Here’s what the deficit hawks at the Concord Coalition say about debt owned by the public vs. intragovernmental debt:
So, knowledgable people like the late Warren Rudman, Paul Volker, Judd Gregg, Tim Penny, and Robert Rubin disagree with your assessment. When you get that array of the political spectrum saying that people should pay much more attention to debt held by the public, as opposed to the balance of trust funds, then you’re really on a limb with what you’ve just argued.
Ok. Ideally, should this Trust Fund have been growing, shrinking, or staying the same size during the economic boom of the 1990s? Or, if you prefer, was it a good thing or a bad thing that the Trust Fund grew in the 1990s?
Not really, what I said doesn’t conflict with what they said. They are saying we should pay more attention to “debt held by the public” and I agree. What I said was that the treasury bonds in the various trust funds: 1) still receive coupon payments and 2) still represent a future claim on tax revenue to continue making those coupon payments and to eventually repay the principal balance. For those two reasons to assert that they are not “real debt” is incorrect. Do you agree or disagree that they 1) receive coupon payments and 2) represent a future claim on revenue?
It’s a good thing, but it’s questionable if the entire trust fund should be made up of self-issued debt. Many other countries with similar funds have their money in sovereign wealth funds that invest partially in the market. I think it’s questionable about the wisdom of making it so that the more money our retirement trust fund receives the more in debt the country is, when there are alternatives.
Some creative things we could have done for example, is had the trust fund buy up a lot of the MBS after the financial crisis. That would have helped the markets and ultimately given very strong return–because while people got spooked by the MBS market people like myself that invested in MBS assets during 2008/2009 have seen a very substantial return on investment since then as the panic resulted in extremely undervalued MBSes across the board.
But the fund is legally required to invest its surplus in treasury bonds. You seem to point that out as though that is 1) the only possibility or 2) desirable.
Does intra-governmental debt have the same status as government debt “owned by the public”? It’s a mistake to treat this as a black-and-white question. Fuzzy thinking is better. It may not lead to simple answers; but getting simple answers to some of these questions is an indication of fallacy!
Debt owed to private investors is “worse” (“debtier”) than debt one government agency owes to another. (Anyway, whether debt to SSTF is one trillion or three is almost irrelevant when compared with size of unfunded Medicare obligation.)
And debt owed to foreigners is “worse” (“debtier”) than debt owed to Americans. After all, American-owned debt can always be repaid by Reverse Robin Hood: Take from the poor (taxpayers) and give to the rich (bond-owning banks and wealthy individuals). Repaying foreign-owned debt eventually requires transferring American assets to foreign ownership. This is why Greece had such huge problems: Not the size of the debt, but the fact it was owed to foreigners. And why Japan may be OK: it has huge debt but owes it to Japanese banks.
On another matter, I think it’s wrong to include interest in costs. Think of the idea of money’s “present value.” Today’s $1,000,000 has the same value as next year’s $1,050,000 if the interest rate is 5%. Or, to look at it another way, if we levy a $1,050,000 tax next year instead of $1,000,000 this year, the taxpayer will have earned $50,000 during the delay – just enough to pay the higher tax.
You’d need to define the word “status.” I can assure you it represents a claim against future revenue, regardless of whatever else you say.
Why is debt owed to private investors “worse” than debt owed to the SSTF? You need to expand on this point.
You’re also generally incorrect on the actual debt being worse than an unfunded Medicare obligation. Actual debt must be repaid, if it is not, then it severely harms the economy. It causes financial panic, market collapse, lack of U.S. debt being valued around the world etc.
Medicare obligations are only theoretical, they can be changed by Congress at any time and thus be lower or higher.
Aside from a strange, almost mercantilist era thought process as a justification, explain why bonds held by foreigners are actually “worse” than bonds held by Americans. The more foreigners want your bonds, the more liquid your bonds are and the lower interest rate you can borrow at. It’s not intrinsically bad to have your bonds purchased by foreign entities. It also to some degree ties those countries in some degree to your own economically.
Greece’s problems were not really that their bonds were owned by foreign creditors. Their problems were that their bonds were issued in Euro and had to be paid in Euro. Their economy however was just a small microcosm of the Eurozone, if they had still be on the Drachma, it would have been worth much less than Euros during the worst parts of the crisis. This means the government could have paid the nominal amounts on their bonds at a much lower “real” cost. They also would have had the option to basically “inflate away” the bonds as a nuclear option, by simply printing more of them. Since they do no control their own currency, they had no such option. This meant they were left with being forced to accept a Eurozone bailout or exit the Eurozone entirely (which they did not want to do.)
That’s just part of their problem, specific to their bonds. Additionally they had an extremely corrupt government, inefficiently arranged economy, vastly less revenue than spending and a host of serious economic problems. The idea that their troubles were caused by foreigners owning their debt is simplistic and incorrect.
As for Japan, there are serious problems with their debt structure. Much of Japanese debt is owned by older Japanese people, many of whom are retiring or near retirement. Japan’s young population is smaller and getting smaller. This creates a scenario in which in the future, the working population will be very small relative to the retired, bond-holding population. Since Japan will not default on its debts, this means that it will have to continue to make coupon payments and principal repayments on its bonds even as its number of taxpayers steadily decreases. Many have described this as a future in which young workers are basically “enslaved” to older retired Japanese people.
When I talk about total debt numbers, I talk about total debt outstanding, it has nothing to do with interest rates. But the collective coupon payments on all of our bonds must be considered in terms of Treasury costs, because they represent a sizable portion of the Federal budget. Every dollar in revenue from taxes that goes to coupon payments is revenue that isn’t going to government services. This means if coupon payments continue to grow as a portion of economy or relative to GDP, we will have to pay ever-higher taxes to receive the same level of services.
Where did I say that they are “not real debt?” I’m saying that it is debt of not terribly great macroeconomic consequence.
Be that as it may, we seem to be in agreement that, when economic times are good, FICA revenues are going to be high, and that will inevitably lead to more debt… but that’s ok, because it help keep the (more or less) close Social Security system afloat. And, in fact, even if every other aspect of the Federal budget were running a surplus, one measure of US debt (intragovernmental debt) would still keep increasing because, barring some scenario where large number of Americans suddenly change their mind and support Social Security privatization, that’s what the law requires.
Now if you look at the macroeconomically more important debt, what happened during the Clinton years? It hit a high of $3.874 trillion in early 1997, and went down to $3.274 trillion by the spring of 2001, before starting to rise again.
So, under Clinton, the kind of debt that we want to have went up, and the kind of debt that we want to get rid of went down. You seem to be claiming that this means that things were a wash, or that nothing really happened. When, in fact, it was a win-win for the American people.
“The kind of debt we want to have” is a matter of opinion. Further, the total national debt continued to go up under Clinton. Yes, it was a good thing that debt held by the public went down, but it did not go down enough to offset the increase in intragovernmental debt.
The increasing size of the SSTF is not intrinsically win-win for the American people. It’s fine if we can easily continue to make the coupon payments on that debt. However the reality is since we have chosen to only fund it with self-issued debt (unlike a sovereign wealth fund as you might see in Norway for example) we both eliminate any chance that it can actually provide enough return to avoid future benefit cuts or revenue increases, and we create an ongoing interest payment burden from the rest of the treasury. It’s actually lose-lose.
People think that because 17 trillion dollars of debt is a lot of money and we’re in a period of history where cities, states, and governments are defaulting. The US dollar was the standard trading currency a few years ago and now other countries are abandoning it.
I don’t understand why you don’t understand the financial shift taking place in front of our eyes.
Bingo. Glad it took only three responses to get the correct one.
If the GOP House teahadists dig in their heels as they’ve threatened to do, we could see some US government defaults this fall and a further lowering of the debt rating.
I hope we don’t go into another Social Security Trust Fund rabbit hole, but if I take $20 out of my right pocket and put it in my left pocket, and write on a piece of paper that I owe my right pocket $20, do I have $40 or $20?
Let’s assume I am very trustworthy and have always paid my debts on time.
Let’s assume that I then spend my $20 bill on whatever. Do I now have $20 or $0? Remember, I am very, very trustworthy and can be counted on to pay my debts, so that $20 IOU is very likely if not absolutely certain to be repaid.
According to the people at Politifact, we can both be right. But I still maintain that I’m more right than you are.
Now you’re just being silly. Or you aren’t actually paying attention to what I wrote, either one. Even if you think an increase in intragovernmental debt is a “lose,” one has to be out of their mind to think that a decrease in debt held by the public is also a “lose.”
I must be silly as well. An increase in debt owed to yourself isn’t a positive when it reduces debts to other people. At the very least, it is a wash because there are still outstanding debts. Whether we owe money to old people or to the Chinese, we still owe money. And from my experience, I’m still not sure which group would be the most aggressive in collecting.
Well, then you’re silly, too. Bipartisan experts from the Concord Coalition (which I’ve cited already) and the Congressional Budget Office are telling people not to get worked up about intragovernmental debt. For example:
If you want to hate all debt because, say, you have a fondness for Islamic banking practices, then that’s great. But to call, or at least imply, that all debt is equally hazardous is not supported by very reputable, bipartisan or nonpartisan groups with vast experience in economics.
There is no intrinsic linking of the two. Yes, for a select number of years during the Clinton Presidency intragovernmental debt rose as debt held by the public decreased. But most of the time they both increase year to year.
So at the end of all things, the SSTF will eventually have to sell off all its bonds and it won’t really exist, instead current benefits will have to be paid by current contributions. When this is first projected to happen I think in the first year it is expected to have a 25% shortfall, so you’ll have to actually get the rest from somewhere other than payroll taxes (general revenue, obviously.) That’s projected decades down the road, but when it does happen we’re much worse off that instead of investing the money we basically gave the operating arm of the government a low interest loan that barely beats inflation rate.
As a practical matter, this can’t happen. If investors feel that the inflation rate will be higher than the interest rate, they won’t buy the notes. The only way you can sell notes is if you give them an interest rate that’s above the expected inflation rate and that means you’ll be paying more money back than you borrowed even with inflation taken into account.
