Government borrowing (debt) is not like private borrowing (debt). Let me explain. 1/x
Suppose I am the government, and I spend 10 greenbacks into the economy. Visualize them flowing from my hands into the economy. Now there are 10 green pieces of paper in the hands of consumers/businesses. 2/x
This is all income to someone. Taxes will be paid on a percentage of that new income. Let's suppose the people send 7 of those greenbacks back to the federal government, in the form of taxes, leaving them with 3 greenbacks. 3/x
The government has run a budget deficit equal to -3. Now, because the government "borrows" whenever it runs a deficit, the Treasury will issue 3 bonds. But this is not borrowing in any meaningful sense. What happens? 4/x
The government holds up 3 Treasury bonds and says, "who wants 'em?" And, lo and behold, there is a scramble to swap out 3 *non-interest-bearing* greenbacks for 3 *interest-bearing* Treasuries. 5/x
The money to buy the bonds is supplied by the seller of the bonds! Try that next time *you* go into debt. 6/6
Extra credit for asking why the US government bothers to borrow back its own green paper.
Bonus points for knowing the answer.
