Modern Money Theory: Deadly Innocent Fraud #2: With government deficits, we are leaving our debt burden to our children. – Warren Mosler. 

Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.

Professional economists call this the “intergenerational” debt issue. It is thought that if the federal government deficit spends, it is somehow leaving the real burden of today’s expenditures to be paid for by future generations.

The idea of our children being somehow necessarily deprived of real goods and services in the future because of what’s called the national debt is nothing less than ridiculous.

Nor is the financing of deficit spending anything of any consequence. When government spends, it just changes numbers up in our bank accounts.

The entire $13 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the Fed. And what happens when the Treasury securities come due, and that “debt” has to be paid back?

Yes, you guessed it, the Fed merely shifts the dollar balances from the savings accounts (Treasury securities) at the Fed to the appropriate checking accounts at the Fed (reserve accounts).

Nor is this anything new. It’s been done exactly like this for a very long time, and no one seems to understand how simple it is and that it never will be a problem.

When I look at today’s economy, it’s screaming at me that the problem is that people don’t have enough money to spend. It’s not telling me they have too much spending power and are overspending.

When we operate at less than our potential – at less than full employment – then we are depriving our children of the real goods and services we could be producing on their behalf. Likewise, when we cut back on our support of higher education, we are depriving our children of the knowledge they’ll need to be the very best they can be in their future. So also, when we cut back on basic research and space exploration, we are depriving our children of all the fruits of that labor that instead we are transferring to the unemployment lines.

A U.S. Treasury security is nothing more than a fancy name for a savings account at the Fed. The buyer gives the Fed money, and gets it back later with interest. That’s what a savings account is – you give a bank money and you get it back later with interest.

It’s all a tragic misunderstanding.

China knows we don’t need them for “financing our deficits” and is playing us for fools. Today, that includes Geithner, Clinton, Obama, Summers and the rest of the administration. It also includes Congress and the media.

Paying off the entire U.S. national debt is but a matter of subtracting the value of the maturing securities from one account at the Fed, and adding that value to another account at the Fed. These transfers are non-events for the real economy and not the source of dire stress presumed by mainstream economists, politicians, businesspeople, and the media.

The deadly innocent fraud of leaving the national debt to our children continues to drive policy, and keeps us from optimizing output and employment. The lost output and depreciated human capital is the real price we and our children are paying now that diminishes both the present and the future. We make do with less than what we can produce and sustain high levels of unemployment (along with all the associated crime, family problems and medical issues) while our children are deprived of the real investments that would have been made on their behalf if we knew how to keep our human resources fully employed and productive.

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