How the government pays for its debt

There are two ways that the government pays for its debt: taxing its citizens and “money printing.”

How the government pays for its debt
Photo by Aditya Joshi / Unsplash

There are two ways that the government pays for deficit spending (debt): (1) taxing its citizens and (2) selling Treasury bonds to the Federal Reserve (“money printing”).

Taxing citizens

Taxing citizens brings in tax revenue for the government. If the Federal Reserve (Fed) didn’t exist, the government would have to have a balanced budget (only spend as much as they receive in tax revenue). This is a sustainable way for the government to pay for its debt.

Money printing

Selling Treasury bonds reduces the real cost of the government’s debt because it causes the value of the dollar to go down (inflation). This is unsustainable because the government can and will spend more than they could recoup with tax revenue (as we’ll see in a later section). The government will keep inflating the dollar to pay for its debt.

Think of inflation as an extra tax for people who hold dollars. To avoid this tax, hold as few dollars as possible. Buy assets like bitcoin, stocks, and real estate. Not investment advice.

Money printing also increases taxes due to “tax bracket creep”. As inflation increases, people’s salaries will increase even though their purchasing power stays the same. For example, someone making $50,000 a year will make nearly $100,000 in 6 years at 15% inflation. This puts people into higher tax brackets even though they’re not actually “richer.” So people pay more and more of their income to taxes due to inflation.

What if the government doesn’t pay its debt?

If the government could not tax citizens or “print money,” it would default on (not be able to pay) its debt. This would cause a global economic collapse. But that won’t happen because in the current system, the government can exploit taxing and money printing.

How much debt does the US have?

The US national debt is currently $29.3 trillion. The US federal tax revenue is $4 trillion. If the US stopped all spending today, it would take almost 7.5 years to pay off its debt. But the US is not decreasing its spending, it is increasing its spending. This is unsustainable.

This is why some people (like Peter Thiel) want to shut down the Fed. It would force the government to only spend what it can recoup from taxes.