Is our “national debt” a real debt?


by dbking

Question by marvinsussman@sbcglobal.net: Is our “national debt” a real debt?
Our “national debt” is not a real debt because it has none of the three essential qualities of a real debt:

1.That the debt must be a burdensome but necessary obligation, the best of bad choices.

When the Treasury auctions bonds, it is acting like a bank accepting deposit accounts, not like a home buyer undertaking a mortgage burden. The Treasury auctions bonds only because Congress requires the sale to cover an annual budget deficit. This requirement was waived during World War II, followed by 35 years of prosperity with no harmful inflation. There is no reason to believe that deficit spending cannot again be successfully financed by simple keystrokes. Inflation is always caused by poorly regulated bank lending during prosperity, never by excessive deficit spending during recessions.

2.That the debtor must repay the debt.

Yes, each bond is redeemed at maturity, but the “national debt” is the total value of all outstanding Treasuries. In our history, we have rarely had even a modest annual budget surplus. No serious politician today has any plan whatsoever for a budget surplus. In effect, the “national debt” has never been repaid and never will be repaid.

3.That the debtor must bear a significant interest payment burden.

While the bond-holders receive significant interest payments, the Treasury services the “debt” by auctioning more bonds, ad infinitum, with no burden other than a few keystrokes. Economists recognize this by declaring that our “primary” annual budget deficit does not include debt interest payments because they never consume physical resources and have no economic effect. The taxpayer bears no significant interest payment burden.

What if there is a run on Treasuries?

Where will the bond-sellers put $ 11T in cash? Eurobonds? BoJ bonds? Corporate bonds? Illinois bonds? Detroit bonds? CDs? Money Market? Bank accounts? Stop kidding! There’s nothing but Treasuries for risk-free interest, even if the real (inflation-adjusted) rate is negative. Safety is what they want.

What if buyers stop buying Treasuries?

That could only happen if China’s bonds are better than ours. And that can only happen if China’s infrastructure is better than ours. And that can only happen if Congress is more worried about the “national debt” than it is worried about China’s infrastructure.

Won’t we need higher tax rates to pay for increased deficit spending for infrastructure?

We are not taxed to pay our “debt”. There is no correlation between “debt” level, which always rises, and tax rates, which rise and fall. Our annual budget deficit is exactly equal to the increase of our annual private savings, an addition to our buying power. We are taxed only to lower the deficit, to lower our savings and buying power, to avoid inflation, a threat due only to full employment, which we now crave. A larger deficit and/or lower middle class tax rates would increase our buying power, raise GDP, and lower unemployment.

A rational voter will vote against every candidate who worries more about the “national debt” than about millions of unemployed or underemployed Americans who are drawing benefits forever instead of building infrastructure.

Unfortunately, by definition, half of all voters have below-average intelligence and cannot understand the statement made above. For proof, just read the answers below.

And, unfortunately, the brighter half of the voters gets screwed by the morons.
Edgar; Try reading the details. Get educated.
Please don’t respond to this question unless you actually read the details in its entirety. I am not interested in your current understanding of the question. I am interested only in your response to my argument concerning the question. Thanks for your co-operation.
Midnyter: Demand is money in the hands of consumers. So, new products cannot increase demand. Increasing the purchasing power of the dollar means deflation. Believe me, you don’t really want deflation! The economy would freeze. Who would spend a dollar today if it would buy more tomorrow?
Pull my finger: Other than stagflation, an energy shortage problem, inflation happens only during prosperity, when tax revenue is up, deficit spending is down, and bank lending is up. Foreign investors don’t look at “debt”. Only deficit hawks look at “debt”, a figment of imagination.

Your “run on the Treasury” is like a discussion about flying pigs. Fruitless.

Full employment implies shortages and delays, which cause bidding wars for goods and services, hence, inflation. WW II had about 1% unemployment – and severe rationing where necessary.

We do not borrow from China, Chinese corporations must keep their dollar earnings in US banks, where they are traded for Treasuries.
Pull my finger. Edit #2:Weimar inflation was caused by Versailles Treaty requirement of reparation payments in gold, not poverty. There is no cause and effect relationship between poverty and inflation. Poverty implies an abundance of low cost labor, low consumer demand, too few buyers, stores full of goods, reduced price sales, and deflation. Not inflation.

You completely ignored my argument against the possibility of a Treasury run to enter into a psychological thesis about how such an impossible run would proceed. I don’t see any value in such a diversion.

Previous treasury runs in history? Not since we first moved into fiat currency in 1971, which the Eurozone does not have. Let’s stick to the subject: US fiat currency under the Fed-Treasury regime.

You asked how full employment was the cause of inflation and I explained it. You didn’t know of an historical example and I gave you WW II, meaning that severe rationing was the only way to avoid inflation. Why is it so hard to under
understand that when unemployment is high and demand is low, stores are full of goods, there are few shortages and, hence, low inflation?
With full employment, sales are high, inventory is low, shortages increase, and prices are bid up: too much money chasing too few goods causes inflation.

What currency do you think the US government borrows from the Chinese government? Dollars?

If you mean that, due to trade advantages, Chinese corporations hold their profits in a US bank. that is a relationship between a bank and a depositor, not a lender and a borrower.

There is no way to ameliorate the effects or their trade advantage except improved infrastructure that reduces our education, health, energy, transportation, and communication costs.

You can do all the meager research you want, but it will get you no closer to literal or figurative reality than I have stated..
YXES Obama has nothing to do with it. Only Congress can spend.
Robert T: You are ranting, not contradicting my argument. Because you can’t contradict it.
“The macro economics you are operating under is engineered to effectively enslave through debt not free and insure the general welfare through credit that can also only be done by Congress.” You totally ignored my thesis that there is no debt. Deal with it!

“The laws fines, fees and penalties are equivalent to taxing at this point.” At all points. So what?

“So, if it’s not real debt is it just guilt tripping?” It is the sum of outstanding Treasuries, our savings.

“Until recent years the US had “given” almost the same amount in Foreign Aid (bribes as far as many were concerned) as we had in National Debt” $ 16T???
.
“Loans are secured by real property. When real buying treasuries your buying real property.” Property, yes! Debt, no! It is savings!.
Phillip H: You have hit on the only flaw in my argument. I was assuming that Congress was rational. What was I thinking? Of course, if you pass a law that requires everybody to stand on one foot and hop everywhere, we are cooked.

Just raise the debt limit..and get rid of that law.

Best answer:

Answer by Edgar
Your confusion is understandable, honey, what with what passes for public education these days. Good luck!

Know better? Leave your own answer in the comments!

Category: Get Out Of Debt

7 Responses to “Is our “national debt” a real debt?”

  1. yes it is a real debt but is also a gigantic ponzi scheme where old investors are paid with new investors money, if a private company or individual tried the same thing ( madoff) they would get 50 years in jail, however it also leads to massive amounts of annual interest having to be paid which means the debt will never be paid of and will always keep increasing as long as investors trust the government see what happened in cyprus to get an idea of what might happen

  2. Colonel Jack Fessender (Ret.) Reply May 29, 2014 at 9:05 pm

    Only when a Democrat is in charge. FACT.

  3. midnyteryder1961 Reply May 29, 2014 at 9:38 pm

    I’m sure the bond holders consider it a real debt. Treasuries are where investors go in times of uncertainty. Given the poor performance of the economy during this administration, and the availability of said bonds due to rampant government spending, auctions ought to go quite well.

    This, however, will not make the economy better. Only increasing demand can cause more jobs to be created. There are only 3 ways to increase demand – develop new products, increasing personal debt, and my personal favorite, increasing the purchasing power of the dollar.

    Edit: Well what we are doing now isn’t working. New products do create demand. The PC market did not exist in 1965. The automobile market did not exist in 1870. The tobacco market did not exist in 1000. More money in the hands of consumers only works if there is in fact something more to buy (see “companies are sitting on wads of cash arguments by liberals.”) See Depression of 1921 for the correct response in to economic downturns. A balanced budget would in fact cause boom.

  4. If it is not real, then people are getting worked up over nothing.

    No I did not read your rant.

  5. “Inflation is always caused by poorly regulated bank lending during prosperity, never by excessive deficit spending during recessions.”

    Please justify that claim. I don’t see where it is true. If foreign investors see that a nation is in debt and engaging in excessive deficit spending, the demand for that nation’s currency falls. If the supply of a currency is higher than the demand for that currency, what do you call that?

    Your claim about the run on Treasury bonds has some truth to it, but like all runs, when the panic is on, people are dumping the bonds in the hopes of redeeming as much as they can in order to minimize the losses they already see as inevitable. At the point at which the Treasury can no longer redeem those bonds, it is irrelevant. The cost to the nation’s economy of a failure to continue redeeming bonds at any percentage of the initial investment would be catastrophic.

    “…to avoid inflation, a threat due only to full employment…”

    Please justify this claim. For one, I can think of no historical example of full employment, or even near-full employment, nor do I see a causal connection that runs necessarily between full employment and inflation. Again, inflation has to do with the demand versus the supply of currency. Full employment in itself wouldn’t necessarily cause demand for currency to fall.

    While I sort of agree with the general points you’re making, I can’t say that I would characterize the whole of the national debt as being one solely connected to Treasury bonds. Yes, the bonds have been the primary way we’ve tried to cover that debt – it has been more of a shell game than anything else. That does not mean that the nation has not incurred serious debt as a result of borrowing from China, for example.

    Your thesis will only be correct so long as people invested in US Treasury bonds think they can continue to profit from that investment in the long-term. If that attitude should shift significantly, there would be no more veneer to hide the gaping abyss that is actual US debt.

    *Added:

    “…inflation happens only during prosperity…” Demonstrably false. Look at the Weimar Republic. Your entire argument here seems to be drawn (if you’ll forgive me for being so bold as to guess) from US history – stagflation during gas shortages and energy crises in the US in the 1970s, for example. Please understand that in economics, as in all other disciplines, correlation does not imply causation.

    “Your “run on the Treasury” is like a discussion about flying pigs. Fruitless.”

    You understand, I hope, that dismissing my arguments in an insulting manner is not equivalent to effectively rebutting them. It remains the case that there have been economically harmful dumpings of treasury bonds both in US history and in the history of other countries. I don’t see where my concerns are unwarranted.

    “Full employment implies shortages and delays…” Again, with the WWII comparison, correlation does not imply causation. Rationing was a result of wartime expenditures and the redirecting of resources into the production of defense goods, not the result of near-full employment.

    “We do not borrow from China…” That is just false. A meager amount of research would demonstrate that we do borrow from China. If it is your argument that our policies ameliorate the effects of that borrowing, you’re free to believe that is the case, but it does not alter the literal reality that we are borrowing money from China.

  6. The macro economics you are operating under is engineered to effectively enslave through debt not free and insure the general welfare through credit that can also only be done by Congress. The laws fines, fees and penalties are equivalent to taxing at this point. So, if it’s not real debt is it just guilt tripping? Until recent years the US had “given” almost the same amount in Foreign Aid (bribes as far as many were concerned) as we had in National Debt.
    Loans are secured by real property.When real buying treasuries your buying real property.

  7. WRONG!
    Of course it is a Real Debt. You refuse to believe that Fact, but just try Not paying it and you will find out Real Quick just how Real that Debt IS!
    The Government has managed to create a deception about that debt by rolling it over. They pay the interest and when the bonds come due they sell More to have the assets needed to retire the existing bonds. If they fail to make Either type of payment, their entire scam will collapse in mere days!
    That FACT has Congress and the Obama Administration Very Nervous.
    We live in a house of cards.
    Please acknowledge reality.