29 February 2012

The Dirty Secret of Government Debt

If the federal debt were suddenly set to zero, there would be no Treasury bills. Greenspan fretted about this when we got a surplus under Clinton. Without T-bills, investors lose an important government guaranteed investment.

If a central bank like the Federal Reserve keeps inflation low, T-bills are a nice way to preserve wealth. They are not a particularly good vehicle for creating wealth, but they are generally safer than real estate, stock, or gold that can collapse by tens of percent with little warning. 

One of the unspoken truths about government debt is that there is strong demand for it. Demand from, among others, people with wealth and power, people who want to preserve both.

You might think it is irrational to argue for lower taxes without offering any real cuts. It is not. Lower taxes that create debt helps the wealthy twice. First, it lowers their taxes. Second, it gives them a safe - government insured - place to park their money.

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