"Why don't you tell the truth for a change!"
-- James Stewart in Mr. Smith Goes to Washington
"There you go again." -- Ronald Reagan
Here we go again, with more political talk of the national debt endangering American society. But mostly, it's just that -- talk. The bottom line reality is that we owe this money to ourselves. Why? Because government debt is in the form of U.S. savings bonds, as well as bonds and securities issued by the U.S. Treasury, most of which are held by American investors or U.S. financial institutions.
Even if all investors, including those based overseas, tried to cash in the securities at the same time -- so unlikely as to be virtually impossible -- the result would be runaway inflation as trillions of dollars flooded the economy. Who would suffer? Not investors, because they would have the cash. Those without bonds to sell and few other assets to liquidate would be impoverished by soaring prices.
A crisis would come if a major portion of these savings bonds and Treasury certificates were all presented at the same time to the U.S. government for payment. The government must then use available cash to redeem them. But the kicker is that the bonds, notes, etc., are negotiable, which means they don't have to go back to the government, but can be sold to someone else. If you hold Treasuries, you can sell them to your local banker or broker who can then resell them to another investor. Thus, the government is not involved and its cash reserve is not threatened.
Moreover, many of the bonds and notes are held by Americans, who trade them with each other. Foreign investors are not necessarily involved, and even if they were, there is no threat to sovereignty. Why destroy those who owe you money?
Meanwhile, here are some numbers to consider. The total U.S. debt is above $16 trillion, roughly the same as GDP (Gross Domestic Product, the total value of all goods and services produced in the U.S., and used as a measure of the economy). So the government is in debt to roughly the same value amount that its citizens produce.
The federal spending plan is in the region of $4 trillion, and the federal deficit -- the amount by which spending exceeds revenue -- is about $1 trillion.
Setting aside for the moment the deficit, since the talk is about the debt, not the deficit, and there should be a balance where revenue matches or exceeds spending, let's consider how important the debt is.
Answer: Not very, since we owe it to ourselves.
Conservatives are fond of comparing the country to a corporation or a family, but firms regularly go into debt, issuing bonds and borrowing to fund their operations. And families go into debt whenever they take out a mortgage to buy a house, or whenever they use a credit card. Often, corporate borrowing exceeds sales revenue, but the plan is that revenue will increase and, in any case, the bonds must be paid off. Families, moreover, rely on future income.
Bonds, then, are as safe as the entity that issues them. And some companies do go bankrupt when they have little or no chance of raising enough revenue to survive. Even so, bonds must be redeemed. Common stock, on the other hand, represents part ownership in the firm, and if the firm fails, the stockholder is out of pocket. In fact, some investors use bankruptcy as a tool to get out from under debt and move on to other investments. (You know who they are.)
So, on the national level, will the debt come back to haunt? That depends on whether the ghostly debt is perceived as a menace. If so, then the ghost is an independent entity out to destroy. If not, then the ghost is part of us, and there is no reason to think we would destroy ourselves.
More numbers. Total federal debt, as of June 2012, was $15.85 trillion, according to the U.S. Treasury. Of that, $6.47 trillion, or 40 percent, was held by Federal Reserve Banks and other governmental agencies. The balance, $9.38 trillion, or 60 percent, was held by private investors.
Who are these private investors? Scarifying TV ads would have you believe they are all Chinese, but how likely is that, since many Americans as well as investors around the world also buy U.S. government securities. Why? Because they're safe, and they pay higher interest rates. A two-year Treasury, for example, has a coupon (interest) of 0.25 percent, according to Bloomberg.com. A two-year UK government bond carries a 5 percent coupon, Australia, 4.5 percent, and Germany zero. Compare that with your local bank's CD rates.
It is true that national bonds can become unpopular when a government topples or is in danger of toppling, sending the value of their bonds down and interest rates up. Thus, a government cannot issue new securities because the interest rates become prohibitive. This has happened in the past, and some countries are facing that possibility today.
In general, however, government savings bonds and Treasury securities are as safe as the government itself. One sure marker of that is when the negotiated price of a government bond goes up. That means the bond is safe. It also means low risk, which in turn means low interest.
Even so, your local bank can sell you a CD earning 0.01 percent, use the proceeds to buy a government security that earns 0.25 percent, and pocket the difference in complete safety.
If you fear the U.S. government is in danger of toppling, then you have reason to liquidate your bonds and stash your cash elsewhere.
Where? Try a mattress. Or a casino.
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