Understanding the National Debt and Dollar Devaluation: Debunking Misconceptions

In a recent discussion, the question was raised about whether the U.S. government would purposefully devalue the dollar to relieve itself of trillions of dollars in debt. While this idea sounds appealing on the surface, a deeper analysis reveals why such an approach would be counterproductive and economically unsound.

Why Dollar Devaluation is Not a Productive Strategy

The proposed strategy of devaluing the dollar to reduce debt is not feasible due to the mechanics of how the U.S. government finances its debt. The U.S. Treasury sells securities as bonds and bills, and these need to be repaid in full when they mature. To alleviate the debt, the government must continuously issue new securities, making the devaluation of existing debt moot.

The value of the dollar does not directly affect the repayment of this debt. When securities are issued, they are typically denominated in U.S. dollars. Any changes in the value of the dollar, whether up or down, will be accounted for in the interest rates on these securities. Therefore, the existing debt does not diminish in value just because the currency devalues.

Exploring the Golden Rule: Attribution to Stupidity

The Golden Rule of Hanlons Razor suggests that we should not assume malice where ignorance would suffice. In the case of America's inflation, it is not due to a deliberate attempt to devalue the dollar, but rather poor economic advice from policymakers.

Leading economists who advise the government on monetary and fiscal policies may lack the understanding of what actually triggers inflation. Their recommendations may inadvertently lead to inflationary pressures, but they do not do so with the intent to devalue the currency.

The True Nature of the U.S. Debt

The term "national debt" once referred to a form of government borrowing that had to be repaid. However, this system ended 50 years ago with the U.S. dollar's loss of convertibility to gold. Today, the national debt is merely a curiosity and a meaningful number beyond recognizing the gap between spending and tax revenues.

Legally, this gap must be filled through the sale of Treasury securities. Without the law, the true nature of these securities would become apparent: they serve as savings accounts for businesses and individuals looking for the safest place to store their excess U.S. dollars. The government does not need this money; it merely provides the service of a risk-free place to keep dollars.

The Federal Reserve can influence short-term interest rates by manipulating the supply and demand for these securities, but this does not relate to the repayment of any "trillions of dollars in debt." The repayment of these Treasury securities is guaranteed with the same U.S. dollars they were purchased with, as the dollar is no longer convertible to gold.

Concluding Thoughts

The U.S. government's actions regarding the national debt and dollar devaluation are driven by practical, rather than malicious, economic policies. While the concept of devaluing the dollar may seem attractive, it is not a viable solution due to the nature of the U.S. financial system. Understanding the true nature of the debt and the mechanics of how it is managed can help dispel misconceptions and inform more accurate economic policies.