Money Myth 4: We are leaving a debt burden to our children.

FACT: The accumulation of saved government money in the economy is not debt in any sense of the word. It is not a burden now nor will it be in the future. 

The real debt we leave to our children is the state of the environment and the nation's resources they inherit from us, along with the lack of investments we could and should have made in their future. It is never about the record of government money on an accounting ledger.

First, let's address the fear of the national "debt". I put "debt" in quotations because it is the wrong word to describe what is really the accumulation of all the injections of new government money into the economy over time. When the government sells bonds it is in order to give savers an opportunity to earn interest on the money the government has already spent; it is not seeking to borrow money from the private sector to fund future spending.

The so-called national debt is, in fact, better described as our national savings - or perhaps the government's net investment in the economy!

Think about why saying "debt" is terribly misleading:

• Those we consider in debt must earn income to pay off their obligations. But sovereign currency-issuing nations simply issue new money when they spend and they have no need for "income". (Remember that taxes are not "income" to such a government - they simply remove previously issued government money from the economy.)
• The so-called "national debt" is denominated in the unit of money that only the government can issue. How can the government "owe" Dollars when it can produce them at will? Why would it every need to borrow it's own IOUs that it can issue without limit? You begin to see that this term makes no sense.
• And what about the interest? What if interest rates rise and the interest on the debt gets really big? Won't our children have to pay more in taxes to fund it? No.
• To make interest payments on the "debt" the Central Bank simply credits bank accounts with new money. 
• No taxes are needed, no matter how big the number is. (This interest is basically a hand-out or "transfer payment" to savers from the government).
• And besides, the interest rate is set by the Central Bank - we will never be forced to pay high interest rates by the financial markets or other nations unless we choose to for reasons of our choosing.  

So why do we use these terms like "debt" and why do some nations default and get into financial trouble? Couldn't what happened with Greece or Argentina happen to the US? 

In terms of why some nations get in trouble, it is usually because they have given up complete sovereignty by either becoming a currency user (like Greece with the Euro) or, if they are a currency issuer, they have pegged their currency to another currency (or gold) in a fixed exchange rate or borrowed significant sums from other nations in a currency they don't issue (as many nations have done to the US Dollar). These situations don'y apply to currency-issuers with floating exchange rates like the US, UK, China, Japan, Canada, etc.

So where did this fear of the national debt come from? Basically, it is a left-over from when we were under the gold standard. Until 1971, the US had also given up currency sovereignty and we haven't figured out yet that everything has changed since then. The old shackles of gold are gone and the currency system works entirely differently than it did then.  

• With a gold standard and a system of fixed exchange rates with other nations, we had given up complete sovereignty over the ability to issue our currencies in our national interest. We had foolishly promised to convert our currency (which we can produce at will) to gold (which we could not produce at will) upon demand.
• What this meant is that each nation was restricted in how much money they could issue by the amount of their gold reserves, and how much they could borrow from other nations. 
• By selling long term bonds, that money would be tied up in the bond until maturity and so the threat of having it converted to gold was gone for the term of the bond.
• If we issued too much money, other nations would prefer gold to buying our bonds and so we would have to either give up gold reserves or pay higher interest rates. 
• Under this system, national debt really was debt. Interest rates really could rise based on the bond markets. Nations really could be forced to default on their debt or abandon the gold standard.
• This is exactly what happened to the US government leading up to 1971 where the costs of fighting the Vietnam War meant the US began to lose large amounts of its gold reserves as nations demanded redemption of their US Dollar reserves in gold. 
• President Nixon chose to abandon the gold standard and floated the exchange rate. The US because a sovereign currency-issuer, but we never updated our terminology to reflect the new reality, and so here we are almost five decades later worrying about threats that don't exist.

As stated previously, our so-called "debt" is simply an interest-paying account at the Federal Reserve. It can be "paid off" in a moment if we ever wanted to; we would simply convert all the Treasury Bonds (these are like term deposit acocunts at the Fed) to bank reserves (these are like bank demand deposit accounts at the Fed). All this would do is fill our banking system with a lot of extra reserves which would make the short term interest rate drop to zero. This basically happened during the Fed's Quantitative Easing (bond buying) program. 

If we stopped selling government bonds pension funds would have no risk-free assets that earn interest, our trading partners would not earn interest on the money they collect when they sell us goods, and there would be other ramifications throughout the financial sector since these bonds are used as collateral to secure other transactions between counter-parties all over the world. There is certainly room for legitimate debate regarding the purpose of government bond sales in a post-gold standard world, but it has nothing to do with our children's future or our nation's solvency. 

The only promise we have made to holders of debt is that we will give them US dollars in exchange for their Treasuries. I.e. we promise to give them a Dollar for the Dollar they now have. To do so, the Fed simply changes their "savings account" (Treasury) to a "checking account" (Reserves) and the "debt" is gone. No tax increases are needed. No debt ceiling panic. It is perfectly natural that as our economy grows, our population grows, and our prosperity increases that the accumulation of government money being saved in the economy will increase. And that is all the "national debt" really is - the amount of money we've collectively saved (both domestically and abroad) after all private debt is accounted for.

It is foolish and tragic that we use terms like "debt", "deficits", "going bankrupt", "running out of money" to scare our elderly and young into thinking our nation is accumulating some kind of massive burden on taxpayers. Beyond folly, it is also irresponsible and destructive as it paralyzes us from doing the very things that will ensure a great future for our children.

There is a real debt we are leaving to our children: it is a debt of the worst kind unless we quickly engage the power of our national currency to get back to investing in all the real things needed for life and prosperity. The reason why we left the gold standard and why we have a sovereign currency is so that we can always afford to invest and fund what is important for the good of our people. 

• Are we leaving many with an education deficit or are we ensuring that everyone has access to a complete education and the development of skills necessary for tomorrow's work? That's a burden children can't easily recover from and can continue for generations.  
• Are we leaving our children with clean air and water or will they be forced to clean up a polluted world? That's a real burden no one should have to bear. 
• What about the quality of nutritious food and the quality of agricultural soils and water supplies? Will we leave our children with a burden to restore the environment or will we leave them a healthier environment than the one we inherited from our parents?
• Are we investing in the energy sources that will provide sustainable, affordable and clean energy or will we burden future generations with ever more scarce, costly, and polluting energy supplies? 
• Are we investing in the kind of state-of-the-art infrastructure in communications, medical care, transportation, livable cities, water and sewer systems, and all the other investments that will ensure our grand children have a great quality of life, or are we falling behind on new technologies and letting our vital national infrastructure falls into disrepair out of an irrational fear of government money? 
• Are we giving everyone who wants to work an opportunity to better their skills and have the dignity of earning a good days work to provide for themselves and their loved ones or are we leaving millions left out of the economy and to suffer the indignity of a life on welfare and the host of social challenges that brings? 
• Are we deploying every smart mind and funding the science laboratories and research & development centers they need to invent the next medical or technological breakthrough that will help more people live better, or are we de-funding and closing these facilities and sending the brightest minds to other countries or to find regular jobs and society misses out on these breakthroughs for another generation or two?

These are the real debts we leave our children and grandchildren, and unfortunately, the burden is mounting every day. 

• Our infrastructure alone is now a $3.6 trillion (2013 estimate)  "debt" to the next generation. 
• We have a student loan "debt" burden of over $1 trillion and growing, while creating a disincentive or outright financial barrier to become educated.
• We burden businesses and consumers with the cost of health care while still not making sure it is available and affordable to all, and the costs keep rising. 

What are we thinking? Do we lack people willing to work or the materials necessary to do construction? Do we lack the ability to issue money to pay them? Can we not afford education or health care without taxing businesses and burdening the working class? Of course not - the constraint is in our minds. We're still stuck in the 1970s!

What should be of much greater concern to all of us, conservative or liberal or anything in between, is whether we are using our monetary system to better our children's lives and their future. 

It's time we elect representatives who understand how to use the people's currency for the public good. It's time both parties are held accountable to ensure the government continually adds sufficient money into the economy to keep it at full employment while investing heavily in our future prosperity.