So I Don't Forget the Federal Debt

... or why I was wrong about it.

I was reminded of a lecture earlier in the semester in Globalization when I heard a desk worker in the library talking a little too loudly, enough so I could hear him at a computer about 40 feet away or so. (Whatever happened to indoor voices?) I agreed with him on a lot of what he said, but he kept going, "Look at the federal debt!" And then I was reminded of that lecture. The reply?

"Yes. And?"

So I'm going to get my thoughts out before I revert back to leaping again, trigger at the ready, at the mere mention of debt. The point? Debt has its uses too, and need not be bad debt. But I'll get there. I'll try to go by points.

1. Money has to do with the exchange of value for goods.
Money is not a George Washington, nor is it a gold nugget. Money is not any one material good. When corporations hurl money about in investments, they aren't trucking their chests of gold around (even if the investment happens to be gold, nowadays). They oftentimes simply sign a check, or now even carry out the exchanges in value electronically. When we use a debit card, value is exchanged between our bank account and the seller, who then provides the good.

The best way to think about money then is not as dollars and cents, not as certain measurements of value, but as an exchange of electricity or energy. In our pockets, in our bank accounts, in our investments - to our name - rest the potential for exchange, stored as if in a battery. They each hold a certain liquidity or accessibility. Cash is readily exchangeable, checking account money is with the proper tools, and investments have varying liquidities depending on how efficiently we can sell or redeem them for some value. All of those are potential energy. The active energy come with the payment. Then value is transferred.

2. The federal gov't and the Federal Reserve function separately.
Yes, the Federal Reserve is partially owned by the government. But it has autonomy too; when Ben Bernanke says things, there's not much the President can do. They help each other out. But the debt that the federal gov't runs is not the Federal Reserve's debt. The money that the gov't prints is from the Treasury Department. So on.

3. There are commercial and investment banks.
Commercial banks are the ones we put our money in for ready access, or take loans from. When we put our money into a bank, we've put it in with many, many other people's. The bank holds an assumption that everyone will not demand their money all at once, that they will hold a certain level of money unused for some time. They use this money to give out loans, from which they get a return and make their profit. The trick is to balance the inflow (deposits + loan payments) with the outflow (withdrawals + loans) so that the bank always has money to fulfill its obligations and makes the maximum profit possible.

Investment banks are those that deal with businesses, making all kinds of... yes, investments.

4. The Federal Reserve lends money to banks.
When commercial banks balance between their inflows and outflows, sometimes they run into issues. Perhaps they have more money than they currently want, but want to put the money in something safer than loans. In that case, they buy treasury bonds, treasury notes, so on. Perhaps they have more outflows in a certain time, and need money to meet an obligation. What happens then?

The bank sells some of its treasury notes to meet the obligation, and adjusts otherwise. Who will buy the treasury note without looking to make a profit? The Federal Reserve. It buys high. Then, when more inflow comes than is anticipated, the Federal Reserve will sell those treasury notes at a low cost. If it should ever run out of treasury notes, it buys more debt from the federal gov't. The Federal Reserve manages itself so it works out for them without long-term costs, and the banks meet their obligations.

5. Treasury notes are federal debt.
So, in this way, federal debt is actually used to keep banks operating and lending between each other. If there were not such a way to give some safety net for investing more money, then banks would not lend as much. Hence unhappiness.

Why use Treasury Notes? Because the gov't always pays its debts.

6. If the federal debt were low, the system would not work.
If the federal debt were to fall (a speculative concern in the late 1990s, not now), then the Federal Reserve would have to figure out another investment to exchange with banks, one that is as secure and guaranteed as Treasury Notes. So the Federal Reserve doesn't create money to meet is obligations... it uses the gov't's debt.

So that's one reason why having some debt is important. However, the debt may seem perhaps... adequate. Too adequate? Too large?

7. Debt is not an issue as long as it is paid off.

8. When one goes into debt, that happens because someone has bought the debt.
That's what a treasury note or a savings bond is. It is purchased debt, bought until it has accrued its value plus interest, when it is redeemed. The gov't takes the value, uses it, and through other revenue-raising activities (like taxes), gradually sets money aside as interest paid off on the loans, which is how it accrues. It is easy to pay things off gradually rather than all at once.

9. There is a high demand for this debt right now.
We're in a recession most likely. So people go to a safe investment, like gov't bonds and such. Because the gov't always pays its debts. Much safer than having it in the volatile stock market, exchange market, commodities market...

10. Debt is not an issue as long as someone is willing to pay it off.
Which has held true thus far, and shows no signs of changing. Even when we were doing well economically, people are willing to speculate that the gov't will pay. The only time the debt will become a concern is when people refuse to buy it over a certain period of time. Then the gov't would go bankrupt because it would not meet its obligations in exchanging value.

But such an event would happen with enough time for gov't agencies to react, assuming they were on their toes. So it's not a pressing issue. Only a potential one. Something for a sigh, but not anything to cry about. It isn't a major problem.

There are major problems involving debt of course. Like the trillions of dollars American households hold in debt... if I remember correctly, three times the national debt. How? I don't the hell know.

What I know is that, if that continues, then we the children of America will not live as good a life as our parents. And I only hope we aren't bitter. (I'm not.)