Reply #34: Our borrowing is largely a gold standard relic..

[girl gone mad]

but your real mistake is in imagining government debt to be like household debt.

Government debt is not true debt. The government doesn’t have to draw on revenue, borrow, or sell assets to cover its debts, as households do. It’s just a matter of crediting and debiting accounts on the government's book. This is just an accounting device, even though it appears that there is an actual financial relationship occurring between the central bank and Treasury. Reserves that are transferred to banks through government disbursement are used to buy treasuries. When a treasury is bought there is a transfer of reserves from the buyer’s bank account at the Fed to the government’s account. When the treasuries are redeemed (sold), the reserves that were stored at interest are simply switched back, creating a deposit again. It’s essentially the same as buying and selling a CD, just a swap between reserves and securities at the government level.

Government spending is included in GDP, not constrained by GDP. A sovereign fiat currency government does have infinite capacity to spend and produce money, but if the government floods the system with too many dollars chasing too few goods, this will drive up prices.

Foreigners don't fund our spending. We don't need to sell bonds to China, but it's a relationship which is more beneficial to us than it is to them. China gets pieces of paper which we produce at little to no cost in exchange for finished goods which they labored to produce. We give them a small amount of interest and provide a safe haven for their savers.