WHY DOES THE GOVERNMENT BORROW DOLLARS?
It doesn't. It allows interest paying deposits in T-security accounts at the FRB. Why then, does the federal government issue T-securities? It's an obsolete process based on an obsolete law that, very simply says: The total of T-securities issued each year, must equal each year's total federal deficit.
Not that there is any functional relationship between deficits and T-security accounts (There isn't.) It's just that by law the two numbers must be equal. So, for instance, if the federal government spends $10 million and receives only $3 million in taxes, it runs a $7 million deficit, and is required by law to issue $7 million worth of T-securities, though T-securities have no relationship to deficits.
It's almost like having a law stating for every car there also must be a horse -- a meaningless relationship.
Years ago, there was a reason for this strange law, but no more. Change the law, and the government could run that deficit without issuing a single T-security. The dollars in T-security accounts are not used for federal spending. They just sit there, at the FRB, waiting to be paid back.
WHY ARE GREECE AND ILLINOIS GOING BROKE?
The U.S. "debt" is 100% in dollars, our sovereign currency. Being the sovereign creator of dollars (aka Monetarily Sovereign), we never can run short of dollars. So anyone wanting dollars from the FRB, will have no trouble getting them. The U.S. does not spend the dollars it "borrows." Those dollars are kept in T-security accounts at the FRB.
When the U.S. spends, it send instructions to creditors' banks to increase the dollar numbers in those banks. These instructions are cleared by the FRB. This is how the U.S. government creates dollars.
But Greece and Illinois are monetarily non-sovereign. They do not have a sovereign currency. Greece uses euros, which it does not have the power to create. It cannot store borrowed euros in its central bank. Greece needs to spend the euros it receives from borrowing.
Illinois too, uses dollars, but dollars are not its sovereign currency. Like Greece, Illinois has no sovereign currency. It spends the dollars it borrows, rather than being able to store them in a bank account.
BOTTOM LINE
Federal debt is not like non-federal debt. Same word; two different meanings. Federal debt is the total of deposits in T-security accounts at the Federal Reserve Bank. The Federal Reserve Bank has more that $12 trillion in deposits. Many private banks have billions in deposits.
Bank deposits are a sign of strength, not weakness.
Federal "debt" is a myth, promulgated by people whose agenda is to reduce federal spending for the poor and middle classes. Pay no attention to these evil people. Growing federal debt is a sign of strength, not weakness.
Rodger Malcolm Mitchell
Monetary Sovereignty
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