Is all money really backed by debt?

Since our currency is, in fact, a debt instrument, then the answer is yes. If the debt were truly retired, we would have no more currency.

I suppose an argument exists that our currency is also a representation of value, so in that sense it might still be acknowledged to be worth something even if the debt was retired.

I don't think we have to worry about it in our lifetime, though.

So when some pundits talk about "reneging on the national debt," what specific implications does that have on the currency since it is backed by the debt?

Hyperinflation?

Money in the US largely follows a debt pattern.

But in Asia - countries with savings - they are the ones funding our OM purchases.

Chase Us, Break In http://chasingconsultantsbreakingbankers.blogspot.com/

Not to belabor the obvious, but if the US government defaults on its debt the modern financial system, as we know, it would fall apart. Tangentially, that's the best argument to sell massive quantities of US govvie CDSs.

You bring up an interesting topic... makes me think about the modern monetarist school of thought, which relies on the quantity theory of money formula... someone correct me if I'm wrong here.

PQ = MV

Put simply, that translates into (price levels x Real GDP) = (Monetary supply x velocity of $)

Monetarists assume that (Price Levels / Velocity) is a relatively constant value, meaning that Real GDP is positively related to supply of money... thus, the money supply should grow at a steady rate and government should otherwise be hands-off on the economy... they should avoid deficits and heavy spending. Just print currency, essentially... which does not incur debt.

STK3... if the government starts buying back treasuries, that actually grows the money supply exponentially by the money multiplier, which is (amount of par repurchased / reserve requirement) That's the principal behind open market operations. The fed buys treasuries, sending the $$$'s back into the market. If the fed sells treasuries, it's taking $$$ out of the market.

Ideating... I don't think the fed will ever default. Ever. I think the more realistic question is what happens when US gov't debt loses its AAA rating (though I'd love to meet the analyst...) and the Chinese start dumping treasuries, flooding the market with supply. We've seen yields pop almost 100bps in the last month due to oversupply, and mortgage rates jumped along with them from 4.81 to 5.28ish... imagine how high rates would go if the Chinese start flooding the market. Think people don't want to buy houses at 5.25% ... what happens when 30 yrs are going for 10%. Just a few thoughts... only time will tell about rates, but I'm of the mind that we're in for some pretty serious inflation.

Sof_2.. the treasury can not retire or issue debt without affecting the money supply.

Well in theory...

We can also create currency by net exporting/growing our GDP. So net export > interest expense, the exported GDP should be paying for the interest and paying a portion of principal... meaning at some point all the principal will be re-paid using dollars created, not dollars borrowed. If net-export=interest expense, then the principal will keep getting rolled, but the interest expense is sustained through exported GDP. Obviously we're not net exporting sufficient to meet interest expense right now, that why we need to issue more debt to finance the interest expense.

This is obviously ridiculously simplified, since their are probably thousands of other factors that would come into play... but in theory it is possible.

That's not quite true. If the debt is denominated in US dollars, it can only be repaid in US dollars. Since all US dollars currently in circulation are backed by some form of debt, we cannot "decrease" any outstanding debt without also affecting the money supply.

So what happens if we fly to the UK, pack up a briefcase of GBP, return to the states and convert to USD. Then you have USD that is backed by the gilt, as opposed to T-Bills, right?

This is getting too cerebral/theoretic for me, one day pre-exam.

Associate Geurilla - I agree with what you wrote here:

"STK3... if the government starts buying back treasuries, that actually grows the money supply exponentially by the money multiplier, which is (amount of par repurchased / reserve requirement) That's the principal behind open market operations. The fed buys treasuries, sending the $$$'s back into the market. If the fed sells treasuries, it's taking $$$ out of the market."

I understand this concept, this is how the Fed sets the target fed funds rate (through the NY fed) but this is the logic I was following in my post:

Lets say the US needs a $1 trillion, so they can either print the money or "print" and sell treasuries. Wouldn't both solutions increase the money supply by $1 trillion?

If what I said is true then the government could start printing money to pay off the outstanding treasuries and that wouldn't affect the money supply (substituting one type of money for another).

If my logic is flawed can you please point it out? The only thing that I am not sure about is whether issuing new treasuries increases the money supply or not - took econ a long time ago.

The difference here is that you are talking about the Fed selling treasuries that are already on the Fed's balance sheet, while I am talking about the government issuing new treasuries.

The Fed only "prints" money when it PURCHASES treasuries from the public (thus exchanging debt for money in the economy). This increases the money supply.

If the Fed SELLS treasuries to the public (thus exchanging money for debt in the economy), the money supply decreases.

There is no "printing" of money when treasuries are sold, only when treasuries are purchased by the Fed.

If the government needs money, it will ask the Fed to issue treasury NOTES (i.e. debt) and not actual currency. These notes are then sold either domestically or internationally. In either case, the debt is denominated in US dollars, and therefore, requires the government to repay all holders of the debt in US dollars.

Since there is only a finite amount of US dollars in circulation and all of it is already backed by some existing debt, the Fed is forced to "print" more US dollars to "fund" the government's principal and interest payments.

While raising taxes will enable the government to collect more money and repay some of its debt to certain parties, raising taxes will not solve the entire debt problem in the US since all the money collected through taxes is already backed by some existing debt.

To create "new money" in the economy, the Fed has to "print" new money by purchasing treasuries or banks have to lend new money into the economy through the fractional reserve system.

In either case, the "new money" is always backed by debt.

I believe this is what the OP is talking about: http://www.youtube.com/view_play_list?p=2BFC5DC5BA467429&search_query=z…

It is very interesting and I would like to hear an economics professional explain/discuss this further. Certainly makes sense why Ron Paul advocates auditing and then abolishing the Federal Reserve.

so we cant pay off the national debt?

That would give more backing to our currency, but could that also generate more money in the market?

I think another very risky method is to rebase our currency not on the power of the economy, but maybe by specie. Even though that will kill off most growth due to a stagnant money supply, it will stop the system of creating more money by adjusting interest rates.

The bad thing is if we do this before we pay off the debt, would foreign countries force us to pay back our debts with specie?

can someone tie this discussion with the notion that when the U.S. stops borrowing, the rest of the world would suffer? Also, how is the U.S. able to absorb so much debt? its strong consumer spending base?