THERE IS AN innocent false impression of our present day economic ecology that widely exists today. This collective misunderstanding mostly arises from a failure to distinguish the completely separate monetary functions of the United States federal government, from the monetary functions of everyone else. Since the gold standard era ended, the federal government operates under a new paradigm, different from what we were taught long ago, and different from what we are still told today. Certain idiosyncratic relics from that bygone-gold-standard era, like the formality of needing to raise a debt ceiling to increase federal government deficit spending, or the tradition of selling Treasury bonds to finance that spending, still clumsily coexist with today's post-gold-standard reality. As a result, the important needs of the rest of us, to balance our individual budgets, are routinely confused and often commingled with the more important needs of the federal government, to balance their entire economy.
In the gold-standard era, the US federal government, then a user of dollars backed by gold, needed to finance deficit spending by raising revenue via taxation, or by selling debt in the form of bonds, which are today called US Treasury bonds. When it left the gold standard, however, the federal government completely changed, from being a user of dollars (backed by gold), to becoming the issuer of dollars (that are not backed by gold). Today, in the post-gold-standard era, the function of financing federal government deficit spending has also completely changed, and Treasury bonds now play a new multifunctional role in our modern monetary system.
All US Treasury securities (short-term bills, medium-term notes, and long-term bonds) are a safe investment for all users of dollars because all US Treasury securities are risk-free, interest-bearing, time deposits in the Securities, or savings account, at the US central bank, the Federal Reserve. Treasury bonds are actively traded in a liquid global Treasury bond market which serves as a safe harbor for dollars taking flights to quality away from risky assets, into risk-free assets like Treasury bonds, during global market turbulence. Treasury bonds are used in monetary policy to set the price of dollars, or, the interest rate of money, and to keep the economy growing smoothly by accommodating or tightening economic conditions to achieve full employment and price stability. Treasury bonds are used in fiscal policy to help grow the economy whenever increased federal government deficit-spending is needed to stimulate aggregate demand. Furthermore, Treasury bond issuance today serves to neutralize the inflationary effect of newly printed, freshly created, fiat dollars that now finance federal government deficit spending.
The federal government is the issuer of dollars, and everyone else - you, me, all households, all businesses, any US local cities, US states, or foreign governments (all together, this book will refer to these as the "nonfederal government"), are the users of dollars. In today's modern monetary system, all dollars are initially added by federal government deficit-spending, and they multiply from nonfederal government deficit-spending. All dollars are printed, or created, by both federal-government and nonfederal-government deficit spending, and far from being a problem, this is how the economy grows. Injections of newly created dollars from both federal-government deficit spending and nonfederal-government deficit spending kick that flywheel, a yin-yang of supply and demand, to keep it spinning in a steady balance along with all other existing dollars in the economy. Post-gold-standard, the federal government, the issuer of dollars, doesn't need to borrow dollars to deficit-spend anymore, but the nonfederal government, the users of dollars, still does.