Wednesday, March 23, 2011

$14 trillion in debt? How about $14T in cash in our hands!



We constantly hear about the debt left to our kids from government spending. It's $14 trillion, right? They pound this figure into our heads constantly. You can even go online and look up one of those crazy "debt clock" websites. They'll break it down for you as $45,818 per citizen.

So what is the debt? It's the amount of government securities--Treasuries--outstanding. "It's what WE owe," they say. Well is it what we owe or what the government owes? Let's be clear because it makes a difference. The debt is what the government owes. It owes it to the public, foreigners and to other government agencies.

From an accounting standpoint the debt is a liability of the government. However, to the non-government (that's us) it's not a liability, it's an asset.

Treasuries are nothing more than dollar denominated liabilities that pay interest and have some term or duration, say, 2 years, 5 years, 10 years, etc.

What's is a dollar bill, then?

A dollar bill is pretty much the exact, same, thing with only a couple of small differences. A dollar bill is a dollar denominated liability of the Federal Government, but it differs in that it has no term and pays no interest.

That's it. That's the whole difference between a dollar bill and a Treasury. No big deal.

Actually, you can think of a dollar bill as being like a checking account and you can think of a Treasury as being like a savings account or Certificate of Deposit. (Would you say you're broke if you held $14 trillion in a CDs?)

So by definition, those $14 trillion of Treasuries outstanding represent the same thing as if the government just handed out $14 trillion in cash, with a slight difference in duration and interest. And really, it's only about interest because you can roll over a Treasury as many times as you want making duration a moot point.

Ask yourself or your colleagues at work...if the government had sent out an enormous mountain of cash do you think people would be going around saying that it's some kind of great, big, liability that's going to be passed down to their kids and grand kids?

Hardly.

On the contrary, they'd be jumping for joy saying they've just inherited a windfall...a windfall that will eventually be handed over to future generations. They'd stop calling it a burden and instead, they'd be calling it a blessing.

Believe me, this is no lottery dream. It's exactly what's been going on. That $14 trillion "debt" is actually the exact same thing as $14 trillion of cash that has been literally handed out.

The crazy part is, in order for the government to "pay its debt" it would have to take back those trillions $$. And that's precisely what we are asking it to do. That's how we think we're going to "save" future generations. How dumb is that?

20 comments:

Matt Franko said...

Mike,
This post is more evidence that you indeed are over-qualified to do the 'Glenn Beck Show' when he is on vacation!

Any chance this topic area could be used in your "cross-fire" with Gasparino? Charlie may actually "get it"....

Resp,

Mike Norman said...

I already sent about 20 topics and haven't heard back from them. I wouldn't be surprised if they suddenly decided to cancel the whole idea. I think they may have gotten nervous that the stuff is too revealing and "off topic" to be of any use to them.

Joe said...

Great post. I've explained this topic to several friends of mine. Theyre starting to "get it."

rommeldak said...

LOL! I'm giving a talk on the debt and deficit Tuesday--I may add some of this in!

Mike Norman said...

Joe,

That's very encouraging!

-Mike

googleheim said...

YEAH, THE GRANDCHILDREN SHIELD

YOU'VE SEEN THE POLITICIANS WHO HOLD BABIES UP AS A SHIELD, AND THAT'S WHAT THAT MEANS.

EITHER THEY GRIPE ABOUT TAX PAYERS ON THE HOOK AS IF THEY ARE ADVOCATES FOR THEM, OR THEY GRIPE ABOUT THE DEBT TO OUR GRANDCHILDREN AS IF THEY ARE GOING TO RESCUE THEM.

THE FACT IS THAT VOODOO ECONOMICS FROM REAGAN, BUSH I AND BUSH II ARE TERRORIZING THE GRANDCHILDREN WHO ARE ALIVE TODAY ALREADY.

SUPERCONDUCTOR SUPERCOLLIDER > GIVE THE SCIENCE MANTLE TO THE EUROPEANS AND WHILE IT OCCURS THERE ARE SIGNIFICANT LACK OF RADIOISOTOPES AVAILABLE TODAY FOR NUCLEAR MEDICINE IN THE USA, MANY PHYSICISTS RETIRED OR WENT ELSEWHERE, ETC

IRAQ WAR PART I THEN SHUT THE GOVERNMENT DOWN ...

IRAQ WAR PART II THEN SHUT THE GOVERNMENT DOWN ...

we are living today as the grandchildren of those in yesteryear who tried to balance budgets ( clinton 2000 ), make markets deregulated and speculated, etc etc

i'm sure your bored by now.

Letsgetitdone said...

Hi Mike,

Two things:

First, here:

"Believe me, this is no lottery dream. It's exactly what's been going."

Shouldn't that be:

"It's exactly what's been going on."

And second:

"The crazy part is, in order for the government to "pay its debt" it would have to take back those trillions $$."

That's true of we take it back to pay the debt; but if we just pay it back when the debts fall due with newly created money without issuing any additional debt, then we'd be replacing the 14T in bonds with 14T in cash. So, the only thing that's crazy here is the idea that we should pay it back only after we tax the equivalent amount of money away from people without introducing any new money into the economy to offset those taxes.

Michael Bindner said...

At some point, too much debt becomes inflationary. You are correct, however, that paying back the debt also means calling back the currency.

The obverse is also true - to "End the Fed" one must first pay back the debt. Ron Paul does not seem to get that one. It gets worse for the Paulistas - in order to pay back the debt without crashing the economy, the rich must be taxed more heavily - not so much that they are bled dry - but enough for them to notice it.

rvm said...

"Believe me, this is no lottery dream. It's exactly what's been going."

Sadly, considering the rising inequality of income distribution during the last 30 years, the lottery winners are usually not among middle and low income class people. :-(

Letsgetitdone said...

Michael Blindner,

"At some point, too much debt becomes inflationary. . . ."

Japan's debt-to-GDP ratio is in the 200% range. Where's the inflation, and where's your empirical evidence that a Government sovereign in its currency will experience inflation when its debt to debt-to-GDP ratio reaches a certain point?

googleheim said...

can someone tell me why the Euro still flies with the PIIGS ?

if America announces this sort of bailouts, then we get weaker USD.

if EU announces it .. nothing Euro stays course.

What is going on here ???

Is the currency market rigged or not ?

I can only come to following conclusion - the Maastrict Rule is not being followed.

They are bailing out their confederacy and we are not bailing out our confederate states.

If that is the case, then we have an example where MMT is being applied in the EU and it works but is being smoke screened behind some Austerity measures.

Here it is not being applied to help the states of the Union.

That's a kicker - MMT being hidden behind a false veil of Austrian Economic austerity !! the result - a strong Euro.

The Arthurian said...

Hello Mike Norman.
That $14 trillion "debt" is actually the exact same thing as $14 trillion of cash that has been literally handed out.

Na. It is more like a record of $14T cash that was borrowed and handed out, and has not yet been repaid.

The $14T was handed out, or "spent." Indeed it was. But I think the people who worry about government debt are worried that another $14T will be needed to pay off those outstanding treasuries. Me, I understand that the government does not pay off debt, so that whole argument is moot.

Myself, I have trouble with little things, like saying that debt is the same thing as cash that has been handed out.
I say debt is a record of what was borrowed, that has not yet been repaid.

Art S

Tom Hickey said...

The federal government's position must be the inverse of the nongovernment position. Government provides the medium of exchange to facilitate commerce, and it doing so provides net financial assets for nongovernment as currency, reserves, and securities, all of which play different role although they are directly convertible, being denominated in the government's money, e.g., the USD. What the form of the government's liabilities may be is relatively immaterial, and so is the amount, since what counts is the real resources involved. The nongovernment net financial assets must correspond to government liabilities as a matter of accounting. See JKH on this here. What the form of the government's liabilities may be is relatively immaterial, and so is the amount, since what counts is the real resources involved.

The Arthurian said...

Hi, Tom... I never know if you are talking to me. If you were, you missed: Your whole comment went way over my head this time.

Tom Hickey said...

Arthurian, all government issuance, regardless of whether it is coins, FR notes, reserves. or tsys is a government liability and a nongovernment asset. That's how the accounting goes. What the government owes nongovernment for its USD liabilities, regardless of form, is a tax credit. Spending is transferring tax credits, and savings is accumulating them. This shows that government "borrowing" makes no sense because the government has no use for its own tax credits. It doesn't pay taxes, it issues tax credits and then collects them. That's it.

Did you read JKH's comment at Interfluidity? He spells it out.

The Arthurian said...

"Spending is transferring tax credits, and savings is accumulating them."

Tom it sounds like you are saying money is tax credits.

Tom Hickey said...

Right, Arthurian. I got that from Warren. He says "tax credit with no backing."

Tom Hickey said...

Let me put it more starkly. There are two "worlds," the real world and the accounting world that reflects it. Everything in the real world has a corresponding figure in the accounting world. The figures in the accounting world are "units of account," in the US, USD.

USD's are tax credits. Government imposes taxes and provides the tax credits needed to meet this obligation to the state in exchange for goods and services (spending), or simply transfers them (transfer payments).

The federal government could conceivably raise taxes to equal the amount of stuff in the real world. Everyone would have to get the tax credits to meet this obligation by selling (transferring) their stuff to the government. But then the game would be over, so the government would never do that, even if it could.

This ability to impose taxes and issue tax credits is how the money game works.

The federal government cuts the banks in by allowing them access to reserves and currency, which are required for all final settlement of transactions. Banking involves creating deposits by risking capital through credit extension. This game works because banks are given direct access to reserves and currency, which the rest of the people do not have.

According to Warren this arrangement makes the federal government the currency monopolist.

The political question then becomes what % should the government get for pursuing public purpose. In a liberal democracy, the people get to decide this rather than the state. But in a representative democracy like our, it is the government that decides, not the people directly.

The Arthurian said...

Thanks, Tom. But all the explanation of MMT is wasted on me, until I get some simple definitions worked out.

To me, "money is tax credits" is not a very good definition, though I can see how it fits in with the "we use money because we can pay taxes with it" line of reasoning.

Next definition: What is debt?

I need a definition that applies to the public and private sector, both. I need a definition that agrees with what I know about debt from my own experience.

Tom Hickey said...

Credit is the flip side of debt. All debt is the result of a credit. Government creates debts to itself through taxation and provides tax credits to satisfy those debts to the government. As a matter of accounting the tax credits are booked as assets in the private sector. The corresponding liability is in the public sector. This is how nongovernment net financial assets get created. There is no corresponding liability in the private sector. When banks create credit money (loans create deposits) the net is zero - no increase in net financial assets.

This the distinction between vertical and horizontal money in MMT.