In the column of 25-Nov-95 you wrote:
“Cecil on occasion hears from some genius who thinks he’s come up with the solution to the national debt: print enough money to pay the whole thing off!”
Isn’t it true that the Treasury, in issuing public debt, is in effect, if not literally, “printing money?” If the public buys $100 billion of goods from China and China in return buys $100 billion in Treasury notes, there is now in the world the original $100 billion cash, the original $100 billion in goods, and $100 billion of negotiable Treasury notes. It’s like magic.
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Yes the US in this case is printing money, and by issuing the bonds to cover the economic value of that new currency the dollar retains its value. The Fed agrees to buy back those bonds for face value plus interest in whatever negotiable currency required. In short the US is backing this newly printed currency by the contributions of bond purchasers, who are betting that in the near future the US is going to pay off those loans (who’s rates are usually favorable enough to draw the finances required to fund the currency inflation).
Basically the US hasn’t shorted investors with its Treasury Bills since its inception (when it sold those bills to finance the Revolutionary War) which gives the US 200+ years of good credit on the international stage. It is based on this credit that the US can afford to continue selling bonds to finance its currency publication (when necessary) which it then buys back (paying off the bonds) to curb inflation when too many of those bills fly about.
The net result of this is the National Debt, the wealth owed others for printing this much money (which is necessary to guarantee the amount of liquid capital required to lube the US economy) which in itself is a reliable domestic investment vehicle and ironically the savior of 20th century capitalism.
John Q Public had $100 billion. China had 10 million tons of tea. John exchanged his money for China’s tea. China now has 100 billion dollars. China uses this to buy 100 billion dollars worth of T-notes from the US government, figuring that when they mature they’ll be worth 110 billion dollars.
So the tea went from China to John. The money went from John to China to the US. And the US borrowed 100 billion dollars from China with the promise to pay it back with 10 billion dollars interest.
No, it’s borrowing money. There are three primary definitions of the money supply, and none of them include government bonds. The fact that the United States Treasury sells a bond, in and of itself, does not increase the money supply.
It’s like magic any time anybody borrows–you, me, General Motors, or the United States government. But again, the bonds (or IOU’s or promissory notes or what have you) that the borrower issues aren’t considered money, unless the borrower is offering checking privileges against fractional reserves–which the United States Treasury doesn’t.