On Government Debt
Memetics In The Context of DOGE
One more piece elaborating on my reply to Elon on X, before we start digging into ideas, trades and essays on frameworks and models.
Government debt, particularly in the case of the United States, is frequently misunderstood. It’s not "debt" in the traditional sense—a burden to be repaid with future sacrifices. Instead, it serves as the collateral account of the economy, a foundational feature of the financial system. For the USD, as the world’s reserve currency, this dynamic operates on a global scale. US Treasuries are effectively the collateral for the world economy, the primary asset sovereign nations and institutions rely on to park reserves in a risk-free, liquid form.
Understanding this requires unpacking the mechanistic plumbing of Federal Reserve operations, as well as the behavioral nuances that underpin monetary systems.
The Mechanistic Plumbing
The Federal Reserve’s toolkit is essential to grasping how government debt functions. Consider these key tools:
1. Open Market Operations
The Fed buys or sells Treasuries to influence short-term interest rates and ensure liquidity in the financial system. When the Fed purchases Treasuries, it injects reserves into the banking system, effectively increasing the money supply.
2. Reserve Requirements and Interest on Reserves
Banks hold reserves at the Fed, which can earn interest. Adjusting these rates influences lending behavior, directly tying Treasuries to broader economic activity through commercial banks and their willingness to lend.
3. Yield Curve Control
In extreme cases, the Fed can target long-term interest rates directly by purchasing Treasuries across maturities, ensuring that bond vigilantes—those betting on higher yields—cannot reprice government debt outside the Fed's intended range.
This mechanistic control underscores that government debt, particularly in the case of the USD, does not function like a household budget. It’s the opposite: it is the operating framework for economic activity.
The Behavioral Nuances of Fiat Systems
Fiat currency operates on an intersubjective, faith-based system. This isn’t to dismiss its validity; rather, it acknowledges that fiat’s value is contingent on trust in the government and its institutions. Taxes enforce demand for the currency, while credible monetary policy maintains purchasing power.
Here lies the cognitive dissonance: hard money systems—like gold or cryptocurrencies—feel more intuitive because they tie value to scarcity. Fiat, by contrast, exists as a collective agreement backed by nothing tangible except the government’s ability to tax.
When hard-money monetarist memes gain traction, they risk undermining this shared faith. Yet, as much as these narratives resonate with certain ideological preferences, they face a practical wall: no bond vigilante can reprice US Treasuries against the Fed. The Fed’s monopoly on dollar creation, combined with its ability to control rates, renders such an attempt futile.
More or Less Spending: A Feature, Not a Bug
Government spending must strike a delicate balance. Too much spending can be inflationary, especially when there’s a lack of productive slack to meet rising demand. But too little spending leaves the economy operating below potential, with underutilized resources and stifled growth.
The optimal level of government spending depends on the economy's productive capacity, measured in terms of labor, capital, and technology. Fiscal policy, in tandem with monetary policy, should aim to sustain equilibrium—stimulating during downturns and restraining during booms. Thus, as an operational tool, budget deficits are a feature, not a bug.
For example:
During recessions, increased government spending can absorb slack, creating jobs and spurring investment.
During inflationary periods, fiscal restraint, alongside Fed rate hikes, helps cool demand.
Of course, this is in ideal terms as we've observed in recent times government has been less nimble here than optimal. Luckily, the Department of Government Efficiency (DOGE) is looking to get to work on the deficit. Re-engineering government for efficiency and productivity is a noble task, whether or not it might be motivated by a misunderstanding of government debt.
Treasuries as the Collagen of the Global Economy
Treasuries are more than just sovereign reserves. They underpin global financial systems in profound ways:
Repo Markets: Treasuries serve as collateral for short-term borrowing, providing liquidity for financial institutions.
Risk Management: Treasuries anchor portfolios, hedging against volatility in riskier assets.
Foreign Exchange Systems: Central banks globally hold Treasuries to stabilize their currencies and manage cross-border capital flows.
Their ubiquitous role makes US government debt the collagen that binds the global financial system together. Attempts to reduce or eliminate this debt ignore the destabilizing consequences for this intricate web.
Accounting for Government "Debt"
Finally, consider the accounting perspective: if we calculate the US government’s net debt, cash and cash equivalents on its balance sheet are technically unconstrained. As the issuer of the reserve currency, the US government can always create dollars to meet its obligations. The constraints are real economic ones—resources, labor, and productive capacity—not financial ones.
By understanding this distinction, we see that government debt is not something to fear but a tool to wield. The real challenge is not in "paying it down" but in managing it wisely to foster economic stability and growth.
This framework demands a deeper engagement with Fed operations and the behavioral psychology of fiat systems. Misunderstanding these concepts leads to flawed narratives that fail to grasp the sophisticated interplay of mechanisms and human trust that underlie modern monetary systems. Far from being a burden, government debt is the scaffolding on which the economy—and the global financial system—stands.
Best,
CHT