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Giving background to my question: a prominent economist was discussing the problems of the US currency and predicting it's collapse, said the following:

"...a currency is a store of value, it's a promise of a government to repay"

He continued as follows:

"People are eventually going to realise, with the US issuing even more debt, historic amounts of debt, the dollar has to go down, because we can never repay the debt...we have 250-260 trillion dollars in debt when you include all the obligations that we have in terms of social welfare entitlement programs, medicare, medicaid and it just keeps going up and up and up, and eventually the dollar is going to go down and down and down...because people are going to realise they are worthless...".

So, my question is in 2 parts as follows: As the US uses fiat currency with no physical commodity attached to it (since 1971)...

(i) How does the economist link the total national US debt of 250 trillion dollars with the US governments promise to repay when defining currency? In other words, what has 'a promise to repay' definition part of the currency got to do with the huge US debt?

(ii) The explanation of what the economist means when he defined the US currency as a "promise of a government to repay"? I mean, what is there to repay when a currency has no physical commodity attached to it other than swapping it for another dollar?

Thanks.

Note: The link to that programme on youtube (please fast forward to position 15:33) is here.

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  • $\begingroup$ This question is asking for things that are largely opinion-based, as you want to know what a particular person meant. (Disclaimer: my opinion is that his analysis is flawed, and so what he means does not really matter.) I think the question needs to be re-phrased to be a question about economics (and not what a person really means), so it might be possible to give an answer without having to worry what he said in an interview. $\endgroup$ – Brian Romanchuk Mar 15 '18 at 21:27
  • $\begingroup$ @BrianRomanchuk this isn't the first time I've heard "a dollar is a promise to pay" and I'd also like to know what it means. $\endgroup$ – user253751 Mar 16 '18 at 9:59
  • $\begingroup$ The question should be rewritten as “is the dollar a promise to repay?” - this eliminates what that particular economist was talking about. He thinks the “debt” is 250 trillion, which is an indication that he is not a reliable source. $\endgroup$ – Brian Romanchuk Mar 16 '18 at 10:26
  • $\begingroup$ @immibis Thanks for your support, which may have tilted Brain's decision to answer. $\endgroup$ – Cem R. Mar 16 '18 at 13:20
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I looked at that video only briefly. Trying to interpret what that interviewee said would be an opinion-based answer, which this site wants to avoid. I will instead try to answer the question without referring to his comments. In my opinion, I have serious doubts that the economist in the video could offer a convincing explanation of what he said.

Note: it is incorrect to refer to future entitlement spending as a “debt”. At most, it is a “contingent liability.” A debt is a financial claim, held by an owner. An inability to distinguish between debts and contingent liabilities is a signal that he is an ideologue, and not a reliable source. This also means that the 200+ trillion debt is a worthless figure, as it would need to be held in context against future tax revenues as a capitalised asset - which will also run into the hundreds of trillions of dollars.

(1) The linkage between “the promise to pay” on currencies large existing debts and contingent liabilities is presumably the threat of inflation or hyperinflation. In the case of a hyperinflation, a currency is often withdrawn from circulation, and so it cannot be used to pay for things. However, I cannot name a serious body of economists that treats hyperinflation in the US as a possibility under current policy settings.

(2) A promise to repay on currency is just a promise that it will be redeemed at par value by the US government. This means that banks can convert currency to deposits at the Fed (“reserves”) at par. Although this is just converting one US government liability for another, it does distinguish currency from other tokens that might circulate (foreign currency, gift cards, etc.). For an individual, since they do not bank at the Federal Reserve, it gives them a right to exchange currency at par for a bank deposit - or to settle tax payments.

From the perspective of Chartalism (or neo-Chartalism), the “promise to repay” derives its importance from the fact that currency will be accepted at par to settle future taxes. The prospect of the need to settle taxes is what gives currency its value.

Although settlement at par seems natural, it was not always the case. Pre-Federal Reserve, cheques (check in American spelling) drawn on other banks with weaker reputations would not settle at par. That is, you might need to write a cheque of \$110 to settle a debt of \$100 at another bank. The “promise to repay” (and payment system regulations) mean that these “internal exchange rates” disappear.

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  • $\begingroup$ Yes, you are right, I never thought of it that way, that is, the $250 Trillion dollars will be offset by the coming tax revenues, etc. Thanks a lot for answering my question, it means a lot to me. $\endgroup$ – Cem R. Mar 16 '18 at 13:15

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