National Debt "Crisis"

When is a crisis not a crisis?

When you owe the money to yourself

   Concern about the rising national debt is in some ways a false worry, largely because much of the so-called "national debt" is money held in trust by one government agency for use by another; Social Security and Medicare funds, for example. Another major portion is in government bonds, held by still more government agencies or by American citizens. Moreover, these bonds are denominated in dollars, so the government can easily eliminate the bond debt simply by printing more dollars. Or the Federal Reserve can punch a big hole in the debt load through its Open Market Operations, in which it buys and sells government bonds, thereby injecting or taking out dollars from circulation. In essence, the "debt" is just transferred from one government agency to another, so it's not really the kind of debt that can bankrupt a government.
   The only way a nation can go bankrupt is for a major part of its debt to be held by foreigners, and the outsiders call in the debt. But much of the American national debt is moving back and forth between government agencies, and isn't held by foreigners at all. So the TV ad that shows Orientals claiming they "own" the U.S. is a false worry, misleading because very little of the national debt is held by foreigners. And calling in the debt would be pointless, since the Treasury could simply print more dollars to pay off the debt. That, however, would inflate the overall supply of dollars and result in higher prices. If wages do not follow the rise, more expensive imports would be less affordable and Americans would buy less stuff from foreign firms.
   As for other American assets owned by foreigners, recall the sale of a part-interest in Rockefeller Center to a Japanese firm some years ago. The firm did, indeed, own a share of the real estate, but it was not as if the buildings were to be dismantled and reassembled in Yokohama. That didn't happen. What did happen, however, was the market value of the real estate tumbled a few years later, and the investors lost on the deal. So the cash -- as well as the buildings -- remained in Manhattan.
   Economists have long known and taught that the national debt actually means little, since most of it is money we owe to ourselves. Yes, the number is high -- $16.4 trillion, at last count. But so is the overall economy, at $15.8 trillion. In last year's third quarter, the economy grew at an annual rate of more than 3 percent. Fourth quarter data are due out January 30.
   A family can have an income of $100,000 yearly, and live in a house with a mortgage of $300,000. They are in debt, but not in trouble. Unless, of course, the main source of income stops. But a family is not a government, and does not have the ability to manipulate the money supply as does the U.S. Treasury or the Federal Reserve. A family cannot (legally) print more money to pay down its debt. A government can. The bigger question is, should it? The answer is that governments often do, and we all live with the consequence of a larger money supply, which brings higher wages ... and prices.