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Policymakers need to start being more honest about how the U.S. debt works.
It's an age-old debate among the members of Congress. How do we cut the budget? How do we reduce the debt?
But the argument over whether to raise taxes on the rich or cut spending to social programs is not the most frustrating part of this never-ending debate.
Rather, the whole debate is built off a misunderstanding of how the U.S. debt works and how the government spends money.
At best, Congress is ignorant of the process. At worst, they're fully aware of how the U.S. debt works and are simply molding their arguments to push a sinister political agenda.
How the U.S. Debt Works
The U.S. Federal Reserve acts as the U.S. government's banker. It is also the banker for the private sector's commercial banks and for foreign holders of U.S. dollars.
When the government wants to make a purchase, it simply wires money to a commercial bank and those funds are held as an overdraft in the commercial bank's reserve account at the Fed.
Let's say the U.S. government wanted to buy a weapons system from a defense contractor. They would wire those funds to the commercial bank holding that defense contractor's account. And the defense contractor could then withdraw those funds and convert them to cash, or more likely, let them sit in the commercial bank's reserves until they want to draw on them to pay a business expense.
Could the U.S. Default on Its Debt?
With news of both a Greek default and what was almost a Puerto Rican default, observers are predictably going to find a way to shift focus at some point – to the $18.2 trillion in U.S. debt.
The big question here is: Could the United States go the way of Greece and Puerto Rico? Could the U.S. government default on its debt?
The simple answer is yes, the U.S. government can default on its debt, but not in the same manner as Greece or Puerto Rico.