“Debt” and Bull Markets

The stock of Treasuries is generally misunderstood to be the national “debt”. In fact, it is the record of the net transfer of funds to the private sector from the federal government. It is not money that was borrowed by the Treasury. The federal government is monetarily-sovereign, which means it creates the money it spends and destroys the money it taxes back. The Treasury does not borrow what it can create as needed.

When the Treasury spends more than it taxes back, it registers a deficit (net-spending), and this deficit is matched by the sale of Treasury bonds. This sale is not a functional requirement for the Treasury to operate. It is a vestigial leftover from the gold-standard days which today is used to manage reserve levels and interest rates.

Treasury bonds are a form of savings account where the Treasury pays interest on the dollars held in the account. The Treasury never touches the money, and when the bond matures, the money is simply transferred back to the owner’s checking account along with new dollars in interest.

Increasing “debt” correlates strongly with the SPX (chart below). This makes sense when one understands that the so-called “debt” is actually the net-transfer of funds to the private sector.

ANG Traders are among the few who understand that bull markets are fed by deficit spending.

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