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The biggest misnomer in American politics is that the US needs to pay off its debt. It doesn’t. Paying off our debt would actually be a disaster, because it would eliminate an entire market that depends on American debt securities.

Rather, what’s actually more important is for the US to stop running massive budget deficits. It may sound like a subtle difference, but it’s actually quite huge.

In the US, the “debt” is merely a calculation of accumulated budget deficits over time, and I’d argue that it’s not that meaningful of a number, except to show what happened in the past. Whereas, a budget deficit is how much more the government spends than it takes in.  Whenever there is a deficit, it creates inflation.  Whenever there is a surplus, it creates deflation.  For this reason, it’s more accurate to think of things this way:

Deficit = Inflation

US debt to GDP could stay at 120% for the next 200 years and we’d be fine. But if we keep running budget deficits over 8% of GDP, then we’ll begin to see very significant inflation in the economy.

There is a caveat to this. This is only true because the US is a sovereign issuer of its own currency. For this reason, “debt” isn’t debt in a meaningful sense. Rather, debt = inflation.

If the US did not print its own currency, our “debt” would be more like debt for individuals and corporations.  This is true for our state governments, as well as the Eurozone nations that are pegged to the Euro (an external currency in an economic sense).

None of this is to say Federal spending isn’t important.  Nor is it to say that the “accumulated Federal debt” is irrelevant.  It’s merely to say that due to our status as a sovereign issuer of currency, it’s future deficits that are more pertinent.  So the goal should not be to “pay off the debt.”  Rather, the goal should be to stop running massive budget deficits and start balancing our budget, before we create more inflation.