Most of today’s national debt rhetoric by politicians and the news media relies on tacit public acceptance of the following false premises:
• Somebody will eventually have to pay back the national debt.
• If we continue as is, our grandchildren will face the grim reaper of debt foreclosure.
• We are therefore guilty of fiscal child abuse.
Some economists have even built the payback of the national debt principal into their present value models, which then yield hugely scarier liability numbers (in the $60 trillion range) than the already hugely scary $8.6 trillion national debt number.
Think how badly it would derail all that rhetoric and all those arguments if it turned out that not one single dollar of the principal on the debt need ever, ever be paid back—even if the debt keeps growing and growing and growing.
If that sounds looney, so be it. It’s the truth. Consider a few facts that, for some reason, none of the fear-peddlers seems capable of acknowledging. Each Treasury security held by the public, when it matures, is “paid back” using the proceeds obtained by selling a new Treasury security to the public. In effect, the debt principal is never retired; it is merely rolled over and over, perpetually. That means the interest payments are the only element that must be covered by tax receipts. Even if the interest payments keep growing because of permanently growing debt, their effect is neutralized when tax receipts grow at least as fast as the interest payments, as is happening today. But the main point is, forget the debt principal, because not one dollar of taxes will ever have to be raised to pay it back.
This is perfectly sound financial practice. Successful businesses roll over their long-term debt all the time, just as the federal government has been doing for generations. Here’s how William F. Hummel, an expert on monetary economics, puts it in one article at his extensive website:
Government debt is commonly regarded as a future tax liability of the private sector. However the unique position of the government as issuer of the monetary base enables it to roll over its debt continuously. In doing so, its securities become the functional equivalent of perpetuities, i.e. bonds that never mature and thus are never redeemed. De facto, there can be no net tax liability on perpetuities.
The important point bears repeating: Perpetual rollover of debt principal yields the same outcome as if the debt were comprised of perpetual bonds, or perpetuities. And the present value of the principal on any perpetual bond is zero. None of the principal on a perpetuity will ever be paid back; the holders buy them for their interest income stream only. The British issued perpetual bonds years ago; they were called consols. Our debt, because it is continually rolled over, works just like consols worked.
Politicians and journalists who peddle fear of the debt, or fear of the present-value of future liabilities, need to defend their arguments from now on. Can they defend their fear-mongering against the valid assertion that none of the debt principal will ever have to be paid back? If they can defend it, let’s hear it. If they can’t, let’s hear them change their rhetoric.
Something’s got to give, and it’s time we started forcing the issue.