borrowed from someone earlier? But that's because you don't have fiat money. You actually have to get your dollars from somewhere; you can't just make them up. It doesn't matter whether it's called "fiat" or some other term. Even if you "make them up" that has to mean you ran a printing press or in some other way produced the money to pay it to someone. So even if you "make them up" the question still is reasonable: where did those dollars come from? The answer might be "we made them up" or "we printed them on our copier" etc. If that's it, then just say so. That's also a source for the money. Swammer above just said the deficit was paid, from the new debt, or new bond issues. ... Which is why I spoke up. Are you saying Pope Swammi is wrong? Are you saying some of the deficit is paid by means of "printing" new money rather than from additional debt? like Germany "printed" bills in the 1920s? basically the same because it's not borrowed? Is it widely recognized by those knowledgeable that some of the deficit is paid this way, without new borrowing but just by "printing" money like Germany did? None of the debt is paid by working to produce future value, as (most/some) private debt is. It's reasonable to ask why some debt should not be paid by future work to produce value, instead of only by borrowing more in the future. This is a legitimate question to raise. So then isn't it the case that most of the budget deficits/debt is repaid from debt money, such as future debt, or issuing new bonds to be repaid later, or maybe in some sense from past borrowed money? So virtually all U.S. debt comes from lenders who understand that the payment to them of principal and interest is dependent on still more debt, or still more money from borrowers, or additional debt. So, the money borrowed from A will be paid back to A by other money borrowed from B, while B will be paid back from money borrowed from C, or even from A again. In any case, virtually all the debt is paid out of some other debt money, earlier or later. The debt payback to the bondholders is from still more borrowing or debt. Like borrowing from John and assuring him that he will be paid back from money borrowed from Mary, and telling Mary that the money borrowed from her will be paid out of the money borrowed from John. So now you have that money -- we're richer by thousands we got from Mary and John, and both of them will get full payment of their principal and interest -- the money is fungible, so it doesn't matter if some other borrowing is also necessary. All the lenders will get their principal repayment and interest from still other lenders from somewhere. But also a small part comes from "printing" new money, perhaps, like Germany printing bills in the 1920s, but if so that's only a tiny fraction of the debt repayment. But what about the annual budget deficit? Where is that paid from? Is that also paid from the new debt, like the redemptions (repayments of principal) are? Yes. The ($10 trillion minus $9 trillion) in the 2018 example WAS the budget deficit that year. Meaning that budget / all those budget items were paid for with enough new debt money to cover the deficit, or the amount not covered by tax revenue. Isn't this true every year, for every deficit? No. What new debt is not paid from future debt? Only a tiny fraction, perhaps, which is "printed money" such as Germany in the 1920s. The only other way it can happen is if the government runs a surplus, which it basically never does. It's more complex than this, but assume that inflation is caused by, and is proportional to, the amount by which government outspends its revenue. If we borrowed enough to make up that difference, there wouldn't be inflation. So you assume there is a tiny amount of inflation due to German-style "printing money" as in the 1920s. But even so this is only a tiny fraction, so is negligible. And there's no reason to believe this is any significant cause of the U.S. inflation rate. You can't show a causal connection between these. Government spending causes inflation. Taxation (etcetera) causes deflation. So long as taxes and spending are balanced, we don't get either inflation or deflation. We do get other inflation or deflation unrelated to government spending and taxing. But this doesn't address the point that virtually all new debt is paid by future debt. (Maybe ALL, 100%, but even if it's only 99%, the point is still the same.) And yet, as you point out, we almost always get inflation. The implication is that we almost always spend a little more than we bring in. No, you seem to think ONLY government spending/taxing causes inflation. But there are other causes. Borrowing money has the same anti-inflationary effect as taxing it. So, if we borrowed enough to cover all of our spending, we wouldn't have inflation. And we do have inflation. But from other causes than government spending. That's a good thing; we like a little inflation. My point is that we have it, almost always. Which means that, as a general rule, we spend more than we bring in from taxation and borrowing. Do you know that for a fact, or is this just your speculation? i.e., that some "printing" of money is done to partly pay the deficit? You haven't said how you know this. Let me stress, again, that the situation is more nuanced than this, complicated by, the business cycle, transaction speeds, confidence in the government, expectations about inflation, economic growth, fluctuations in the money supply, Brownian motion, extraordinary delusions and the madness of crowds, and doubtless other things I don't know about. But the underlying principle remains. Regardless of the inflation due to "printing money" to pay some of the debt (or reduce it) -- even if it's true, the point is that payment of the U.S. debt (or annual deficits) is basically from new debt issued in order to pay off earlier debt. There is reason to question the wisdom of relying totally on future debt to pay for the present debts, and expecting future lenders to always want to keep buying the bonds, knowing that there is no source for the future repayment other than future borrowing or future issuing of more bonds like the ones they're buying now. All the lenders are relying on future lenders for their payback, and this is all that the debt is based upon. Unlike all the U.S. debt prior to the 1930s which was mostly paid back by future tax revenue, in a period when annual deficits were the exception and budget surpluses were the rule. This is not changed by your speculation that a tiny fraction of the deficit might be paid by "printing" money instead of borrowing it. Isn't it always covered completely by new debt money? No. But virtually always? Yes. That "printed money" you're speculating about is only a tiny fraction, probably less than 1%, if there's any at all. It's only your speculation that we're relying on "printed money" like Germany did in the 1920s. This is dubious. But even so it's only a tiny fraction at best. The term "fiat" doesn't change that, does it? Yes. If our money was backed by gold (or whatever) then, over the long term, we couldn't spend more than we brought in. This has nothing to do with whether anything is "backed by gold." Virtually all our debt is being paid from still more debt, regardless of "fiat" jargon or "backed by" jargon. The way to not pay with future debt is to run a balanced budget. Or, to at least reduce the deficits/debt, by borrowing less, rather than borrowing 10% or more of the budget as we are doing now. Small amounts of ongoing debt might be accepted as standard, such as 1 or 2% of the total budget being paid by debt rather than current tax revenue. One might make a case for that. But no one is explaining the benefit of financing 5% or 10% of the budget, as the norm, by debt, always to be repaid by more future debt. Doesn't it come from issuing new bonds, regardless whether someone calls it "fiat" money? Most, maybe, but not all. The point is that it's paid from borrowed money, from earlier or new borrowing, from issuing bonds. So, how is the debt repaid to the lenders? From additional borrowing. It's like applying for a loan, to buy a house or whatever, and when the lender asks if you can repay it, your answer is that it's no problem because you'll borrow more money to pay for this money you're borrowing now. And those new loans to pay for this loan will also be repaid from still future borrowing. Or, to this you want to add: "But we're also going to 'print money' to pay for some of it. So don't worry, we've got you covered. We can pay it from future borrowing and from 'printing' new money for whatever small part isn't covered. So rest easy about getting repaid. It's no problem." Is that not how the deficits are paid? or how the lenders paying for the current budget will themselves get paid? through future borrowing, just like we're borrowing from them now? How is this not an accurate description of how the federal deficits are paid? And presumably that debt is repaid, every dollar of principal and interest, to the bondholders. Money is fungible, but there's a sense in which we never paid off our debt from World War II. No, it was totally paid to those lenders back then. They all were paid principal and interest. To pay a debt means to pay the lenders, not that you get totally out of debt. And most debts are paid by working to earn more money to pay the debt, while some is paid by taking out future debt to repay the previous lenders. But there is a limit to how much the deficit can be repaid by future debt without doing damage to the economy, just as private debt usually is not secured by just promising to borrow more in the future to repay the current lenders. It is more healthy for the economy if a major part of the debt is paid for by doing work to create value, rather than total reliance on future borrowing to repay the earlier borrowing. Much/most of our war debt before WW2 was paid back by doing work to create new value rather than with additional debt. But now it's all paid from additional debt -- old debt repaid out of more recent debt, to be repaid out of future debt. And we never will. Instead, we just inflated it down to where it's negligible. No, 10 trillion  per year, or thereabouts, is not negligible. The necessity to borrow another 9 or 10 trillion every year, in order to pay the previous lenders, is not something you can dismiss as "negligible." And if it's paid, then it has to be paid FROM somewhere. There has to be some source from which it's paid. Which has to be more debt -- right? It doesn't have to be, no. It usually is, of course. If we just paid off our debt by printing money, then money would become nearly worthless. But, no, it doesn't have to be. And usually a bit of it isn't. You're just saying a small part of the debt repayments are from "printing money" like Germany did in the 1920s. But that's what is "negligible," if it's true. It doesn't change the fact that the debt is repaid basically from additional debt -- more trillions of debt repeatedly needed in order to repay the earlier trillions. Thus a persistent inflation. Meaning money is "printed" like Germany did in the 1920s. But it's small. It's "printed" in order to pay some of the budget deficit, or it's "printed" in order that the deficit can be smaller. So maybe the high inflation of the 1970s was due to "printing money" during those years in order to pay the budget, such as paying the Viet Nam war cost? Is it agreed that there was more "printing" money in the 1970s to pay costs, and this caused the higher inflation? You're not telling us where you're getting this. There are other causes of inflation than only the government spending. And all the budget items are paid for with something, though the tax revenue is less than the total budget. So how is that extra trillion or half-trillion $$deficit paid? Isn't it from the new debt issued / new bonds = latest debt increase? Mostly, yes, but not all. So "printing money" like Germany in the 1920s is one way to pay the deficits (but only a tiny fraction, so this is of no significance to explaining how the debt is repaid). There seems to be a suggestion that some of the budget, or the debt is paid by "printing" dollars, essentially the same as running the presses to print bills, like the Germans did in the 1920s, and this is called "fiat" money which is not debt money. But isn't that false? We exercise restraint, so we don't get runaway inflation. But we prudently arrange to have a little inflation. Again you're saying money is "printed" in order to pay some of the debt, like Germany did in the 1920s. The only difference is that it's a small amount. Does everyone agree that we're doing this? Or is this a secret which even some experts are not supposed to know? or which they know but are supposed to deny? How do you know any of the debt is paid this way? Isn't it the case that the last time the U.S. issued money that way was in the 1860s, in a very rare case to fund the Civil War, when Lincoln rejected the demands of banks which demanded too much interest? I assume that spending a little more than we bring in is usual. Hence inflation. I.e., "printing" money to pay some of the cost, rather than borrowing. But you're not saying how you know this. This is probably not the cause of U.S. inflation, as you seem to think. To smooth out the business cycle, we're supposed to run deficits during recessions and surpluses during booms. But that's 90% myth, isn't it? We've had many "boom" years but NO SURPLUSES (or virtually none) since 1931. In the late '90s we had a few balanced budgets but virtually no real surpluses. When did the U.S. have "surpluses during booms" except before 1930? Hasn't it really been deficits during both recessions and booms? I don't think it's at all a myth. We're supposed to run surpluses in good times. The fact that we don't do what we're supposed to in no way suggests that we aren't supposed to do it. So, by running constant deficits and no surpluses, we're going against what we're "supposed" to do? So you're judging that we're not "supposed" to be doing this? In other words, it's wrong to be doing this? Constantly running high deficits and virtually no surpluses leads to bad results which wouldn't happen if we did what was right instead, which is why we're not "supposed" to be doing it, and we're paying a price for it, or will pay a price for it some day, in your judgment. We like a little inflation, so those shouldn't cancel each other out; our surpluses should be smaller than our deficits. How about ZERO surpluses -- is that small enough? Too small. So again you are condemning the large constant deficits and virtually no surpluses because this is doing net damage (now or in the future), in your judgment. Even before 2020 we had several trillion-dollar deficits, give or take, but what surpluses have we had? Virtually none. And you're okay with that? Again you're judging that these chronic deficits are doing long-term net harm, for which a price is being paid, or will be paid, and we'll be sorry we did this. We've had some huge deficits vs. some modest deficits vs. a few rare balanced budgets. We need to stop kidding ourselves that deficits are partly offset by surplus years. More than 50 years ago there were 3 or 4 modest surplus years, but otherwise surplus years are non-existent, despite several "boom" periods. "I smoke twenty packs a day and it hasn't hurt me yet. You need to stop kidding yourself about smoking being harmful." Didn't you say we're "supposed" to do differently than this? Why do you judge that we're "supposed" to do other than this if this is not harmful? You said: . . . we're supposed to run deficits during recessions and surpluses during booms. And you said this "supposed to" isn't a myth: I don't think it's at all a myth. We're supposed to run surpluses in good times. The fact that we don't do what we're supposed to in no way suggests that we aren't supposed to do it. So you're judging that we're not supposed to do this, but why are we "not supposed" to do it if it's not harmful or wrong or bad? Which is it? If it's not harmful or bad or wrong, then how can it be that we're "not supposed" to do it? So, sometimes, and to some extent, deficits don't get "paid for." What does that mean? that welfare and military etc. were not paid what the published budget says they were paid? They were all sliced down 10% lower, as needed to eliminate the deficit? No, the whole budget is always paid, from somewhere. Whatever you say. So you're saying some of it is not paid? Which items of the budget were not paid for? Did they cut funding for military or health care or EPA or food stamps etc. in order to reduce the budget down to the level of the tax revenue? Which year was that? Assuming Swammerdami is correct, all the debt is paid when due, and all the budget funding not paid by tax revenue was paid by new debt (except in the 1860s when some of the budget was paid for by "printed" money not borrowed -- (and maybe earlier also?)). Is there any exception to this? If we stipulated that you were totally right as a matter of history, that would still leave the obvious possibility that next year, or some other year, the deficit would not be exactly offset by borrowing. Again you're speculating that a tiny % is paid from money "printed" as Germany did in the 1920s. Even so the point is that virtually all the debt has been repaid from still further debt, rather than from "printing" money to cover the difference. So in summary it seems the following are the basic facts about the debt: Currently the debt money is increased about 10 trillion$$$ per year, but is repaid by a similar amount (maybe a trillion less) each year, so the net debt increases in the range of a trillion or so each year -- though just now it's increasing faster than this because of the pandemic.

Increasing debt is used to pay the annual deficits, which have to be paid -- not by "printing" money but by borrowing only.

If you said that that's how we do it in practice, I'd be skeptical, but I'd grant the possibility. But, since you say it has to be paid in that manner, you're just wrong.

But you're just quibbling over a tiny percent which you speculate is provided by "printing" money as Germany did in the 1920s. Which probably isn't happening, but is irrelevant anyway because the amount would be negligible.

And even though the Fed plays various games, it's not correct to say that it "prints" money like Lincoln did for a short time in the 1860s. Whatever it does to create more money, it's always by some new form of debt increase, which all must be repaid from still more debt in later years which has to keep increasing in perpetuity.

Is that correct? Is any of that not accurate? Is any of it exaggerated, or distorted?

I think you overstate your case.

I'm making allowance that your speculation about "printing" money could be true, though there doesn't seem to be any proof of it. But even so it's still the case that virtually all the debt is paid by means of still more debt. So new lenders are assured of being repaid by the promise of still more borrowing from future lenders, who in turn will be paid by still more borrowing, more future lenders, on and on into perpetuity. With no assurance that any new wealth will be created, nothing new invested into future benefit from which to pay the interest or repay the principal -- only promises of repeated future borrowing, like a drug addiction which has to keep being reinforced with ongoing doses continually without end. Or a stock market speculator who keeps borrowing more in order to buy more and more.

What part of this is an overstatement?

#### Swammerdami

##### Squadron Leader
Staff member
Lumpen, you keep asking the same question over and over. I'll repeat the answer one more time.

When the federal government spends $1 trillion more than it takes in from taxes, its debt increases by$1 trillion. (Don't listen to confusers; listen to me! ) Strictly speaking it borrows, say $10 trillion, to redeem$9 trillion maturing debt while getting an extra $1 trillion for its deficit spending. If the government spends$1 Trillion LESS than it takes in from taxes, it might borrow only $8 trillion, again redeeming$9 trillion in old debt. (However 1998-2001 was the last time U.S.G. was in surplus, and that surplus was quickly spent on Bush's Iraq adventure.)

Are we clear so far? Can we move on?

The United States has issued various kinds of money over the years — if you're an oldster you may recall when most dollar bills were labeled "Silver Certificate" and could be redeemed for silver at more than face value. But since 1971 the only legal-tender banknotes printed in the U.S. are "Federal Reserve Notes." (If you stumble on a 55-year old silver certificate, it will have some numismatic value, but the U.S. Treasury will no longer redeem it for silver.)

The best way to understand the details of money creation in the United States is to ignore that most of the Fed Reserve Board is appointed by the President (with Senate consent) and to treat the FedRes as an independent bank. Pretend you don't know that the FedRes is heavily regulated, and donates its profits to the U.S. Treasury. (There's an example of U.S.G. revenue that doesn't come from taxes, but that, and the profits due to coin seigniorage are insignificant for our purpose.)

When the U.S. government spends money it writes a check on its account at a Federal Reserve Bank. AFAIK, those accounts come with no overdraft protection. When Treasury runs out of money in its account, it BORROWS more money by auctioning bonds, notes or bills. It does NOT print its own money (and hasn't since 1971). The money it borrows is digital money created by FedRes and remember that we are treating that Bank as a private bank INDEPENDENT of U.S. government. That "money" largely takes the form of computer records, not paper. Some customers will want paper money (pictures of Benjamin Franklin) to pay their hookers or cocaine dealers, but that is IRRELEVANT.

(In earlier posts, I've touched on "Quantitative Easing" and how that enables the FedRes and Treasury acting in concert to create a form of fiat money, but we'll get back to that after we're sure we understand the foregoing.)

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I'm making allowance that your speculation about "printing" money could be true, though there doesn't seem to be any proof of it. But even so it's still the case that virtually all the debt is paid by means of still more debt. So new lenders are assured of being repaid by the promise of still more borrowing from future lenders, who in turn will be paid by still more borrowing, more future lenders, on and on into perpetuity. With no assurance that any new wealth will be created, nothing new invested into future benefit from which to pay the interest or repay the principal -- only promises of repeated future borrowing, like a drug addiction which has to keep being reinforced with ongoing doses continually without end. Or a stock market speculator who keeps borrowing more in order to buy more and more.

What part of this is an overstatement?

Long-term debt is not of necessity a problem. (In Switzerland, 100-year mortgages are not uncommon.) Creditors will extend credit if they see ability to meet interest payments. In that regard, you are correct! Borrowing for investments that will provide growth (e.g. bridges and highways, education, healthcare) is more likely to be payable in future than borrowed money that's splurged on hookers and blow!

An obvious rule of thumb is: If debt is growing no faster than growth, then it is contained.

U.S. Treasury debt is growing FASTER than economic growth. It IS logical to be concerned. But first let's all agree on the mechanics of debt.

#### Swammerdami

##### Squadron Leader
Staff member
I think we're finally in agreement that the REAL question of the thread is:
Will the mounting federal debt have adverse consequences?
With no assurance that any new wealth will be created, nothing new invested into future benefit from which to pay the interest or repay the principal -- only promises of repeated future borrowing, like a drug addiction which has to keep being reinforced with ongoing doses continually without end. Or a stock market speculator who keeps borrowing more in order to buy more and more.

What part of this is an overstatement?

Long-term debt is not of necessity a problem. (In Switzerland, 100-year mortgages are not uncommon.) Creditors will extend credit if they see ability to meet interest payments. In that regard, you are correct! Borrowing for investments that will provide growth (e.g. bridges and highways, education, healthcare) is more likely to be payable in future than borrowed money that's splurged on hookers and blow!

An obvious rule of thumb is: If debt is growing no faster than growth, then it is contained.

U.S. Treasury debt is growing FASTER than economic growth. It IS logical to be concerned. But first let's all agree on the mechanics of debt.

Fred @ StLouisFed.Org is a great source for graphing financial indicators. Click the link to see 60+ years of interest and inflation rates. It's easy to add (or remove) indicators to this graph.

Three interest rates are shown; by increasing rate these are (Blue) overnight rate among chartered federal banks, (Green) 10-year Treasury yield, (Cyan) 10-year Baa Corporate yield.

Finally, a (Red) line is inflation. Prior to the 2008-2009 credit crisis, inflation was significantly higher than an interest rate only during the Nixon-Carter stagflation of the 1970's. On the chart you can see how this was defeated by taking FedFunds to 19%. That rate is now Zero.

In the lower left of the graph, see a slider icon near '1955'. Slide it up to 2005 or so. See how the (Corporate Minus Treasury) differential got to 5.5% during the 2008-2009 crisis, and to nearly 3% with early Covid fear. I've added a fifth line (Violet) mortgage-backed securities held by FedRes. (This can be considered a form of spending that doesn't show in the Federal spending pie-chart. It rose from zero to $1 Trillion during the Obama recovery, and has gone to$2 Trillion with Covid. Total FedRes balance sheet has increased by \$4 Trillion during Trump Administration.

But so what? The graph may be instructive, but it doesn't predict the future. Many players want to see stable prices and continued business profits; the FedRes will do its best to accommodate them. The euphoria may shatter if some external shock leads to steep price hikes in essential raw materials. There would also be trouble if foreigners lost interest in collecting dollars, but what are they going to ask for instead? Bitcoins?