Does the deficit really matter if owed to ourselves?

People seem to fret a lot about the national debt and how it will take forever to dig out of it, but as long as it’s not foreign debt is it really that bad to have?
Isn’t most of the national debt internalized so we basically owe the debt to ourselves?
The government spends, spends, spends on all types of programs, infrastructure, etc. etc. but the money still stays here.
I would think the whole tax(take money from the public/private)-spend(give money back to the public/private), tax-spend cycle is part of what keeps the economy moving.
The whole circulation of money has to be a good thing as long as there aren’t dams in the system (big corporations) funneling off massive amounts from the streams of cash. Which in turn you hit them with big taxes to get the money back into the cycle again.
So why again is this debt bad if owed to ourselves?

If you had a $100,000 in credit card debt, would you worry about it? I sure would. At some point, we are going to have to pay this, either in higher taxes or fewer services.

I’m very worried about it.

Because the Govt gets it from China, Japan and India and they kind of expect it back (as well as regular interest payments)?

But $100,000 in credit card debt you owe to someone else.
$100,000 in government debt they owe to the public, the same people who get taxed to pay the debt.

But as per my OP, if it’s NOT foreign debt does it matter?

Well, why would we even bother collecting taxes then? How about this plan: stop collecting taxes, and just borrow the money from the US citizenry (don’t want those foreigners involved, of course). Since deficits don’t matter if we owe the money to ourselves, we’ll be rich because we’ll still be getting all those government services paid for by borrowing, yet we’ll get to keep all our money since we aren’t paying taxes. We’ll get twice as much as before.

Or if you don’t like that, if the tax and spend cycle is what makes the economy really move, why not tax everyone at 100%? Remove all those dams in the economy where people selfishly try to keep their money. The government takes everything then spends everything. Win-win-win.

But it is unless you are talking about printing money and that’s not usually been a great idea in the long run for obvious reasons such as hyper-inflation.

The $100,000 you owe to someone else too! The person that purchased the government security that expects their investment and interest at some future date. Where do you think this money is coming from?

Hm, okay. So is this stimulus package and auto industry bailout money coming from borrowed overseas money?

Most of the debt held in the U.S. is not U.S. savings bonds held by private individuals. It is treasury instruments held by banks, pension funds, insurance companies, and other large institutional investors. The interest on these are very low because they are considered the safest assets to own. If the government were to default, it would destroy those institutions in the short run, and any that survived, or the new ones that took their places would not buy U.S. debt in the same way every again. They might still buy some, but only at a higher interest rate, and not as the place to park money that you absolutely can’t risk losing.

With that said, I don’t think domestic debt is much of a threat if for no other reason than it will always limit the total debt to some percent of GDP. Right now our debt/GDP ratio is not that bad. It would be even better if the government could only borrow money available domestically. But if we are borrowing from all over, then we could end up with a lot more debt than we could handle without jacking up inflation.

Jonathan

Who is “the person”? Foreign investors?
If so then yes, I guess the deficit matters since that flows money out of the internalized money flow.

Thanks for the infomative reply.

OK, suppose you have $100,000 in the bank. You borrow that money from yourself and spend it on hookers and cocaine. Then you just pay yourself back later. After all, it’s not like you owe the money to anyone else, you owe it to yourself.

Do you see a bit of a flaw in this scenario?

The wiki page on US public debt is a good starting point

Some of it, yes. A fairly substantial portion of the US national debt is owed to people and entities who are not American.

It’s true a lot of it IS owed to Americans, but you still have to pay that money back. And the amount owed is owed equally by all Americans but is not owed equally TO all Americans. You have to (1) tax people to get the money, or (2) you have to borrow even more money to pay off existing debt. Option 2 will inevitably lead to Option 1, because if you borrow to pay off existing debt then the federal budget will be devoted more and more to paying off debt until finally there’s no room to do anything else and you either tax more or spend way less.

Either way, domestic debt constitutes a transfer of money from people and businesses who don’t hold some of the debt to people and businesses that do. The former group gets screwed directly, and the latter group makes some money in the short term but is screwed in the long term because of the warping effects that all this transfer of money has on the economy.

Also, taken to an extreme, even if paid back without incident, at some point the U.S. debt would absorb all available capital. There is only so much money available to invest at any given time. If all that money is invested in U.S. government securities, then there will be no money for investing in new businesses, loans to existing business (corporate bonds), or smaller governments (municipal bonds). The only way we would every reach that point would be if the government forced people to loan it money, at which point it would be better for it just to take the money as higher taxes.

Jonathan

As stated in the wiki article, foreign ownership of the national debt is in the 25% range with the three biggest creditors of the US being China, Japan and the United Kingdom.

That means that approximately one quarter of the interest payments are siphoned out of the US economy and shipped overseas. What effect does that have on the US economy, when foreign interests essentially have a lien on 25% of the federal tax revenues?

As well, in response to the “we owe it to ourselves” argument - the wiki article breaks down the debt by estimated ownership of the debt. Approximately one-quarter of the debt is held by private institutions, investment or pension funds, or individuals. That means that a large proportion of the debt held domestically is held either directly or indirectly by individuals, who have a strong interest in the stability of their investment in the federal debt. If the federal government’s borrowing reaches the point where it puts in jeopardy the government’s ability to pay the interest, it would have large-scale ramifications for those individuals and the economy. That is part of the concern - how much indebtedness can the federal government safely assume?

This would only be true if all federal tax revenues were dedicated to servicing the debt. As of February 09 2009, the government still collects taxes to do other things.

Quite right - I meant to refer to 25% of all taxes dedicated to interest payments, not 25 % of all taxes. My mistake.

Following up on that point, what percentage of federal spending is now allocated to interest payments and debt retirement?

Treasury securities interest was 430 billion out of 2.8 trillion so about 15%. Cite.

ETA, that is gross interest and net total spending, but you get the idea.