Wrapping My Head Around a Tree

There a discussion going at http://www.the99declaration.org/debt_reduction regarding Modern Monetary Theory and Monetary Sovereignty, which are closely related economic theories. A user going by the name of Rodger Malcolm Mitchell, who presumably is the same person described here, has been pushing the idea that, essentially, we could pay all of our debts any time we want just by crediting bank accounts. Initially, I conceded that while true, that would result in a loss of confidence at the world level, which would cause inflation (since our money is based on nothing more than confidence in America).
Recently, a friend of mine and I got into a discussion about the national debt. He was looking at the statistics displayed on http://www.usdebtclock.org/, particularly debt owed per citizen. During the course of our conversation, I gained a clearer picture of the concept of Monetary Sovereignty, and would like to walk myself through how our debt works.

The first thing to realize is that the term "debt" is misleading. When you or I think of debt, we think of having a monthly bill to pay. Someone has fronted us money, and we make incremental payments -- usually with interest -- to square it up. At the national level, this is completely wrong. We only make payments when someone comes to collect. But what are they collecting on?
As I covered in my post, "8. Debt Reduction," all "debt" is in the form of treasuries. There are four types of treasuries: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities. Federal Reserve Notes (ie: dollar bills), are backed by treasuries, so they could also be considered a form of debt. Debt held by the public stimulates the economy, while debt held by foreign investors *could* harm the economy.

We always hear that China holds the majority of our foreign debt. This is true. China has purchased more treasuries than any other foreign nation. What does that mean?
The nearest that I can tell, treasuries must be purchased using dollars. If not, it doesn't seem like it should be a difficult process to turn yuan into dollars. So the process seems to be:

1. American businesses and consumers send dollars to China.
2. China buys treasuries using its dollars.

Of course, since most of this is electronic now, it's a simple matter of converting my dollars into a Chinese company's yuan inside a banker's computer. Regardless, now China holds treasuries, which are worth more than they were purchased for. But what are they worth? If China were to come collect on all of those treasuries (assuming that they had all matured), what do we give them?

Dollars, of course.

So they currently hold a piece of paper that represents a debt. Then they turn that paper in for more paper, which also represents a debt (and is, in fact, backed by the same paper that China originally held).

Now, the obvious question is: What if we don't have enough dollars on hand to give to China for the debt that we owe them? Well, first off, like I said above, it's mostly electronic, so we can just credit their accounts. If they want paper, we can print them paper.

But won't this cause inflation? It might. If every country that held treasuries cashed them in, and the world was flooded with dollars, they would be very easy to obtain, so the demand for them may go down. If that's the case, however, why would any country ever cash in its treasuries? If worse came to worst, and they were forced to cash them to fix some kind of economic collapse, they risk devaluing the very thing that they need. Instead, why not just trade what they already have (ie: the treasuries themselves)?

Now, I'm not suggesting that we force foreign countries to cash in their treasuries. I'm also not suggesting that we continually run a deficit (which, incidentally, has little-to-nothing to do with the national debt). 

What I am suggesting is that national debt means very, very little when it's all based on a lot of nothing.

Rodger?