Debt Is (Mostly) Money We Owe to Ourselves

[phantom power]

Below are two series, both expressed as percentages of GDP: total domestic nonfinancial debt (public plus private), and U.S. net foreign debt, as measured by the negative of the net international investment position:



What you can see here is that there has been a big rise in debt, with a much smaller move into net debtor status for America as a whole; for the most part, the extra debt is money we owe to ourselves.

And here are the same numbers, measured as changes from 1980, so that you can see that the great bulk of the rise in debt was not financed by foreign borrowing.



People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish.

http://krugman.blogs.nytimes.com/2011/12/28/debt-is-mostly-money-we-owe-to-ourselves/

[Tansy_Gold]

1. Well, correct me if I'm wrong, but

isn't this "problem of distribution" exactly what we on the left have been talking about for, oh, 150 years or so? The haves are taking out "loans" from the government that they have no intention of repaying; the repayment will come from taxpayers/workers who never got any benefit from the loans.

I'd say that's not exactly "nonsensical."

[mbperrin]

2. I own not one dime of government securities, which is how we finance the national debt.

China, Japan, UK, oil exporters, Brazil and lots more:

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

own nearly $5 trillion or a third of it, while big banks, insurance companies and so on own the rest.

None of these are me. I don't owe myself a damn thing, but you can be sure I owe all those on this list.

If we really "owed it to ourselves" we could just forgive ourselves and move forward.

Sorry.

[Tansy_Gold]

3. Well, that's pretty much what I meant

If the ones who borrowed it were the ones paying it back, that would be one thing.

I mean, what is "government debt" really? What are "government securities"?

Again, I have no formal education in this at all, so I'm going by what makes logical sense to me, and that could be totally wrong.

But suppose I go out and buy a "Savings Bond." That's a "government security" isn't it?? And what it really is is a loan to the government that they will repay at a specificed time with a specified amount of interest. If I demand they pay back the loan early, they pay me less interest. That bond is, in effect, a loan I made to the government, which in turn is a debt the government owes to me.

But the government isn't in the business of making money. (Printing it? Yes. Making it? No.)

The government only obtains money by taking it away from those who earn it, through taxes, fines, fees for services (postage, passports, use of public lands, visiting national parks, etc.).

The only reason the government would even have to borrow money from someone else -- someone who has the money to lend in the first place -- is if the government is spending more than it's taking in in revenue. And since its only sources of revenue are the taxpayers and users of government property and services -- uh, that would be us, folks, and our children and grandchildren -- then the repayment of the debt WITH INTEREST will fall to us, and we aren't paying ourselves back at all.

Now, it seems to me that all this does is put more and more burden of debt on the taxpayers, but more and more $$$ in the hands of those who already have plenty of $$$. And since the bankers, etc., aren't getting taxed at the same RATE as the rest of us, they're getting a much better deal. They earn income from the interest on the loans PLUS they pay less in taxes on that income.

Obviously this is all very simplified, and I've probably made a lot of errors, but what it boils down to is this whole business of the national debt is actually a way for the haves to get more and more and more of what they already have too much of.

So, by moving manufacturing jobs to China, the corporations make more money, China gets to lend money back to the US and make more money off the American taxpayer, tax revenues go down, the government has to borrow more, the lenders make more in interest, etc., etc., etc.


Does that all mean that a stock market crash (a big, serious one, not the kind that last for a day or so) and resulting deflation would be catastrophic for the American economy? Would that put the US on the same financial footing as Greece? Would the best solution in that kind of scenario be default? If there's no default, would the entire population become slaves to the creditors? Is that what's happening in Greece right now? And Italy? And Spain?

Or did I get something wrong?


TG, who is flying blind because 1.) she really doesn't know a thing about economics and 2.) she hasn't put her contacts in yet this morning, so forgive the typos!

[mbperrin]

4. You've said it well, and flawlessly.

Debt is a way to transfer future claims for goods and services to the present. More debt now, less ability to claim goods and services in the future for those paying it back. In this case, the borrower, the government, and the payers, the taxpayers are not the same.

War profiteers, big banks, stock traders and all those whom you have named benefit.

Yes, it's a transfer scheme. That's why they try so hard to convince us that Social Security is broke, so they can just grab the surplus themselves.

If the stock market crashes, it is a garage sale for those with large cash. This is why the market is down over the last decade, but Warren Buffett and others have only gotten richer. John D. Rockefeller went into the Depression a multimillionaire and came out the first billionaire.

So yes, that's what is happening elsewhere. The cure is default, created by mass refusal of the population to go along, ala Iceland.

[Sam1]

6. The Federal Government does not have to obtain money (American dollars) from any one.

You state: "The government only obtains money by taking it away from those who earn it, through taxes, fines, fees for services (postage, passports, use of public lands, visiting national parks, etc.)".

Since they issue it and they issue it by spending it and giving it away the Federal Government is a creator of money not a user. As long as the dollar is freely floating fiat money the Federal government can not run out, go broke, or default. In fact with out Federal government debt there would be no savings in the private sector.

[mbperrin]

10. Please cite the economist and formula that shows that government debt creates savings in the private

sector.

I have a degree in economics, and I've never heard that one.

Please respond.

[jtuck004]

18. You have a degree in economics and have never heard (or studied) the chartalist perspective?

Last edited Sun Jan 22, 2012, 05:58 AM - Edit history (1)

I know there are classes where it is not discussed, (such as those by Greg Mankiw, perhaps?), but it would seem foundational for a well-rounded perspective.

In any event, this paper from Professor Randall Wray at Univ of Missouri - Kansas City discusses this...

From the paper: "Budget deficits represent private sector savings. Or another way of putting it: every time the government runs a deficit and issues a bond, adding to the financial wealth of the private sector. (Technically, the sum of the private sector surpluses equal the sum of the government sector deficits, which equals the outstanding government debt—so long as the foreign sector is balanced.)"

and there are some formulae that might be applicable at http://pragcap.com/resources/understanding-modern-monetary-system , near the end. Haven't ever tried to email Cullen, but it's worth a shot, I suspect. People love to talk about their writing.

Dr. Wray is very interested in helping others learn about this, and I am sure he would be glad to answer any questions - he answered mine, great resource. Might take a few days, but I bet he would be delighted to get an email about his writing.

[email protected]

I hope that helps.

[mbperrin]

19. I see now. It's the rather old fashioned notion that money is meant to be a store of value.

More modern take is that it is a claim for goods and service, no more. The goods and services are the actual savings of any economy, but money received without productive activity on the part of the holder robs the rightful owners of their claims.

These are the folks who call themselves post-Keynesians. No, I would not have studied them any more than I would waste time on gold bugs, nor the Illuminati.

But thanks for the info - it did jog a few brain cells. It's just a really old idea, never really mainstream. But thanks.

[jtuck004]

20. Yep, goods and services much more modern. Better go round up some goats

to trade so I can pick up a few things at the store.

ltr

[mbperrin]

21. Didn't read a word, did you? The money is a CLAIM for goods and services.

ONLY goods and services have value. Unless you want to sell me your house for some colored bits of paper I just cut out.

Paper-shuffling and trading as if it has value is what is killing the real economy - the one where people eat, live, breathe.

[jtuck004]

22. What really has value is human potential, not goods and services, and not

fiat currency. Greed and criminals are directly responsible for our current financial crisis and damaged economy. Maybe we need 100 million people to get an accounting degree to see it.

Quote:

"I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces."

From "An Essay on Voluntary Servitude", Étienne De La Boétie (google it - it's good, if you've never read it)

We need opportunities for 30 million people to operate outside the economy of today's greedy bastards. Any group that can band together and gain control of assets for cash could do this on a local basis. They could network with each other and live somewhat outside of that control, have a parallel economy. Gonna be some pollution, but they could start to gain assets, and thus Power.

Perhaps they will need training to use it or even see it...maybe some housing and food. Investment of trillions to make it nationwide, but not that much just done at a neighborhood level.

So much to do

[JDPriestly]

9. I posted this in response to someone else.

If you pay payroll or Social Security taxes, then some of the debt is owed to you.

The Social Security Trust Fund is loaned to the government. The Sec. of the Treasury is responsible for safeguarding it.

The Republicans spent a lot of money on war and tax cuts for the rich and do not want to have to pay the money back to the Social Security Trust Fund (or other creditors). That is why Republicans are at the same time so down on Social Security and the national debt.

Our Constitution grants to the Congress the authority to issue our money. The Fed is in that respect just an agent of the Congress. The US dollar was not created by God on the 8th day. It is created by our government.

Currencies come and go. Trade and business stay.

Don't worry about repaying the debt so much. Worry about how you will survive when you can no longer work if Wall Street grabs your personal savings and the Republicans destroy your Social Security.

The whole national debt hysteria is just a red herring.

[Tansy_Gold]

12. This is a little different because

As individuals we have no control over the FICA contributions that are taken from our earnings. This is not a voluntary purchase/loan, as is the purchase/loan of "securities."

And the problem is that trade and business have NOT stayed.

And social security is not part of "the debt."

[JDPriestly]

14. Money from the Social Security Trust Fund which was created because

of the extra money, money beyond that paid out in Social Security benefits, that has been paid into the Social Security Trust Fund since around 1985 has been loaned to the US general fund and makes up a portion of the domestically owed debt of our government.

That trade and business have left the country is a huge problem. Social Security did not cause the debt. Social Security has a surplus.

The general fund of the government is in debt to the Social Security Trust Fund.

I think we are agreeing but using different language.

Our "loan" to Social Security is provided for by law. You are correct that it is not something that we individually decided to loan. The Treasury Dept. handles the Social Security Trust Fund.

[Tansy_Gold]

15. Exactly. And furthermore,

If another government or another bank or another "investor" buys "securities," as has been stated before in this thread as well as others, those voluntary investors are protected. What we've seen recently, however, is representatives for those investors (aka pukes in government and some dems, too) attempting to hijack/steal/whatever you wanta call it, our "investment" in Social Security. We have no say in whether or not we contribute to it, nor do we have any control over its, well, its control.

Not only that, but we don't even own that investment. By that I mean we cannot pass it along to someone else, sell it, trade it, nothing. If we die and have no surviving spouse or dependent children who qualify to receive benefits on our behalf, our investment just stays in the kitty. That's not true of "securities," which exist in and of themselves as something the "investors" purchased. When my husband died, I became eligible to receive benefits based on his earnings, which were higher over our working lifetimes than mine, but MY FICA contributions will go to pay someone else's benefits. I'm not saying this is wrong, because in fact I think that's the way the system should work if it's to be a safety net for the retired, the disabled, the dependent. But it is different from an investment purchased and owned and potentially disposable/redeemable at will and/or at face value.

[JDPriestly]

16. So, if you can afford it, invest for yourself also.

Most people don't have any discretionary income to invest.

So, Social Security is their retirement.

Some put more into Social Security than they take out. This helps so many people.

Social Security is an essential program that helps to hold our society together.

It is not intended to be a personal investment.

I strongly support Social Security. Not everyone is brilliant enough to invest well. Older people are prime targets of investment scams and con artists. I had an elderly aunt who personally foiled a ring when she was in her 80s. I happen to be very proud of her. But she was extremely intelligent even at an advanced age. Most seniors are not so quick.

Further, who wants to have to watch the stock market or handle a small portfolio of investments (which no honest broker could afford to handle) when they are in their 80s or 90s? I know someone that age who dreads the arrival of her bank statement each month because just balancing that is a huge burden.

I'm retired. I rely on Social Security. It is an absolute necessity. Without it, young people would have to live with and support their parents. That would be much worse for most young families than is the cost of paying for other people's Social Security benefits.

Remember, those of us who are now on Social Security paid generously for our parents and our grandparents. It is the American way.

[JDPriestly]

8. If you have paid your payroll taxes -- your Social Security taxes -- your old-aged

pension insurance fund taxes -- then you have loaned money to the US. So yes you do owe yourself something.

[mbperrin]

11. I pay the Teacher Retirement System of Texas.

So I have no SS taxes withheld.

But certainly, for those that do, you are correct.

[Blue Hen Buckeye]

5. Repudiate the national debt and let the chips fall where they may. Or

collect enought in taxes on the rich only to pay it off.

[JDPriestly]

7. I wonder what portion of the debt is owed to the Social Security Trust Fund.

That money goes into the pockets of seniors -- and is immediately spent for food, rent, essential clothing, health care, heat, other utilities and small items -- maybe a few Christmas gifts for the grandkids.

Thanks for posting this. Krugman again brings a sanity and calm to the discourse.

[dmallind]

13. About 27-30% from memory

Intragovernment holdings are about 4.5T and SS is by far the biggest chunk of that. Their bonds are not exactly the same ones you can buy via Schwab et al, but are government debt held by other departments of the government nonetheless.

[banned from Kos]

17. SSA Trust fund = $2.6 trillion - total debt now over $15 trillion

about 14%.

There is other intergovernment debt though. Just not the SSA Trust Fund.