Why can’t a government forgive it’s own internal debt?
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So, “internal debt” is things like “The Federal Reserve holds a bunch of US Government Bonds” or “The government owes a lot of money to the social security trust fund”?
And, in answer to that question, it can forgive that own debt. But, there’s no reason to do so — it’s the left hand owes money to the right hand. So, at some level, it’s just accounting.
But, at least for the Federal Reserve, that would cause problems: One of the tools that the Federal Reserve uses to control the money supply, interest rates and inflation is buying and selling government bonds. If, for example, the Fed wanted to increase the money supply, it would buy bonds from the rest of the federal government and effectively print money in return. If it wanted to decrease the money supply, it would sell those bonds, sucking all that cash back in. If suddenly all those bonds were “forgiven,” it would no longer have something to sell.
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