Economics

Isn’t it Time to Stop Calling it “The National Debt”?

How about Government-Issued Assets instead?

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By Steve Roth

Fourteen. Trillion. Dollars. That’s how much the U.S. government “owes.” You hear that massive number all the time, right? And people are forever telling you that you and your family are on the hook to pay off that scary huge number. There are 125 million U.S. households. You do the arithmetic. The horror.

What those scare-mongers don’t tell you, and generally don’t even understand: it actually makes almost no sense to call that figure “the national debt.” And no, you’re not on the hook to pay it back.

Imagine this: you’re the queen or king of a sovereign country. You decide to mint and issue a bunch of tin coins that your people will find useful. You use those coins to buy stuff from people in the private sector, and pay them to do work. Voilà, the people have money.

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Is your government now in “debt” as a result of that “deficit spending”? Does it have to “pay” something to somebody at some point in the future? Do you have to redeem those coins for wheat or pigs or anything else? Obviously not. There’s just a bunch of money out there that people can use. You’ve made no promise that your treasury will ever redeem those coins for anything. They just circulate.

Those government-issued assets, held by the private sector, are only “liabilities” to the government in the most pettifogging accounting sense. If you “owed” some money that you would never, ever have to pay, would you put that on your balance sheet as a liability? Would it be anything beyond a pro forma entry designed to satisfy some obsessive impulse for accounting closure? A debt that will never be paid off is a very questionable “liability.”

That’s essentially the situation with the U.S. national “debt.” The U.S. issues money by deficit spending. It puts more money into private accounts than it takes out via taxes. The private sector has more balance-sheet assets (but no more liabilities, so it has more “net worth,” the balancing item on the righthand side of its balance sheet). The treasury has made no promises to redeem that new money for…anything (except maybe…different government-issued assets). It’s just out there.

Now it’s true that the U.S. et al operate under an arguably archaic and purely self-imposed rule: their treasuries are required to issue bonds equal to that deficit spending. This is a straightforward asset swap: the private sector gives checking-account deposits (back) to the government, and the government gives bonds in return. Private sector assets and net worth are unaffected by that accounting swap; it just changes the private-sector portfolio mix — more bonds, less “cash.” (Treasury “forces” the private sector to make that collective portfolio-adjusting swap through the simple expedient of selling bonds at an attractive price — a point or two below similar deals in the private sector.)

The same kind of asset swap happens when the Fed “prints money” for quantitative easing. The private sector gives bonds (back) to the government, and the Fed gives “reserves” in return — deposits in banks’ Fed accounts. Sure, the Fed creates those reserves ab nihilo, but they’re not a money injection into the private sector, like deficit spending. They’re just swapped for bonds. That accounting event doesn’t increase private-sector assets or net worth. It just changes the private-sector portfolio mix (more reserves, less bonds).

In any case, the private sector is holding government-issued assets. Whether they consist of bonds, “cash,” or reserves, is it realistic to call that money originally spent into private accounts a “debt” for the government? Is it in any real sense a government “liability” if it will never be redeemed for anything? Would a better term be “government-issued assets,” or similar?

Look at the U.S. and the U.K. as examples. The stock of government-issued assets from those sovereigns has been steadily (though fitfully) increasing for more than two centuries and three centuries, respectively. (And in the handful of cases where the stock was reduced significantly, the result was major economic depressions.) That centuries-long growth pattern could conceivably change at some point, but…why would governments stop issuing financial instruments all of a sudden — exchangeable instruments that their economies need to operate fluidly, and grow — while their economies continue to expand?

The government has committed itself to issuing bonds for archaic reasons, so it needs to roll over its “debt.” Old bonds mature, the government pays them off and issues new ones to replace them. Unendingly, for decades and centuries. But the stock of government-issued assets just keeps growing — as it should and must in a growing economy.

Those government-issued assets are a necessary lubricant for the operation of the private-sector economy. As the economy gets bigger, more of those assets are needed, as a kind of giant “pool” or buffer stock  to avoid transactional lockups. (See: Paul Krugman’s babysitting co-op.) Realistically: will government stop issuing that necessary lubricant, or withdraw what it’s already issued, when the economic consequences of doing so are so dire?

It’s common parlance to say that the private sector is “holding government debt.” That’s understandable, since the private sector is holding bonds. But it’s a misnomer, and a pernicious, confusing one. The private sector is (obviously) holding assets on its balance sheet. The “debt,” such as it is, only exists as an offsetting accounting liability on the righthand side of the government balance sheet. (While “holding debt” is a handy verbal shorthand, if you think about it for a moment the usage makes no sense at all. How can you own something you owe? Debt can’t be an asset that you “hold.” It’s a liability.)

The private sector holds (owns) government-issued assets, not liabilities. And even the offsetting liabilities themselves are rather dodgy and iffy accounting entries. The government issues those assets as a public good. In the big picture over decades and centuries, that’s the end of it.

Another key understanding: Those different types of government-issued assets (bonds, “cash,” reserves, etc.) are straightforwardly fungible in the private market — at least at the margin, where it counts. The private sector couldn’t swap all its government bonds for currency or checking deposits at once (nor, realistically, would it). But if an individual bondholder needs cash for real-goods transactions or whatever else, the necessary asset-swap transaction happens with a mouse click. Likewise holders of checking-account deposits: if they want physical currency, their bank stands ready to make the swap; it’s called “withdrawing cash.” If the bank runs short on physical currency, the Federal Reserve provides it on demand in exchange for the bank’s reserves, its account deposits at the Fed. (With the Bureau of Engraving and Printing standing behind the Fed, presses ready to roll as the transactional economy expands.)

Now the private sector’s portfolio mix certainly has economic import (and even more so, changes in that portfolio mix). But that mix is secondary and subsequent to the total stock of various government-issued assets in play — be they bonds, checking deposits, whatever. Without a sufficient pool of those lubricatory assets, the financial economy binds up and freezes.

Which is why you, as queen or king, issued those tin coins in the first place. The economy needs them to operate smoothly. Sure, you got some one-time free labor out of the deal — “seignorage” and all that. But did you benefit? Maybe you used the labor to build roads. Both the roads and the coins are public goods. You just end up, still, as queen or king — of a more prosperous country. That one-time transaction happens — you issue coins and pay people to build roads or whatever (you “deficit spend”). But those coins (or bonds, or whatever) remain out there forever, for generations, doing the good work that needs doing in the economy. Money makes the world go round.

There’s really no reason to call those coins, or any other financial instrument the queen or king chooses to manufacture out of thin air and swap for those coins, “national debt.” Let’s switch to a term that actually describes the things that we ultimately tally up on the lefthand side of our private-sector balance sheets — something like “government-issued assets.”

There are deep political and economic implications to this kind of rethinking and renaming, but I’ll leave those implications to the ruminations of my gentle readers.

2016 May 15


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  • This piece is somewhat hard to follow, but the Smith seems to be arguing that the issuance of government debt should be seen purely as seignorage. It may ultimately come to that, but that is not really an accurate description of what is currently happening.

    Currently people buying government bonds are foregoing current consumption/private investment in exchange for a share of future tax revenues– which would effectively transfer resources in the future from taxpayers to bondholders.

    If bond buyers really thought current bond sales were was just seignorage, I think you would find significantly higher rates being demanded as well as higher level of inflation.

    • pimlico

      Taxes don’t fund anything. Taxes aren’t spent. They are merely the method of draining liquidity from the economy to prevent inflation.
      Bond buyers are currently getting negative interest rates in some countries. Why would they do that?
      It’s because they like the security of government bonds. It’s somewhere safe to invest their savings. That’s why people buy bonds.

      • That doesn’t change the fundamental fact that if there was not a promise that the bonds might be repaid some day with future tax receipts (as opposed to printed dollars), the interest demanded would be significantly higher.

        • pimlico

          They can’t use taxes to pay for anything. Taxes are just redeemed government IOU’s (money is just a government IOU) once an IOU is redeemed it disappears.
          It’s all basic accounting, simple double entry bookkeeping.

          • That is one way to look at them, but it does not affect my initial point.

          • “a promise that the bonds might be repaid some day with future tax receipts”

            In fact, they just get rolled over, forever.

        • Sam Levey

          I don’t think the people receiving the dollars in repayment care whether it comes from taxes or the printing press. They only care about seeing the same number of dollars back + interest, and would prefer that those dollars can purchase the same amount of goods and services as when they went in (or more).

    • “the issuance of government debt should be seen purely as seignorage”

      Not quite. Deficit spending is effectively seignorage. Spending money created out of thin air. Gov bond sales and QE are asset swaps, just alter the private-sector portfolio mix (cash/bonds/reserves). The asset-swap accounting event itself does not change private sector assets or net worth. Deficit spending does — it increases both.

      • All US government deficit spending is currently paid for by the sale of treasury securities.

        • See:

          “archaic and purely self-imposed rule.”

          “This is a straightforward asset swap.”

          “Private sector assets and net worth are unaffected by that accounting swap.”

          Think through the bookkeeping. It’s straightforward. And there’s piles of econ and accounting literature out there explaining this in excruciating detail. (Search “MMT.”) You’re a super smart guy. If you’re finding it “hard to follow,” you’re not trying. You may not agree, but…

        • nyc girl

          “…while both taxation and bond sales drain reserves from the banking system, neither provide the government with money with which to finance its spending. Indeed, both taxation and bond sales lead (ultimately) to the destruction of HPM [High-Powered Money].

          An analysis of reserve accounting reveals that all government spending is financed by the direct creation of HPM; bond sales and taxation are merely alternative means by which to drain reserves/destroy HPM.
          The choice, then, is between alternative methods for draining reserves in order to prevent the overnight lending rate from falling to zero. In light of these findings, it is, perhaps, time to reconsider our definitions of monetary and fiscal policy as well as our treatment of taxation and bond sales as ‘financing’ operations.”
          Can Taxes and Bonds Finance Government Spending? p. 24
          http://www.levyinstitute.org/pubs/wp244.pdf

  • Duncan Cairncross

    Robert Heinlein said it perfectly in “Beyond This Horizon”

    A simple explanation that
    The money supply should increase as the economy does
    Which if you think of money in the economy as similar in function to blood in a body makes perfect sense

    Directly from the book
    We call the system “finance” and the symbols “money”
    The symbolic structure should bear a one to one relationship
    to the physical structure of production and consumption .
    It’s my job to keep track of the actual growth of the
    physical processes and recommend to the policy board
    changes in the symbol structure to match those in the
    physical structure

  • Anton Galenovich

    Is not it a value of trust to the government expressed in coins? they are not public good, just virtual equivalent of costs

  • Locke

    How does this work with increasing interest payments though? As the gov increases its liabilities to pay for its “deficit” isn’t there a point where gov debt will compound too quickly to be reasonably controlled? It also is not a closed system. Many of these debt holders (or asset holders or whatever) are outside the country and that pulls more gov spending out of the country thus not contributing to GDP??

    • Locke

      Clearly I’m having a hard time with this. Is there a source I should go to? I would like to think it is my understanding that is lacking, and not the authors.

  • Brad Lewis

    Excellent article. As another economist who found MMT a breath of fresh air, and quite accurate, I’m glad to see this article. One comment on overseas holding of debt. To get that debt, the countries in question had to send us something in return–generally goods and services, as we have a current account deficit and capital account surplus. So we got resources. They took our IOU’s. They do so for good and logical reasons, generally: the U.S. dollar is a reserve currency, our inflation rates have been quite low, and they can get some goods later.
    DW Anderson is forgetting a stock/flow point, which is actually made in some of the comments. As the private sector expands, people want to hold a part of their wealth as default-free savings: it’s collectively quite reasonable for them to do it. The fact that an individual bond will be rolled over has nothing to do with the aggregate effects. Other than the U.S. government, a currency issuer–to use MMT terms–who in the economy issues truly default-free debt?
    Just as the money stock tends to rise with income, the debt has, for a long time, too.The fact that government debt now arguably substitutes for money in many cases (corporations can use the repo market to park cash) makes it even more evident that we’re talking about is a stock of debt that is default-free and useful as an asset in people’s portfolios. And there’s no reason to think the private sector would need or want to pay it back, within fairly wide limits.

  • So there are free lunches!

    Printing money, increasing debt and keeping rates low will inevitably lead to increasing bubbles and increasing crashes.

    There is always a price for irresponsibility. At a minimum it will cause economic instability. And this instability can spread to other countries.

    • Justin Dixon

      There is a difference between saying state debt is the wrong way to frame the conversation and stating that we should print without limits.

      Populations fluctuate and flat currencies get effectively taken off of the market through things like hedge funds or simple large scale private storage (enough so that there are several rich people who if they simply dumped their currency are more likely to cause the type of inflation that you are showing concern about, than the actual Fed).

      So can we continue to not make more money if we are not covering a large amount of needs, and the money supply is steadily reduced in relation to the population by both hoarding and growth?

      Again this doesn’t have to be without limits, but it should not be called debt.

  • Peter Duray-Bito

    The French experimented with these ideas over 200 years ago. It took Napolean to lead them back to reality.

  • David Brin

    Another way to reconfigure the debt dialogue is to emulate the effective polemical tricks of the right. How I’d love to see a second “National Debt Clock” showing where we’d be now, if we (the citizens) had charged just a 5% royalty on the fruits of U.S. federal research. We’d be in the black!

    The point of this “counter clock” would not be to demand such royalties, but to show how much benefit we receive from shared investments in scientific and technical seed corn.

    How have we Americans been able to afford the endless trade deficits that propel world development? Simple. Science and technology. Each decade since the 1940s saw new, U.S.-led advances that engendered enough wealth to let us pay for all the stuff pouring out of Asian factories, giving poor workers jobs. Jet planes, rockets, satellites, electronics & transistors & lasers, telecom, pharmaceuticals… and the Internet.

    For more, see: http://davidbrin.blogspot.com/2012/10/eight-causes-of-deficit-fiscal-cliff.html

  • Anthony Ladd

    The value of dollar is in part propped up by the expectations of stability and growth. Does not decades of deficit spending undermine this credibility? Fiat money is only as good as people’s faith in the economic and political system backing it. That is what is truly being hurt by that multi-trillion dollar number you say is irrelevant. Why would people buy those bonds if they did not have any faith in the ability of the government to pay with a return? What would happen if people decided they didn’t want those bonds anymore?

  • Anthony Ladd

    The opportunity cost of debt is future spending. So if you are the government, you are not bound by the opportunity cost? Hey, just sell more bonds and increase the money supply? No need to raise taxes, cut government spending in the future. No credibility crisis. This sounds like the ultimate free lunch.

  • Brad Lewis

    The article on which we’re commenting made the key point on this. The assertion is not that there is no constraint on federal government spending–and the “federal” part makes it different than any state government, business, or person. The federal government is a currency issuer and we only borrow in a currency we control. So insolvency isn’t a problem unless we just choose to default. State and local governments, businesses, and individuals are currency users and do have a standard budget constraint.
    The key is that federal deficits create safe financial assets that others want to hold. (Under a gold standard we have to use large amounts of real resources to dig the stuff out of the ground, refine it, and then stick it back down into vaults, in order to be allowed to create money. See Milton Friedman’s Money Mischief for a good commentary on that.) Of course it’s possible that a government could overissue. But based on current interest rates on Treasuries, would you say people are being forced to hold them at gunpoint or something at this time? Hardly.
    And think about one other point. When the Global Financial Crisis hit, the private sector and state and local governments, rationally, reacted the way they generally do when business turns down: they spent less and tried to save more and rebuild their balance sheets. A major benefit of the large federal deficits was the creation of safe financial assets that the private sector could use to repair its balance sheets. No private issuer of debt could do that: the private bonds they create are offset by the private debt they’ve taken on, so the private economy would stay equally leveraged. People started spending again after they’d repaired their balance sheets–after the currency issuer, the federal government, had created enough default-free assets to satisfy their desire to hold more of them. The last time the federal government got rid of its debt altogether was 1835. (And shortly thereafter, 1837-1843, we had a really bad depression.) Have we gone bankrupt anytime since then?

    • Right! There is one key constraint on government issuance of new assets ab nihilo. Inflation. The 70s-era-inspired freakout anxiety about (hyper-)inflation is what drives much current gov policy (fiscal and monetary), and does much to explain current “secular stagnation.” Demand Inflation Now! (DIN)

  • Justin Dixon

    Although there is one problem with this analogy, that I can see as I understand it. While it is true that the US could do this the Federal Reserve exchanges dollars for bonds, meaning that every dollar that exists has interest charged to it. Green backs, printed by Lincoln during the civil war would have followed your tin currency principle, but unless I’m gravely mistaken (which I would appreciate any evidence on this as it would genuinely be a relief) we borrow our current currency from the Federal Reserve at an interest cost. Even our digital currency which is created by private banks and credit card companies through fractional reserve loaning (very loose definition on reserve here) by their nature charge an interest on that currency.

    If I’m correct in my understanding the “debt” is not mathematically possible to pay without infinite financial expansion (leading to us burning through several finite resources and regularly pushing for conquest), but we could through law restructure our currency such that your original statement is true, though currently that would put you in direct opposition to the very money institutions that tend to buy off our politicians.

    Please advise.

    • Brad Lewis

      Part of what you say is accurate but several threads need to be separated out:
      1. Yes, we have a system in which the banking system creates most of our standard money, bank deposits. These banks have required reserve rates, though they really don’t constrain lending (and hence deposit creation) at this point because (1) the Fed pays interest to them on excess reserves, (2) they could borrow reserves in the overnight market if they have loan opportunities that warrant it, and (3) the Fed targets interest rates at this point, and by doing that, gives up the ability to independently target the level of reserves: that is based on supply and demand for reserves by the banking system.
      2. The Fed actually returns any net earnings it has to the Treasury.
      3.Your point on escalation of debt is subject to (at least) two clear qualifiers:
      a. The fear of the “explosion” of the national debt assumes that the increase of the national debt is above the nominal growth rate of the economy. Then the debt would theoretically head, eventually, to an infinite multiple of economic output. So would the assets the public holds. If “too much” federal spending causes very high inflation, we would have a problem. Ironically, the U.S. has actually had very little high inflation in its history.
      b. The escalation of private debt, especially at high interest rates, absolutely is a cause for concern. In fact, that escalation of private debt/private leverage has been a main cause of manias followed by crashes. Ironically, if the federal debt is declining, the safe financial assets provided to the private sector by the federal government are declining: the private sector collectively is thereby increasing its leverage and decreasing its margin of safety. Adding federal debt to private debt–often done, and presented in scary fashion–is really not an accurate way of counting.
      4. There are similarly some institutional features of the way we handle government borrowing. The Treasury can’t just sell bonds to the Fed (based on the fear that that will “monetize” the debt). It sells them to private dealers first and the Fed buys them back. To your point, there’s no particular reason we would need to do it this way.

  • Moslerfan

    I think you are missing, or at least understating, one of the essential purposes of the money issued by the “king or queen” (the state). It’s not just so the economy can operate smoothly. Spending of newly created money (hiring people, buying stuff) moves real economic resources from the private sector to the public sector.

    • Justin Dixon

      But unless state workers live in a vaccuum do they not spend that money back into the private sector?

      • Moslerfan

        Yes, they do. Government spending adds to aggregate demand two ways; immediately when the Government spends, and again when the recipient of the Government money then circulates it further into the private economy.

        The Government’s objectives are to establish justice, insure domestic tranquility, provide for the common defense, and promote the general welfare. It “prints” and spends dollars to achieve those objectives. As pointed out in the article, the dollars then circulate in the private sector, facilitating economic transactions and satisfying a desire for private dollar savings.

    • Matt Beaven

      Government payment of social security does not move real economic
      resources from the private to the public sector. In fact, a lot of
      federal spending does not achieve this.

  • RononDisqus

    Gee whiz, Steve Roth, your thesis is as old as government. Just proclaim a particular thing as money and spend it. It works great! Do we have to “pay back” the national debt? No, but we sure as heck have to make the principal and interest payments which grow as the debt grows and fluctuate with interest rates. Why? Because issued money is at its root quite literally a con game, where “con” is short for “confidence”. The money issued by the issuer, be it the king, the czar or a group of elected representatives has a certain confidence in said money by the governed. Will they accept it for goods and services? Will they accept more or less of it next year for the same goods and services? History is replete with lessons of currencies becoming worthless. There is no intrinsic value in the medium of exchange, only the confidence in it and that waxes and wanes. Historically, gold has been viewed as having intrinsic value, mainly because it’s relatively rare and doesn’t degrade, but at the end of the day it’s just a hunk of metal and only has value because humans making an exchange think it does. If a govt makes too much money and takes value for it from the system, we end up with inflation. I even saw someone on here think we should want inflation. It all ends up being about who pays. Inflation? Those with savings lose buying power and they pay, and most ordinary people got that money by exchanging hours of their life for it. With inflation, those with debt win because they don’t have to pay back as much purchasing power as they got for that debt when they spent it. Deflation? The lenders make out, they get back more purchasing power for the paid back principal than the person taking on the debt got.

    But I know, we’re all so sophisticated now. The rules of history don’t apply. We replaced the c with a v in economics to show just how sophisticated we are. Poppycock. Maybe we should just all vote for an inflation rate and do away with taxes entirely?

  • don quixote

    And the historically low interest rate, and higher but understated inflation rate that underpins this is part of Financial Repression restarted to keep the debt from ballooning. And so this system is intended to fence and sheer the sheep, the 99%, many of which having been saving upwards 40 years to retire but who are being undercut as impoverishment spreads. Sounds more like devonomics to serfdom to me.

  • don quixote

    The $200 Trillion in liabilities as part of the government’s budget is 40% medical payments and doubling every 10 years. Doesn’t sound so sustainable. Meanwhile various countries work to build an alternatives to the dollar as reserve currency.