Consider the case where everyone woke up tomorrow and all money in all forms, coin, currency, bank account balances, etc had disappeared? No one would be able to buy food, farmers would not be able to grow food since they wouldn’t have the money to buy seed or fuel for their tractors. All production would stop because no one would have money to buy the goods produced or to pay for the raw materials and labor that went into the goods. It would be a matter of once again living off what nature provides, bartering with the goods available, or introducing some form of money as a way to hasten the recovery.
Clearly, reintroducing money would be a faster means of recovery than the other two. It would boil down to everyone starting to print their own money (IOUs) or the government printing coin or the Fed printing currency to prime the pump and get economy back on track. Most people would feel safer taking government money they had always used rather than personal IOUs in exchange for purchases.
To get the money into circulation the Fed could simply restore the balances everyone had in their accounts at their banks or the Fed the day before the money disappeared.
Since the Fed printed the money, what form of debt did it incur doing so? None. The balances held in treasury notes and bills at the Fed could simply be replaced with reserve account balances of the same amount. So the national debt would disappear unless the government decided to accept reserves for government issued notes and bills again.
So what is this national debt we keep talking about? What’s to keep the Fed from printing all the money it needs to buy up the national debt? All the interest accrued on the government debt the Fed holds is remitted back to the government treasury anyway.
The national debt is nothing more than the government providing a secure way for the private sector to save and for foreign governments to supply goods to Americans. Foreign businesses selling those goods to Americans convert the dollars they get for the goods into the local currency to pay for the labor and materials that went into them. The dollars the foreign government receives from the suppliers in exchange for the local currency it provides ends up in it’s reserve account at the Fed. They usually buy treasury notes and bills since they pay interest.
The only way for foreign governments to cash in their dollars held at the Fed is for them to buy American goods or assets, and we can decide if we want to sell those goods and assets to them depending on what we want our balance of payments and exchange rate to be.
At this point in time the only threat from the national debt seems to be that it can be used by a minority of Americans to blackmail the majority into accepting their ideology as the governing mandate.
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