It is clear that government securities are not needed to ‘fund’ expenditures, as all spending is but the process of crediting a private bank account at the Fed. Nor do government securities remove wealth, as someone buying them takes funds from his bank account (which is a $US financial asset) to pay for them, and receives a government security (which is also a $US financial asset). One’s net wealth is the same whether you have $1 million in a bank account or a $1 million Treasury security. In fact, a Treasury security is functionally nothing more than a time deposit at the Fed.

About 10 years ago Soft Currency Economics was written to reveal that government securities function to support interest rates, and not to fund expenditures as generally perceived. It goes through the debits and credits of reserve accounting in detail, to the point that government, when the Fed and Treasury are considered together, is best thought of as spending first, then offering securities for sale. Government spending adds funds to member bank reserve accounts. These accounts do not pay interest. So if securities are not offered for sale, it’s not that government checks bounce, but that interest rates fall to zero. This is because when banks have excess reserves, they offer them in the fed funds market; if the government doesn’t offer new securities, the excess supply of reserves in the fed funds market quickly drives the fed funds rate to zero. Government securities offer interest bearing alternatives to non interest bearing reserve accounts, and thereby ‘support’ interest rates at the Fed’s target rate.

In the real world, we know this must be true. Look at Turkey - quadrillions of lira of deficit spending (above 25% of GDP - as high as US deficits during WWII), interest rate targets often at 100%, inflation nearly the same, continuous currency depreciation, no confidence whatsoever, yet ‘finance’ in lira is never an issue. Government lira checks never bounce. If they relied on ‘funding’ (that is, borrowing from the markets) to sustain spending (as some would presume they do), they would have been shut down long ago. Same with Japan - 140% total government debt to GDP, 7% annual deficits, downgraded below Botswana, and yet government yen checks never bounce, and three-month government securities fund near 0%. Again, clearly ‘funding’ is not the imperative.

The US is often labeled ‘the world’s largest debtor.’ But what does it actually ‘owe?’

For example, assume the US government bought a foreign vehicle for $50,000. The government has the car, and a non resident has a bank account with $50,000 in it, mirroring the $50,000 his bank has in its account at the Fed that it received for the sale of the car. The non resident now decides that instead of the non interest bearing demand deposit, he’d rather have a $50,000 Treasury security, which he buys from the government.

Bottom line- the US government gets the car, the non resident holds the government security. Now what exactly does the government owe? When the $50,000 security matures, all the government has ‘promised’ is to replace the security held at the Fed with a $50,000 (plus interest) credit to a member bank reserve account at the Fed. One financial asset is exchanged for another. The Fed exchanges an interest bearing financial asset (the security) with a non interest bearing asset. That is the ENTIRE obligation of the government regarding its securities. That’s why debt outstanding in a government’s currency of issue is never a solvency issue.