David Newman
04-10-2011, 07:26 AM
The national debt represents the total savings at the Fed.
For background, here is an simplified example of how the system works.
Saudi Arabia has oil and decides they want to sell it to us. We need oil and find that Saudi Arabia is willing to sell us some. We agree to a transaction to purchase 2T worth of oil, they get a reserve account with 2T in USD at the Fed. In a reserve bank, a reserve account is the equivalent of a checking account. Now Saudi Arabia is happy because they have the USD they wanted and we are happy because we have oil, it's a equal value swap.
At this point, SA has 2T sitting in their reserve account and the national debt is still 0.
Now, Saudi Arabia has a couple of choices of what to do with that money. They can use it to buy US goods and services, they can let the money sit there unused, or they can buy treasury bills. So, to continue the example, they decide that they don't want to buy any goods and they want their money to generate a return. Their only alternative is to buy T-Bills. They decided to buy one year US Treasury bills in the amount of 1.5T.
So what happens? Their reserve account is debited 1.5T leaving them with 500B in reserves. The purchases of the t-bills is the equivalent of a savings account, so their savings account is credited 1.5T.
Now, the 2T is still sitting at the Fed, 1.5T in savings, 500B in reserves and now the national debt is 1.5T. So, what happens when the one year is up and Saudi Arabia wants their money back? We move the money back to their reserve account + interest.
If you listened to the media, you'd think we were incapable of paying off the debt where the reality is that paying off the debt is just an accounting transaction at the fed.
If you are worried about insolvency, ease your mind, it can't occur involuntarily. We could, voluntarily declare bankruptcy, but there is no reason to commit financial suicide.
For background, here is an simplified example of how the system works.
Saudi Arabia has oil and decides they want to sell it to us. We need oil and find that Saudi Arabia is willing to sell us some. We agree to a transaction to purchase 2T worth of oil, they get a reserve account with 2T in USD at the Fed. In a reserve bank, a reserve account is the equivalent of a checking account. Now Saudi Arabia is happy because they have the USD they wanted and we are happy because we have oil, it's a equal value swap.
At this point, SA has 2T sitting in their reserve account and the national debt is still 0.
Now, Saudi Arabia has a couple of choices of what to do with that money. They can use it to buy US goods and services, they can let the money sit there unused, or they can buy treasury bills. So, to continue the example, they decide that they don't want to buy any goods and they want their money to generate a return. Their only alternative is to buy T-Bills. They decided to buy one year US Treasury bills in the amount of 1.5T.
So what happens? Their reserve account is debited 1.5T leaving them with 500B in reserves. The purchases of the t-bills is the equivalent of a savings account, so their savings account is credited 1.5T.
Now, the 2T is still sitting at the Fed, 1.5T in savings, 500B in reserves and now the national debt is 1.5T. So, what happens when the one year is up and Saudi Arabia wants their money back? We move the money back to their reserve account + interest.
If you listened to the media, you'd think we were incapable of paying off the debt where the reality is that paying off the debt is just an accounting transaction at the fed.
If you are worried about insolvency, ease your mind, it can't occur involuntarily. We could, voluntarily declare bankruptcy, but there is no reason to commit financial suicide.