For high school grads only: can you find the flaw in this logic?

The Q & A dialog below is based upon works by: (books are available at all booksellers)

* Frank N. Newman, former Deputy Secretary of the US Treasury, recipient of the Treasury’s annual “Alexander Hamilton” award, author of “Freedom from National Debt” (Two Harbors Press)

* Francis X. Cavanaugh, US Treasury economist for over 30 years, author of “The Truth about the National Debt”: Five Myths and One Reality” (Harvard Business School Press)

*Warren Mosler, economist, author of “Seven Deadly Frauds of Economic Policy” (Oxford U. Press)

*Dr. Stephanie Kelton, Chair of the UMKC Economics Department, at NewEconomicPerspectives.org

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Q1: Is our so-called “national debt” a real debt, an interest-bearing burden that we must repay?

A1: No, It lacks the two essential qualities of a real debt. It’s a “Debt In Name Only”, a “DINO” -

1. A real debt is a serious burden. Our DINO is not now and never will be a serious burden for taxpayers.

Our DINO is the total value of all issued and still maturing treasuries. The buyers of newly-issued treasuries pay for the redemption of mature treasuries. It’s equivalent to a simple bond rollover done every day by bond-owners. In every auction, more treasuries are demanded than are available from the supply of new issues. Auction winners get the safest, most liquid US dollar instruments; the losers are stuck with bank risk. If it were ever necessary, the Fed could even create an artificial demand for treasuries by buying them in the open market with a few keystrokes. Whoever calls our DINO a burden is either as deceived as most US voters or is indeed a very cruel deceiver.

Our Treasury does not borrow money like a home-buyer getting a mortgage. It is rather a custodian of funds, like a bank accepting money offered for certificates of deposit. While a bank with too many bad loans can certainly have too many maturing CDs, our non-lending, fiat Treasury cannot have too many maturing bonds unless its deficit spending is causing harmful inflation. And that happens ONLY in a war or emergency requiring rationing. It NEVER happens during a recession. During prosperity, banks are ALWAYS the sole cause of inflation, creating over $6 of credit for every $1 of deficit spending. To curb inflation, don’t restrict infrastructure spending for the future! Regulate the banks!

The Treasury auctions bonds only because Congress requires that the proceeds finance the annual budget deficit. This requirement, now a relic of the former gold standard regime, was suspended during World War II, followed by 35 years of strong economic growth without harmful inflation. Now, under our fiat currency regime, Congress can again, without “borrowing”, finance deficits out of thin air, the same way your corner bank financed your home mortgage.

Crying that our DINO is unsustainable, Wall Street scammers have panicked the public and many ignorant journalists and politicians (both in Congress and in the White House). It’s a hoax meant to yield a fortune in commissions by privatizing Social Security and Medicare. And, bribing Congress into austerity, the Wall Street con artists are nursing a huge army of unemployed labor that prevents the middle class from bargaining for better wages. As our rotting infrastructure renders our industry incompetent, it is that growing army of the idle that will become unsustainable.

2. A real debt must be repaid. Our DINO will never be repaid and should never be repaid.

Only a federal budget surplus can reduce DINO. Since dropping the gold standard in1971, we have rarely had even a modest budget surplus. None is now in sight. To supply enough treasuries, the ONLY risk-free instrument used for trade collateral, insurance, pensions, bank reserves, etc., our Dino must continue to grow along with our economy. In fact, deflation and then depression will hit us hard unless big budget deficits replace the cash now flowing into China.

Q2: Could savers make a “run” on Treasury bonds?

A2: Yes, when savers can get risk-free returns from the Wall Street casino or from GM bonds, Illinois bonds, or Detroit bonds. Safety is not everything. Safety is the ONLY thing! That’s why the whole world relies on US bonds.

Q3. Could savers stop buying Treasury bonds?

A3. Sure, when nobody needs risk-free interest for insurance, pensions, trade collateral, bank reserves, etc., etc.

Q4: Could savers prefer foreign sovereign bonds?

A4: Yes, indeed! So far, almost two thirds of the world’s reserve currencies are in US dollars and half of all US Treasury bonds are held by foreigners. But if China’s infrastructure (and so, its productivity) becomes better than ours, its sovereign bonds could become safer than ours. But that could happen only if US voters worry more about our DINO than they worry about our failing schools, falling bridges, leaking sewers, an aging power grid, etc., etc.