Alright Spazz, I finally have an answer to give. I’ve been debating on whether or not to add how the concepts of money creation were used to build the Puritan Work Ethic and why the American Founding decided that was something to be respected, but, as with everything else, protected against with progressive taxation, laws against primogeniture and entail, anti-trust, and inheritance taxes. That was a little too much so I chopped it out.
If it's not actual debt, how much of our national debt is not actual debt. Does that mean we do not have to pay it back, and how much of our national debt do we have to pay back?
The portion on the Federal Reserve's balance sheet is not debt. The rest is. What happens is the Fed uses funny accounting to create money out of thin air and they buy US Treasuries with it. This is called base or high powered money, and is the actual cash in the system from which we build upon.
It may look like we are indebted to the Fed but the Fed returns all of the interest paid by the US Treasury right back to the US Treasury annually. The "debt" could be wiped out with the stroke of a keyboard but is not for functional reasons and because doing so could hurt the integrity of our currency.
How and why is money vanishing, and where is it going?
Most of our money is created by the market as debt through the fractional reserve process. Fractional reserve banking can be regulated and minimized to some extent but it is never extinguished in any monetary system. It's also necessary to have a functional modern economy as it is the main money creating mechanism. In a deflation/depression, money flow seizes and there is no money to earn and service debt payments with. Debts get defaulted on, which is another way of saying money vanishes from the system. It becomes a self-reinforcing cycle where less and less money is available to service debt, &, as debt becomes ever more risky due to default risk, the bank balance sheets face risk of insolvency. If we do nothing then banks collapse and so does the economy. The result is a stone aged, highly inefficient barter based economy where everyone fends for themselves a la The Great Depression.
Enter the Fed. See my 'discount window' comments above. In addition, as the main assistance function, the Fed buys even more UST's in order to lower interest rates and spur economic growth.
The Federal Reserve Bank and other central banks were set up to ensure stability and stop the runs on banks/depressions/recessions and all of that. Has it worked, and if so did they dampen the blow from 2008? Could they have prevented 2008? Did they help cause 2008 as the banks have been accused of helping cause many of the other depressed and recessed economy issues in the past?
Central banks are intended to smooth the cycle but aren't immune to it, & sure as hell aren't immune to our own hubris or political stupidity. They also aren't enough in severe collapses because they can't directly create demand. All the most influential thinkers have tried to imagine up systems that don't require government intervention but every single one of them has failed to find a market-based solution. Eventually every one of them turned back toward government intervention as vital to saving the country (i.e. Milton Friedman toyed around with a full reserve banking concept but scrapped it).
