The Debt-Deposit Duality

The Debt-Deposit Duality. How Much Is the Federal Debt? $12 Trillion? $10 Trillion? $0?

by Rodger Malcolm Mitchell,

Quantum mechanics is counter-intuitive, partly because of the wave-particle duality, which says that something can be both a wave and a particle simultaneously, but when seen as one it cannot be seen as the other.

Measuring the location of a wave-particle is a matter of probability, wherein the location can be anywhere on the wave. For example, where exactly is the particle expressed by this wave?

Is the particle At 1? At -2? Answer: Both and neither. It’s more likely to be at 1, but less likely to be there than at all the other options, combined.

Economics too has its counter-intuitive moments, and one of these has to do with the debt-deposit duality, wherein something can be both a debt and not a debt at the same time.

Question: How much is the U.S. debt?

Is it the red bar (Debt Outstanding Domestic Nonfinancial Sectors – Federal Government Sector)? Is it the blue bar (Federal Debt Held by Private Investors)? Both or neither? My vote: The federal debt is $0, but if you disagree, we have to identify exactly how and what you are measuring.

Assume your friend asks to borrow $10,000 from you. If before lending that money, you discover your friend already owes various people $5 million, you might be less likely to lend him any more, for fear his debts are unsustainable and he is living beyond his means.

Your concern might be exacerbated if you discover he is asking dozens of people for loans. All that debt could be a serious burden on his ability to repay.

Now consider the circumstance in which you deposit $10,000 in your bank checking account. Is your bank now “in debt” to you? Yes, but not in the same way. You don’t view this as a loan to your bank. You view it as a “deposit.”

And if you discover that not only does your bank have many billions on deposit, but it actively is soliciting more deposits, that probably would not concern you. In fact, you may trust bigger (i.e. having more deposits) banks more than smaller banks.

Bank deposits are viewed differently from ordinary loans.

The federal debt is neither more nor less than the total of deposits in T-security accounts at the Federal Reserve Bank, the difference in “debt” amounts, being who owns those T-security accounts. For the red bar on the graph, the T-securities can be owned by government agencies and the private sector. The blue bar shows T-security ownership only by the private sector.

Either way, when you purchase T-bills, you simply have made a deposit in your T-bill account at the FRB. Should you worry about the size of deposits at the FRB?

You might worry about lending money to a friend who already is deeply in debt, and actively is seeking even more loans. But you probably didn’t worry about making a deposit at your local bank. So why would you worry about your deposit at the world’s safest, most powerful bank, the FRB?

JPMorgan Chase & Co. is weak compared with the Federal Reserve Bank, but has more than $1 trillion in deposits (debt). So, with all that “debt,” are they living beyond their means? Probably not. Last year, their profit exceeded $20 billion.

If someone says, “The government is $10 trillion in debt,” that may sound worrisome. But if someone makes the even more correct statement, “People have deposited $10 trillion with the Federal Reserve Bank,” you probably would not think that translates into, “The federal government is ‘living beyond its means.

The statements are identical. “Deposits” simply have a different inference from “debt,” though in one sense, deposits are debt.

The agenda for many people, particularly the upper .1% income/wealth group, is to scare the 99.9% with “debt clocks” and frightening statements about the federal debt being “unsustainable” or the government being “broke.” These lies rely on the negative implications of the word “debt.”

The nefarious purpose is to encourage the population’s agreement with austerity (debt cutting), which widens the gap between the .1% and the 99.9%.

Our Monetarily Sovereign federal government is not, and cannot go, “broke.” Deposits at the FRB cannot be “unsustainable.”

The Federal government doesn’t even owe those deposits; the FRB does, which it pays back simply by transferring dollars from holders’ T-security accounts to the same holders’ checking accounts.

And since the federal government doesn’t owe those T-security dollars deposited with the Federal Reserve Bank, I believe the federal debt is functionally $0.

The next time someone tells you the government owes trillions of dollars, which our grandchildren will have to pay, ask him, “Are you referring to the trillions of dollars in deposits at the Federal Reserve Bank, which are paid off simply by transferring dollars from depositors’ T-security accounts to their checking accounts?”

Of course, the person won’t know what you’re talking about, which is O.K., because they demonstrated they also don’t know what they are talking about, either.

That’s 100% ignorance.

Mitchell’s laws:

  • The more federal budgets are cut and taxes increased, the weaker an economy becomes.
  • Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
  • Until the 99% understand the need for federal deficits, the upper 1% will rule.
  • To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
  • Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
  • The penalty for ignorance is slavery.
  • Everything in economics devolves to motive.

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5 replies on “The Debt-Deposit Duality”

  1. You forget the one big difference: bank customers deposit dollars in their bank, but U.S. Treasury deposits IOU’s in the FRB for which the FRB lends it the correspondig amount of dollars! So yes, the U.S. public debt IS $12 Trillion.

  2. @pcab50 Yours is a common misunderstanding of how our fiat monetary system works.  The money in all those T-bond accounts never actually gets used.  If it was, then the Govt deficit would not increase the money supply as the Fed operates under a 100% reserve accounting system and not a fractional reserve system like private banks…..this is obviously false and all you have to do is watch the money supply form the Fed.  Its OK though, almost everyone gets this part of our monetary system wrong…hence why there is so much confusion about “funding: the Govt

  3. @RODGERMITCHELL Hey Rodger, I’ve already read this piece on your site.  Just wanted you to know I’ve found your description of the debt as deposits to be the most effective way of explaining the irrelevance of the national “debt”.  Thanks for all your hard work fighting the good fight, we will prevail

    Austerians have been largely debunked by recent reviews of key research that tried, and failed, to prove that debt beyond a certain point was economically destructive. Even though that notion seems self-evident.
    Anyway, austerity as dogma was always more a political animal than an economic one. Few economists want to lay to everlasting peace Keynes’s key finding in the early 1930s that proposed Stimulus Spending to get the world out of a Great Depression. In fact, the Roosevelt administration that had embarked upon a “balanced budget” policy soon realized that it was not working. It adopted Keynes’ proposition of government spending to stimulate jobs that, in turn, should kick-start a dormant economy.
    Austerity was proposed, I submit, by a Republican administration as an electoral ploy to prevent the Obama administration from spending its way out of a serious employment situation (handed to it by the Bush administration). It wanted Obama to face the presidential elections of last year with high unemployment. They were “gaming the electoral system”, with complete disregard for the misery that would bring to far too many of our fellow Americans.
    Fifteen percent of the American population, that is close to 47 million American men, women and children, now find themselves below the poverty threshold. They certainly did and do not need a Federal austerity budget.
    No doubt, however large the budget is today, it must be brought back to governable proportions. Meaning that some debt is OK but too much debt shackles tax-revenue to debt-maintenance payments. That money could be better spent elsewhere or, if not necessary, simply reduce tax-revenues.
    The measure most economists adopt towards understanding how well or not an economy can sustain its debt is the Debt as a percentage of GDP number. That percentage depicted as a world-map can be accessed here:
    Note that the colour code has significance, that is, progressing from green to the more “burnt” colours is indicative of a country’s ability to both maintain and reduce its national debt. The US once had a debt to GDP ration below 50%. So, it is currently progressing into uncharted waters.
    The Debt/GDP percentage progress can be reversed, it is a question of how. And Stimulus Spending, which means more borrowed debt, has the beneficial consequences of raising incomes and thus tax revenues – due to what economists call the Multiplier Effect, that is, one dollar spent circulates and by doing so accounts for anywhere between 1.5 and 1.9 times more income.
    So, there is every reason to try it. But, such a notion does not conform with the current political stance of those who control the HofR, from which all spending bills issue. The gridlock in LaLaLand-on-the-Potomac is at its worst …

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