A slightly edited version of this article was published July 25th, 2011, in the Deseret News, under the title, "Term 'national debt' misleads country's finances."
On May 16th the US Treasury Department announced that the debt limit had been reached. Through accounting manipulations the federal government says it can manage to remain under that limit until early August. But what exactly is the national debt that is subject to this limit?
The statutory debt limit is a legal upper bound on the amount of debt the US government can issue through the Department of the Treasury. The actual amount of debt issued is often referred to as the "public debt" or the "national debt." The former term is more accurate, since this debt does not include amounts owed by private individuals or firms. Nonetheless, both terms are misleading.
So how much debt does the US government owe? The Treasury Bulletin reports that the outstanding US debt as of the end of September 2010 was $13,562 billion.
The national debt is held by a variety of individuals and institutions, and some of them really shouldn't count a part of the debt. For example, $5,656 billion was owed by one branch of the federal government to another. The US Federal Reserve System is included in this category because, while it is legally independent of the US government, it must refund its earnings on the US securities it holds to the Treasury. Subtracting this sum leaves a remaining balance that was privately held of $8,369 billion; still a substantial number, but more than a third smaller than the original.
This remainder was held as follows:
• $189 billion held by individuals in the form of savings bonds.
• $337 billion held by banks.
• $608 billion held by mutual funds.
• $1,030 billion held by pension funds and insurance companies
• $509 billion held by US state & local governments.
• $1,282 billion held by miscellaneous other investors.
• $4,257 billion held by foreign entities (firms, banks, governments, individuals, etc.)
It is not appropriate to think of the full amount as the debt of the nation. For one thing much of it is money owed by US citizens to US citizens. Just as I would not count $100 that I owe to my wife as part of our overall family debt, we should not count money owed by the government to its citizens as part of the overall national debt. It is in this sense that the term "national debt" is misleading.
Still that leaves over four billion dollars that the US government owes to foreigners. And if we include the net amount that private individuals and firms owe to foreigners the total is likely even greater. The national debt is only weakly related to the net amount of money we as residents of the US collectively owe to foreigners.
Another reason why the debt figures are misleading, however, is that they only show one side of the balance sheet. In addition to the debt it has issued the government also holds assets. These include some obvious things like the gold in Fort Knox, and money seized from criminals. But they also include physical goods (like the strategic petroleum reserve or stocks of grain bought to support farm prices), property (like the thousands of U.S. government buildings), machinery (like its fleet of automobiles, or its military hardware), and real estate (BLM lands, National Forests, and National Parks, for example).
We might argue that some or most of these assets should not be sold (perhaps never) even if they could be. But when we think of our personal net worth we often include such just goods as assets in our calculations. If a family owns a million dollar home, but owes debts of $250,000 we would not think of them as being broke and in the hole by a quarter of a million dollars; even if they really loved the house and had no intention of ever selling it and moving out. Still, we would also not think it wise of them to continue running up debt. In the long run, if they want to keep their nice house they can't continue to spend more than they earn.
Similarly, the government should not continue to run up its debt or it too may be forced to sell off some of the valuable assets it holds. (The government has done this before; for example, when it sold land to citizens prior to the Homestead Act. However, the primary purpose of these sales was not to raise revenue.)
The national debt is misleading as a measure of our nation's total net worth or even as a measure of the government's net worth. But that doesn't mean it's not important to monitor it and hold our government responsible for how it is managed.
On May 16th the US Treasury Department announced that the debt limit had been reached. Through accounting manipulations the federal government says it can manage to remain under that limit until early August. But what exactly is the national debt that is subject to this limit?
The statutory debt limit is a legal upper bound on the amount of debt the US government can issue through the Department of the Treasury. The actual amount of debt issued is often referred to as the "public debt" or the "national debt." The former term is more accurate, since this debt does not include amounts owed by private individuals or firms. Nonetheless, both terms are misleading.
So how much debt does the US government owe? The Treasury Bulletin reports that the outstanding US debt as of the end of September 2010 was $13,562 billion.
The national debt is held by a variety of individuals and institutions, and some of them really shouldn't count a part of the debt. For example, $5,656 billion was owed by one branch of the federal government to another. The US Federal Reserve System is included in this category because, while it is legally independent of the US government, it must refund its earnings on the US securities it holds to the Treasury. Subtracting this sum leaves a remaining balance that was privately held of $8,369 billion; still a substantial number, but more than a third smaller than the original.
This remainder was held as follows:
• $189 billion held by individuals in the form of savings bonds.
• $337 billion held by banks.
• $608 billion held by mutual funds.
• $1,030 billion held by pension funds and insurance companies
• $509 billion held by US state & local governments.
• $1,282 billion held by miscellaneous other investors.
• $4,257 billion held by foreign entities (firms, banks, governments, individuals, etc.)
It is not appropriate to think of the full amount as the debt of the nation. For one thing much of it is money owed by US citizens to US citizens. Just as I would not count $100 that I owe to my wife as part of our overall family debt, we should not count money owed by the government to its citizens as part of the overall national debt. It is in this sense that the term "national debt" is misleading.
Still that leaves over four billion dollars that the US government owes to foreigners. And if we include the net amount that private individuals and firms owe to foreigners the total is likely even greater. The national debt is only weakly related to the net amount of money we as residents of the US collectively owe to foreigners.
Another reason why the debt figures are misleading, however, is that they only show one side of the balance sheet. In addition to the debt it has issued the government also holds assets. These include some obvious things like the gold in Fort Knox, and money seized from criminals. But they also include physical goods (like the strategic petroleum reserve or stocks of grain bought to support farm prices), property (like the thousands of U.S. government buildings), machinery (like its fleet of automobiles, or its military hardware), and real estate (BLM lands, National Forests, and National Parks, for example).
We might argue that some or most of these assets should not be sold (perhaps never) even if they could be. But when we think of our personal net worth we often include such just goods as assets in our calculations. If a family owns a million dollar home, but owes debts of $250,000 we would not think of them as being broke and in the hole by a quarter of a million dollars; even if they really loved the house and had no intention of ever selling it and moving out. Still, we would also not think it wise of them to continue running up debt. In the long run, if they want to keep their nice house they can't continue to spend more than they earn.
Similarly, the government should not continue to run up its debt or it too may be forced to sell off some of the valuable assets it holds. (The government has done this before; for example, when it sold land to citizens prior to the Homestead Act. However, the primary purpose of these sales was not to raise revenue.)
The national debt is misleading as a measure of our nation's total net worth or even as a measure of the government's net worth. But that doesn't mean it's not important to monitor it and hold our government responsible for how it is managed.
