The debt of the United States is nothing to worry about

on Wednesday, August 3, 2011

The debt of the United States government is not a problem. Compare the following graphs, one of the assets of the United States, and the other of its liabilities. As you can see, both are growing in tandem, and the nation owes about half of what it owns. This is equivalent to a man with a net worth of $50,000 having a mortgage on a $25,000 house. His payments would be $120.36 per month. (Currently, Uncle Sam must pay 4.07% on his long-term debt.) Hardly an irresponsible situation.

The total assets of the Unites States currently total about $185 trillion. The US government currently "earns" about $3 trillion per year (tax receipts), and owes about $14 trillion. Imagine a wealthy man, who owns $185 million in real estate, stocks, bonds, gold and cash, who earns an additional $3 million per year from his businesses, and owes $14 million in outstanding real estate debt. Further, imagine that he has a tremendously low interest rate on that debt (4.07%) and that he is easily able to get a loan from any bank in the world because his credit rating is so high, and he has never been late on a payment in his entire life. This is the financial situation of the US government.

But even this is not the whole picture, because the government owes a large amount of the $14 trillion debt to itself, and to quasi-governmental agencies like the Federal Reserve, and the Social Security Trust Fund.

So, not only does this very wealthy man owe a small amount when compared to his assets, it turns out that he owes a good amount to himself ($6 trillion to the Fed and other government agencies). It's as if one of his companies issued bonds that were purchased by another of his own companies.

If we continue to think about the situation, we should realize that a man owing money to himself is somewhat of a non-issue. Further, around half of the money the United States government owes is to its own citizens, which is a bit like a father owing money to his own young children. The father always has the power to confiscate 100% of the income and assets "owned" by his children, which is also the case with the US government. If push comes to shove, Sam can simply take what he needs to pay his debts, but as we have seen above, there should be little doubt in anyone's mind that he'll be able to keep his promises without resorting to extreme confiscatory policy.

Ownership of U.S Treasury Securities

Additionally, there is much talk about social security "running out of money" soon, and being unable to pay its debts. If you take a look at its history, there is little reason to think this might be the case. If anything, the danger is that the trust fund will accumulate too much excess funding. It currently holds $2.6 trillion in assets that it will use to pay its debts, and has very rarely paid out more than it received over its entire history. The basis of this nonsensical fear is precisely that the US government owes money to itself, and most of those contemplating the situation fail to consider its true nature. It is as if one company owned by the wealthy man has issued bonds, and another owns them, and sells them on the open market in order to fund its liabilities. They forget that those bonds hold real value, as demonstrated by the willingness of the public to purchase them when one of the companies offers them for sale.

It is a mistake to think of the bonds held by the Social Security Administration simply as "debts of the United States." Those bonds are salable assets, and the total quantity of their issue is a known and widely published fact. When the bonds are offered for sale by the SSA, it isn't as if the market reacts to the offering as though the bonds have materialized from thin air. On the contrary, when the SSA trades the bonds for dollars, and subsequently hands those dollars to retired citizens of the United States, the market doesn't (and shouldn't) react in any way that is different than a hedge fund offering the same assets for sale. Those bonds have been issued, and are now distinct pieces of wealth. They happen to be debts of the US government, but there is little difference between the SSA holding $2.6 trillion in government bonds, $2.6 trillion in corporate bonds, or 1.6 billion ounces of pure gold. They are all assets, and all of them can be converted via the open market to cash.