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?

8. Debt Reduction

From http://www.the99declaration.org/debt_reduction

"Adoption of a plan to reduce the national debt to a sustainable percentage of GDP by 2020. Reduction of the $15 trillion national debt to be achieved by BOTH fair progressive taxation and cuts in spending that benefit corporations engaged in perpetual war for profit, inefficient health care, pharmaceutical exploitation, over-prescribing medications for profit, monopolization of the media by a small group of corporations, the prison and military industrial complexes, criminal banking, securities and financial schemes, the oil and gas industry, and all other corrupt monopolies, entities and individuals that have used the federal budget as a private income stream for decades.  Corporate bribery of politicians can no longer be deemed a cost of doing business paid for a lucrative “return on investment.”  This abhorrent and brazen “pay to play” racket run by Congress, corporations and the top income earners, puts greed ahead of People, resulted in a $15 trillion national debt and an unprecedented downgrade of our sovereign credit rating."

This is one of those areas that I'm admittedly weak in. Some or all of this may be flat-out wrong. I know that Rodger Malcolm Mitchell (over on the99declaration discussion) is going to take exception to everything I'm about to say. Yet I plug on.

From what I can tell, the national debt is comprised of Treasury securities. There are four types, but they all seem to operate like an interest-bearing bank account. The interest is calculated different ways for each. So when someone buys a bond (for instance), they are contributing to the national debt.
This isn't a bad thing. When an American invests in treasuries, they are adding to their feeling of wealth, which could help stimulate the economy. The wealthier one feels, the more likely they are to spend on goods or invest in business.
The downside is that at some point, the government is going to have to pay that money back. If it has to sell another bond in order to do it, it's like paying off a credit card with a credit card. Your obligation is fulfilled to one party, but you have a bigger obligation to someone else.
Almost half of the debt is owned by foreign investors. This is where debt no longer helps our economy. It's nice (and probably necessary) to have an influx of foreign money, but there are no "feeling of wealth" benefits, and at some point someone's going to want to collect. If we have to take money from the American economy to pay debts owed to another country, it's going to hurt.

It seems to be that the main debate over whether to raise taxes or cut the budget to deal with the debt is missing the point. We can be in all the debt we want -- as long as we can pay it back. The more treasuries Americans own, the wealthier they feel. The more foreign countries and investors buy treasuries, the more we have on-hand in the economy. So, I think that the bigger issue is managing the debt in a more responsible way, and ensuring that it can be paid if someone comes to collect it without completely destroying the economy.
If we can make sure that we're at that point,  we can accrue all the debt we like.