Interestingly, there is one exception to the rule that "Banks lend out their depositors’ money.” That exception is the Federal Reserve. When the Federal Reserve lends out money, they aren’t lending money that somebody else deposited. Rather, they are spawning the existence of money out of nothing. When the Federal Reserve lends money to a bank, the money comes into existence. When the banks pay the money back to the Federal Reserve, the money ceases to exist.
The only reason money has any value is because we all collectively believe it has value. I have a few dollars in my personal nest egg. I’m hopeful the number of those dollars will grow with interest and that when I retire, an economy will exist where people will be willing to trade real-world useful goods and services for those dollars. But if people stop believing in the value of money, money becomes worthless.
In the inimitable words of Yuval Noah Harari:
Any large-scale human cooperation – whether a modern state, a medieval church, an ancient city or an archaic tribe – is rooted in common myths that exist only in people’s collective imagination. Churches are rooted in common religious myths. Two Catholics who have never met can nevertheless go together on crusade or pool funds to build a hospital because they both believe that God was incarnated in human flesh and allowed Himself to be crucified to redeem our sins. States are rooted in common national myths. Two Serbs who have never met might risk their lives to save one another because both believe in the existence of the Serbian nation, the Serbian homeland and the Serbian flag. Judicial systems are rooted in common legal myths. Two lawyers who have never met can nevertheless combine efforts to defend a complete stranger because they both believe in the existence of laws, justice, human rights – and the money paid out in fees. Yet none of these things exists outside the stories that people invent and tell one another.
There are no gods in the universe, no nations, no money, no human rights, no laws, and no justice outside the common imagination of human beings.
People easily acknowledge that ‘primitive tribes’ cement their social order by believing in ghosts and spirits, and gathering each full moon to dance together around the campfire. What we fail to appreciate is that our modern institutions function on exactly the same basis. Take for example the world of business corporations. Modern businesspeople and lawyers are, in fact, powerful sorcerers. The principal difference between them and tribal shamans is that modern lawyers tell far stranger tales.
Harari, Yuval Noah. Sapiens: A Brief History of Humankind (pp. 28-29). HarperCollins. Kindle Edition.
Tying these ideas to the national debt, there are people and corporations that have trillions of dollars in imaginary assets that exactly balance out the trillions of dollars of imaginary liabilities that the U.S. government holds. As long as they are generally content to have trillions of dollars in government bonds, or trillions of dollars in invented currency that the Federal Reserve could create with the stroke of a pen, or trillions of dollars of any other imaginary asset, then the system will be okay. But if the entities with the imaginary assets wanted to trade them in for real-world assets, we would have a problem.
That is why the Social Security Trust Fund is irrelevant. As a society, we don’t need a trust fund full of imaginary assets that can be distributed to people when they retire. Rather, we need an infrastructure, physical materials, and a labor force that is willing and able to produce the goods and services retirees will need to survive. The fundamental problem is having a society that lives in balance with the environment, continuously invests wisely in infrastructure, and has a healthy workforce that is in balance with people who are too young or too old to participate in the workforce.
Those are the real issues.
