While Frank licks his wounds; I'd like to interject with some Govt bond/debt chat.
$38 trillion in US federal debt is
not debt like you or I have. This is where people get tripped up. Even politicians, financial experts, and economists often treat sovereign Govt debt like a household mortgage or loan obligation. It is not, and I’ll break down why.
There was discussion earlier about California’s state debt. That
is real debt, like our own council’s debt. Cali uses US dollars but cannot create them. It must collect taxes or borrow (via state bonds) to accommodate spending. Like you or I with a mortgage, that debt must be repaid from future income.
That’s the constraint.
Conflating this with US federal debt, or with China’s bond holdings, misses the point. Sovereign Govt debt works differently.
When a sovereign Govt (NZ, US, China, Australia, UK, Japan, Canada, etc.) issues bonds in its
own currency, it does not borrow like a household, a business, Cali, or Auckland Council to fund spending. Bond issuance is part of central bank operations to manage base money liquidity and control interest rates.
Sovereign Govts create new digital money when they spend. The central bank credits bank accounts for every Govt payment: wages, pensions, benefits, healthcare, education, infrastructure, contracts. The money is created
at the moment of spending.
Govt bonds are an
asset swap. The Govt exchanges interest-bearing IOUs (bonds/treasuries) for excess reserves in the banking system created by prior Govt spending. Spending happens first. Bond issuance follows. The Govt is not waiting for tax revenue or “borrowing” in order to spend.
NZ, the US, China, the UK, Japan, Australia and Canada – each issues bonds in its own currency.
None can run out of the currency they create.
Govt bonds issued in a sovereign currency are considered risk-free in the technical sense – meaning they carry no default risk, not that they are free from price or interest-rate risk.
The issuer controls the currency in which the bond obligation is created and can always ensure settlement at maturity. That’s an operational fact, not a political claim.
No.
Bonds are fixed-term assets. If China sells US Treasuries, it sells them on the
secondary market. The US Govt is not involved. This does not materially affect the US Govt’s ability to spend US dollars.
Physical cash can cross borders, but physical cash is a tiny fraction of modern money. Most money exists as digital balances within banking systems. China’s bond holdings are claims recorded within the US financial system.
When China sells those bonds, it sells them to whoever wants to buy them – banks, pension funds, or other institutions. China receives US dollars. The buyer receives the bond. The US Govt is not part of that transaction. The assets simply change hands within the same system.
Sovereign Govts do not owe their spending power to external players*. Bonds are denominated in the currency the Govt itself issues. The central bank can always purchase bonds if needed. In consolidated terms, the state’s liabilities are recorded within its own central bank accounting framework.
Flipping this around, what we call “national debt” is more accurately
private sector savings (that's us!). For the Govt it is an accounting entry; for the private sector it is a financial asset. Every dollar of Govt debt is a dollar someone else holds. Should we talk about how that debt is accumulated and distributed? Absolutely – but that’s a different discussion.
Govts are currency issuers. They face real 'resource' constraints: workers, materials, energy, and productive capacity.
Everyone else is a
currency user. We face financial constraints.
Confusing the two creates fear about problems that do not exist.
* Unless a Govt borrows in foreign currency, in which case it does cede monetary sovereignty for that portion of debt.
** Banks also create money, but through lending. Different mechanics.
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