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ABC news indicates US starts fiscal year with record $31 trillion in debt

Is there any other mechanism besides taxation (of incomes, goods, services) that could reduce said debt?

Individual / Corporate debt is limited by their ability (cash flow) to make payments. Does the same notion (limit) apply to the US Government? Or does it magically print more money to pay said debt?

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  • $\begingroup$ Eliminating government debt entirely would be pretty bad, given how the world economy is set up at the moment. E.g. banks are required to hold a “stock of high-quality liquid assets (HQLA)” to use in the numerator of the Liquidity Coverage Ratio (LCR). Under the standard, banks must hold a stock of unencumbered HQLA to cover the total net cash outflows (as defined in LCR40) over a 30-day period under the stress scenario. Free float of government bonds is already very low at times as can be read here. $\endgroup$
    – Alex
    Oct 7, 2022 at 20:40

1 Answer 1

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Is there any other mechanism besides taxation (of incomes, goods, services) that could reduce said debt?

Yes, not just one but several:

  1. US central bank (Fed) could buy the debt by electronically created new money and then just scrap it by destroying the bond. E.g. if Fed would buy \$1000 dollar bond and then destroy the bond US debt would be \$1000 dollar lower.
  2. Treasury could print physically new money and buy back the debt.
  3. US can default/partially default and say that all/portion of the debt will never be repaid.

Individual / Corporate debt is limited by their ability (cash flow) to make payments. Does the same notion (limit) apply to the US Government?

No it does not apply to the government. Government budget constraint is given by:

$$G= T+ \theta +B$$

Where $G$ is government spending, $T$ are taxes net of interest payments, $\theta$ is new high powered money and $B$ is government debt.

Hence government does not need positive cashflow $T>G$ in order to reduce government debt. It can also just create new high powered money $\theta$ (or it can default which also private company can but private company in default will usually cease operation whereas government just moves on).

Or does it magically print more money to pay said debt?

Magically? No! Government either uses printing press (in US its bureau of engraving and printing - part of Treasury) or computers to do it electronically (by Fed creating new reserves and purchasing government debt). There is nothing magical about printing press or computer ledger.

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  • $\begingroup$ Not disagreeing with this answer, but options 1 and 2 are more or less accounting tricks. They just replace the IOUs held by investors in the form of debt with cash, which is really just an IOU as well, whether it's physical cash or digital. $\endgroup$
    – quant
    Oct 5, 2022 at 21:46
  • $\begingroup$ @quant but cash is not debt for a government you were asking about how US government can get rid of the 31T public debt. Creating more cash is not some accounting trick, it actually does reduce the government debt. Giving investors cash is literally how you have to do it, you can’t pay for regular treasury in let’s say oil or gold. A regular bond literally stipulates that it’s face value has to be paid back in cash. It does not matter where that cash comes from taxes or printing press $\endgroup$
    – 1muflon1
    Oct 5, 2022 at 22:02
  • $\begingroup$ It was probably unfair to call it an accounting trick. What I should have said was that such an act would have little real economic impact. $\endgroup$
    – quant
    Oct 5, 2022 at 22:11
  • $\begingroup$ @quant but that is also not correct, it reduces government debt so it has real impact on government finances. For example suppose government originally had \$1000 with annual coupon \$10, suppose that tax revenue before \$5 so with bond government runs deficit, after buying that bond with new money government would run \$5. Moreover, in short run increasing money supply in a country can affect aggregate demand and it also can affect inflation. $\endgroup$
    – 1muflon1
    Oct 6, 2022 at 10:05
  • $\begingroup$ I think it would just inflate the currency, so where previously the cost was borne by the state, it is now distributed to those holding cash. Ultimately the state will have to tax people to pay it back anyway. So the only difference is that the state taxes people differently to the way inflation does. Taxation by the state is probably better, but the overall cost to the economy would be the same, wouldn't it? $\endgroup$
    – quant
    Oct 21, 2022 at 14:31

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