Quote from: BubbleBoy on September 30, 2011, 10:07:21 AM

There is some truth to this, in that the central Bank is required by law to consider government debt a high quality asset, and the commercial banks have the option to swap debt for cash if and when the central bank decides to expand the monetary base. In effect it's like the central bank prints money for the government's use, and the commercial banks are pocketing the interest.

Your smart. IMO this appears to be the only reason why government debt exists. Functionally it serves no purpose. Instead of issuing Treasuries, the Government(Treasury) should just print money.

Quote from: BubbleBoy

That being said, you have to look at the magnitude of these operations to judge if govt. debt is merely a way of issuing fiat. As it turns out, in the case of the United States it's not: the Fed holds a quantity of bonds in the low trillions of dollars, while the total debt is in the order of 15 trillion of dollars. Roughly a third of that 15T is held by international lenders, a third is intergovernmental debt (pensions for federal employees, federal insurance schemes etc.), and another third is shared by the Fed and the general US public: mutual funds, private insurers etc.

Yea your right. The FED only holds a small fraction of Total Government Debt, but all private holders issue 'credits' on it. If you held a Treasury and deposited at a Private Bank, they would issue credits on it. By definition, when the Bond comes due, the Treasury must pay the value of Bond. Therefore Private Banks( or any smart Private Entity) will treat Bonds in exactly the same way as cash. So even though the FED holds a small fraction of Total Bonds, the Bonds circulating in the economy are functioning exactly like money.

Quote from: BubbleBoy

So if you are an international entity that lent money to US or a pensioner, there's absolutely no "myth" of government debt: the US treasury actually owes you money, and it's very evil if they don't pay it pack. The other face of the evil is the captive citizens that are held accountable for debt they can't control, and which for the most part goes to finance actions that don't benefit them. Yup, govt. debt is pretty evil alright.

The 'myth' is that Government Debt behaves like Household Debt. Unlike households the state can create as much currency as it wants. So when the Bond comes due, the State can simply issue more money to pay back the Bond. This is a result of the interaction between the Treasury and the FED, where the FED purchases Treasuries in exchange for cash. But the total number of Treasuries that the FED can purchase is bound by the number of Bonds. Therefore the amount of money that the FED can create is bound by the size of the National Debt.