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The Wilder View

Follow-Up: Who Has the Most Debt in the US?

Yesterday’s post on US debt by sector brought up some interesting comments. Specifically, that there’s a stark difference between federal debt and private-sector debt (households and/or non-financial businesses). Household and non-financial business obligations are true liabilities in the sense that there’s a party on the other side that requires payment in a currency which must be earned. The federal government faces no such constraint, since it ‘borrows’ and promises to pay in a currency over which it has full printing capabilities. Government debt is better thought of as an asset to the private sector that prefers to save, rather than a true liability to the private sector.

This discussion reminded me of an article that Randy Wray (Professor of Economics at UMKC, blogger here at Economonitor  and New Economic Perspectives) wrote two years ago: The Federal Budget Is Not Like a Household Budget: Here’s Why. The following is an excerpt from the article but the whole thing is worth a read:

4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don’t want a bank deposit, government will give you cash; if you don’t want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.

Rebecca Wilder

3 Responses to “Follow-Up: Who Has the Most Debt in the US?”

Heating OilAugust 19th, 2013 at 2:38 pm

>>"I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency"

Its amazing that our monetary system is founded on a bunch of IOUs. It made somewhat sense when the IOUs were atleast backed by gold.. something that was finite in nature.. Not anymore

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