It is a strange feeling to be in a minority of about 0.01 % of the population on an important subject that is misrepresented regularly in the media, while knowing with certainly that you are right and the overwhelming majority has got it all wrong. In many cases, you could shrug your shoulders and say, “so what”, but in this case, the matter is too important for our daily lives to be allowed to go on uncontested. I am concerned here with common misunderstandings about money and the national debt. It pains me to hear the president of the United States repeat these misunderstandings in front of millions of people, while using his false narrative to explain why the U.S.A. cannot afford improved welfare benefits, better health care, or free education.

My experience is that it is extremely difficult to get the correct understanding across to just about anyone, regardless of their intelligence or experience. One reason, of course, is that most people’s eyes glaze over the moment the subject of money comes up. Where money comes from and where it goes is one of the great mysteries of the universe for most lay people. But even professionals in business and economics have the same problem, demonstrated by the current hysteria in the media about the U.S. national debt hitting $34 trillion. I explained in my recent book—THE BAD NEWS & THE GOOD NEWS (Jackson, 2024)—that the U.S. national debt is not only not a problem, but it won’t be that long before it hits $50 trillion and more, because a growing national debt, is, in fact, inevitable in order to keep the production economy from collapsing. And, by the way, it can be eliminated at any time without a burden on anyone. MMT economist Stephanie Kelton is on the same page, writing, “The truth is, the entire national debt could be paid off tomorrow, and none of us would have to chip in a dime.” (Kelton, 2020, p. 90).

It is hard to know were to begin, so I will start with something that we all understand. Let us suppose you establish a bank account (“demand deposit”) at your local bank and also a new savings account (“time deposit”) at the same bank with a three-month binding period. Assume that each account has $1000, for a total of $2000—your money to do with as you like. Did you ever wonder what happens to your money? Now, a lot of people, including mainstream economists, assume that it is lent out to willing borrowers. It is not, even though it is a common story you will hear in introductory courses on economics and on various websites. That is the first mistake that leads to misunderstandings about the national debt.

What actually happens when a bank lends money to a borrower is that it creates a new deposit account (or credits an existing deposit account) “out of thin air”. I have a number of quotes from Central Bankers to that effect in my book. It is hard to grasp at first, but true. The loan becomes an asset on the bank’s balance sheet. The new deposit becomes an equal and opposite liability. By definition, assets and liabilities have to be equal. Banks do not lend out customer deposits. Your deposit plays no role in new bank loans.

When you make a cash deposit of $1000, your money is included in the bank’s cash account with the Central Bank for you to use at your discretion. Your local bank’s liquidity increases by $1000. Some other bank’s liquidity decreases by exactly the same amount, depending on where your money came from (your employer? sale of something you owned?). The sum total of all the private banks’ cash balances is unchanged by your transaction. This aggregate is called “bank reserves” and represents the bank sector’s total balance with the Central Bank. The Bank sector’s asset is equal to the Government sector’s liability. Everything has to balance. These bank reserves are a component of what I call “the national debt by broad definition”. Register that. Very important!  Now, since ordinary transactions (wages, consumption of goods, etc.) like yours do not affect the total bank reserves, then what does affect the aggregate bank reserves?

The answer is—a government deficit. Dollar for dollar, every increase in government spending—which creates a government deficit—increases the bank reserves by the exact same amount since the government spends money by creating a deposit with a private bank (again “out of thin air”) resulting in an increase in bank reserves at the bank receiving the deposit. Simple accounting—the bank sector’s asset is the government’s liability. The “out of thin air” concept is a consequence of the fact that currency-issuing sovereign states can spend unlimited amounts of money on anything denominated in their national currency, as if they had an infinite credit line at the Central Bank. (They may have self-imposed restrictions, but that does not change the principle). It follows logically that currency-issuing states do not borrow money, no matter what you may otherwise hear from an army of economists, politicians and others, who have difficulty grasping the basics of monetary economics. Money is thus the last thing such a government needs. However, the government does issue securities from time to time, and the above-mentioned politicians and others think the government does this because it needs money to “finance the deficit”, which has actually already been financed by the bank reserves liability. They think the government borrows money from the public when it issues securities, but that is another mistake, and is quite incorrect. The government does not borrow money. Why would it when it has an infinite amount on hand already? The very thought is absurd, if you think about it. Then what is going on here?

Let me explain what actually happens when the government issues securities by going back to the example of your own bank with a demand deposit and a time deposit. A “time deposit” is just an “offer” by your bank for you to swap some of your cash for a time deposit and earn a slightly higher interest rate. Suppose you swap half your cash for a time deposit. Now you have $500 in cash and $1500 in the time deposit. The total is the same, and the bank’s cash is unchanged. The only difference is the interest rate and the time limit.

When the government issues, say, 3-month Treasury Bills, it is doing exactly the same thing—making an “offer” to the bank sector to “swap” their low-interest reserves for a higher interest government security. But the total government liability—“the national debt by broad definition” (bank reserves plus securities)—is unchanged. The government has not increased its liabilities by issuing treasury Bills any more than you increased your money by swapping your cash for a time deposit. Thus, it has not taken on additional “debt” by the “broad” definition, which incudes both bank reserves and government securities. However, if we define the national debt to include only government securities (and this is the normal definition), which I call the “narrow definition of national debt”, then we have increased the “national debt”, but not the total liabilities, which is the more relevant figure, in my opinion.

Furthermore, the government has not, in fact, incurred any debt by issuing securities, in the sense that there is no one to pay back. A liability is not necessarily a debt. This is obvious if we simply reverse the swap so that Treasury bills disappear and the entire government liability and bank sector asset is in bank reserves. Recall that bank reserves cannot and are not lent out by private banks when they make loans.¹ The best way to understand this liability is not as a misleading “debt” but rather as a form of inert or “dead” money, which is nothing more than an accounting entry registering the cumulative government deficits to date, which, by the way, must grow year after year. Incidentally, the fact that many large financial institutions routinely swap their cash for Treasury Bills does not change anything. It is still not a loan, just a liquidity preference.

What about foreign buyers of U.S. Treasury Bills? Many pundits seem to think that China is financing American spending by holding trillions of Treasury Bills. Is there any truth in that claim? No. The Chinese cash deposit with the Federal Reserve is in principle no different from your bank deposit at your local bank. The Chinese holdings are not used by the U.S. government, which spends by creating new money, never by using existing money, just like your bank. The only thing the Federal Reserve owes China is a bank statement.

Why the misconception?

There are three good reasons for the almost unanimous misconception. One is the natural tendency for most people to equate the national accounts of a currency-issuing state with more familiar personal or company accounts. But they are actually as different as night and day! We are used to taking on debt to finance a mortgage, for example. But, a currency-issuing state never takes on debt in its domestic currency (foreign currency is a different matter) because it can always pay for anything by issuing money with a computer key stroke.

The second reason is that mainstream economists have a rather different understanding of money that prevents them from seeing this. For them, it is not necessary to incorporate money into their models as it is considered “neutral”, a mere instrument of commodity exchange in a barter economy. This is compounded by the fact that banking and double-entry bookkeeping—essential to understanding the mechanics of issuing government securities—are not subjects covered in the standard economics curriculum. Mainstream economists believe that bank deposits, whether from private or government sources, are actually lend out. I like the title of the cited article which refutes this way of thinking, “Repeat After Me. Banks Cannot and Do Not ‘lend out’ Reserves” (Shear, 2013). Because of the respect for the views of mainstream economists by politicians and the media, their misconceptions have become mainstream, and it is very difficult for the few folks with the correct understanding, such as a few MMT economists, to break through the media barrier.

The third reason is that the bank reserves liability is traditionally registered in the Central Bank’s accounts, and not thought of as a “debt”, while the Treasury security liability is registered in the Treasury or Finance Department accounts, and is thought of as a “debt”. In my book, I work with a “government” sector which includes both the Central Bank and the Treasury having a consolidated public sector balance sheet, where the difference between a “debt” and a “liability” becomes much clearer.

Does It Matter?

Is the eternal growth in “debt” and interest charges a problem we should worry about? Certainly not in the sense of a coming dollar crisis or credit crisis, as many pundits seem to believe, but there are two other issues that are problematic.

The first issue is a systemic increase in inequality, with the accompanying risk of more financial crises due to highly-geared speculation. I define speculative money as that which is placed in existing assets. It derives primarily from householder savings and, to a lesser extent, excess corporate profits, and it will increase year after year indefinitely in the absence of a wealth tax. In the U.S.A., 40 % of all financial assets are owned by the top 1% of income earners, and fully 90 % by the top 10 %. The lower 60% have no wealth or savings to speak of. So, most of this unnecessary interest income, about $1 trillion this year in the U.S.A., accrues to the already wealthy, increasing inequality and financial risk, as well as increasing health problems for the general public, as documented in various studies.²

The second issue is the effect of the unnecessary interest charges on budget decisions. Since interest charges take up a large part of the budget, there is a tendency for politicians to cut back on worthwhile programs for the general public in order to stay within a self-imposed budget. But, as opposed to government welfare and other spending, interest charges on government securities make no demand on resources, and should be ignored in making budget decisions. Better to remove them entirely and get the bonus of more welfare.

Incidentally, I am not alone with this message. Other members of the 0.01% include several MMT (Modern Monetary Theory) economists, including Stephanie Kelton and Warren Mosler (See references).

1. Shear, Paul, “Repeat after Me: Banks Cannot and Do Not ‘lend out’ Reserves”, http://www.standardandpoors.com/Ratings Direct (August 13, 2013).
2. Wilkinson, Richard, and Pickett, Kate, The Spirit Level, (New York: Bloomsbury Press, 2010).
3. Kelton, Stephanie, The Deficit Myth, (Great Britain, John Murray Publishers, 2020).
4. Mosler, Warren, Soft Currency Economics II: The Origin of Modern Monetary Theory: Volume I, (USVI: Valance Company, 2012)
5. Jackson, J. T. Ross, The Bad News & The Good News: The Economics of Collapse and The Birth of a Regenerative Society, (Denmark, Green Venture, 2024).