The Internet and diverse news outlets have recently been drowning in articles and videos screaming in unison that a U.S. debt crisis is imminent. “How can we ever repay 34 trillion dollars?”, they cry. “We are heading for bankruptcy”, they add.

Is there any merit in these worries? The short answer? An emphatic “NO”.  The fear-mongers do not understand how the monetary system works. They are not alone. You would be hard-pressed to find a politician anywhere that does. I will try to explain the basics in the following.

Firstly, as I point out in my book, THE BAD NEWS &THE GOOD NEWS, an ever-increasing national debt is, in fact, necessary to prevent the production sector from collapsing from an overload of debt. A deficit is not something to worry about. This is true even for a no-growth economy. I prove this in my new book with a very simple chart that a 12-year-old can understand. Furthermore, the national debt can be repaid at any time, and, as MMT economist Stephanie Kelton, writes, “none of us would have to chip in a dime.” (Kelton, 2020, p. 90)

Let me step back a bit and begin with where the misunderstandings arise. Firstly, what I am saying applies to any sovereign currency-issuing country like the United States, the U.K. and most other countries. But not the eurozone countries, which are not currency-issuers. They are currency users. Most people think of such a currency-issuing government as being similar to a company or a household. But it is not. Companies and households are currency users. If they are spending more than they are earning, they must borrow money to finance the deficit. A sovereign government does not borrow, as it can create money at the punch of a keyboard and buy anything it wants that is denominated in its own currency, including all outstandings government securities. The last thing a currency-issuing government needs is money. As I wrote in my book, “Governments with a sovereign currency do not have to borrow, no matter what you hear or read from an army of politicians, mainstream economists, journalists, websites, social media and textbooks.” (Jackson, 2024, p. 39) 

But, you say, we hear all the time about the government’s “borrowing requirements”. And does a sovereign country not issue government securities when there is a budget deficit? Yes, they usually do. But they don’t really have to. As I said, money is the last thing the government needs. So why would it want to borrow? So, what is a sovereign government actually doing when it issues Treasury bills or “gilts” (U.K.) if it is not borrowing?

The short answer? It is doing a swap. It is not creating additional debt. I can illustrate this best with the analogy of your own personal relationship with your bank. Let’s say you have a debit account (demand deposit) yielding 1% and a savings account yielding 3%, both worth $1000, thus the total value is $2000. You decide to transfer $500 from your demand deposit to your savings account. Now you have $500 in your demand deposit and $1500 in your savings deposit, same total, $2000. You just did a swap.

When the government issues a Treasury bill, it does the same thing. Just like you, the government has two accounts, a demand deposit (“bank reserves”) and a savings account (“security account”), each worth, say B$1000, total liability B$2000. When the government issues new Treasury bills worth, say, B$500, bank reserves fall to B$500 and the Security account increases to B$1500. The total liability is B$2000, same as before. What we have witnessed is called a liability swap, Treasury bills for bank reserves—same total liability. Same total debt! No big deal. 

“But wait a minute”, you may say. “You just increased the national debt, as defined by the total securities outstanding—ؙby B$500.” True. The problem is in the definition. It would make more sense to define the national debt as the total government liability, i.e. as the sum of bank reserves and the securities account. But due to an anachronism, we do not do so in practice, causing much confusion.  In my book, THE BAD NEWS & THE GOOD NEWS, I call the sum (total liabilities) “the national debt by broad definition” as opposed to the conventional definition (only securities), which I call “the national debt by narrow definition”.  The only differences between the bank reserves and the securities account is the interest rate and the degree of liquidity. 

The reason for the conventional definition is a hangover from the gold standard days when there was a true difference.  Under a fiat system (no physical backing), there is no one to pay back. This is seen most clearly if the government swaps the entire outstanding securities for bank reserves (i.e. it buys all the outstanding securities). Then the asset corresponding to the government liability is just the aggregate balance of bank reserves in all the private banks. This quantity is better understood as a type of money rather than as a debt.  In my book, I define it as the “third kind of money”, one that is essentially “dead”, as it cannot be lent out and has no connection with real economy money (“first kind”) from bank credit, or speculative money (“second kind”), primarily from householder savings. 

There are other reasons why such a government might issue securities, but not because it needs the money. 

More about this later in subsequent blogs. In the meantime, let me have your comments below or at info@jtrossjackson.com

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Kelton, Stephanie, The Deficit Myth, (Great Britain: John Murray Publishers, 2020).

Jackson, J. T. Ross, THE BAD NEWS &THE GOOD NEWS, (Denmark, Green Venture ApS, 2024)