Why national debts keep growing
Currency issuer deficits are currency user surpluses
Background
First, the concept of currency issuers vs currency users matters here.
Many people seem to believe that currency issuing governments need to borrow the currency they issue in order to have some to spend. But since they are the issuer of that currency, why would that make sense?
Why wouldn’t they simply issue more when they need it?
In a future post I’ll describe how the US government “borrows” US dollars, but for the time being let’s stick with the idea that currency issuing governments do in fact borrow the currency they issue, and that borrowing contributes to what we call the national debt.
How come they grow larger over time?
Three postulates and a conclusion
I’ve got this explanation down to three postulates and one conclusion.
That each of the three postulates is true is self evidence.
And if they are true, which they are, the conclusion must also be true.
Here we go…
Postulate #1
In order for anyone to receive a dollar, someone else had to spend it.
It can not be any other way. Every transaction involves someone spending money and someone else receiving money.
Postulate #2
Everyone who has dollars previously received them.
Unless you are an issuer of money (who live by different rules which I’ll expand upon later), the only way to acquire dollars is to receive them from someone else who spent them.
Postulate #3
In aggregate we have trillions of dollars.
In aggregate. I have a few. Warren Buffet has quite a bit more. But in aggregate, all the dollars we holder of dollars have total up to trillions of dollars.
As we collectively hold them, we previously received them, which means someone previously spent them.
Conclusion
In order for the three postulates above to be true, someone is spending trillions of dollars into existence.
It can not be any other way.
If no dollars existed in the economy, the way the first dollar gets created is a currency issuer spends it and in the process transfers it to a currency user. To the currency issuer that dollar is a deficit and to the currency user that dollar is a surplus.
The trillions of dollars that exist came into existence in this way. They are deficits to the currency issuer and surpluses to us currency users.
Currency issuers?
Who are these currency issuers?
In a word: banks. The central bank AND licensed commercial banks1234.
They literally create money. Literally.
Central banks create sovereign money
Central banks create what is sometimes called sovereign money (as it’s created specifically for use by the Treasury of the nation) and commercial banks create what is sometimes called credit money (as they create money every time they fund a loan).
I’ve seen sovereign money be called vertical money and credit money be called horizontal money, but the main point here is that every credit/surplus to someone is a corresponding debit/deficit to someone else.
For trillions of dollars to exist, someone has to be incurring deficits equal in amount to the total of the surpluses we hold.
It can not be any other way.
Commercial banks create credit money
Now for a very brief detour to talk about credit money
It seems kind of intuitive that when you borrow money from a bank, the money comes from somewhere.
But that’s not true. It doesn’t.
Upon the execution of the loan and repayment agreement, the bank “marks up” an account, which simply means they create records in the banks ledger such that you have an account at that bank containing the money they loaned you.
The money doesn’t come from anywhere. Seriously.
Now, a little (but very little) accounting…
The money in the account is an asset to you, and your obligation to pay some amount every month for some number of months, to you, is a liability.
To the bank, they’re flipped.
The money in the account is a liability to them, as you can withdraw it at any time (and if you borrowed it for a large purchase, you will), and your obligation to make monthly payments, to them, is an asset as you’ll be making your monthly payments to them.
The very brief detour about credit money is now ended.
Back to why national debts keep growing
Because currency issuer deficits are currency user surpluses.
Currency issuer debt is currency user money.
What we call the national debt is part of the nations money supply.
And since large and growing economies need large and growing money supplies, national debts grow as economies grow.
The chart below5 shows sectoral balances for the USA, and as you can see, they balance out to zero.
And this means that currency issuer debt is currency user money.
How are you defining deficit here? If a bank creates a $1,000 deposit for Alice, and Alice promises to pay the bank $1,050 next year, would you say the bank has run a deficit?