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Our National Debt

by Alonzo Echavarria-Garza 3 years ago in finance
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A concise explanation

Like most of you, I was a bit confused and wanted elaboration on the subject of the National Debt. To me, this is one of the most important topics, regardless of who runs the country. So I started searching the web for explanation, but it seems that the articles online fall short of clarity. Most of these websites explain as if you are familiar with financial concepts. To add to the complexity, they reference other governmental websites that explain detail and components of the national debt.

So here is my attempt to disseminate to my fellow Americans the national debt and its components. There is plenty of news coverage and criticism from left and right, and harsh comments depending on who is in office, but the volumes of coverage deal with partisan political commentaries. This muddles up the conversation, and we’re back at square one after hours of reading. I will explain to you the best I can what the National Debt is in the following paragraphs.

The Typical Explanation

Often, you will find that the description of the national debt includes words like liabilities, outstanding, intergovernmental, and such. Other words like "off-balance sheet" add confusion, and discourage many to keep digging. So, let’s get this out of the way.

The common definition is: The national debt is the sum of two components—the debt held by the public (public debt), and intergovernmental debt. The Public Debt has historically been over twice as much as intergovernmental debt.

Intergovernmental Debt

Let's start with the confusing official description first. Intergovernmental debt are securities in possession of the government's trust funds. These also include special funds, revolving funds, bank securities, and marketable securities controlled by the government or held by US Government.

From What Funds is Government Borrowing?

The total national debt can be found in the report issued by the US government titled “United States Central Summary General Ledger Account Balances," and it includes a variety of reports like outlays and receipts, combined statements, and outlays and receipts by branch.

The report mentioned above, does not provide a detail of each fund. The rest of the funds are:

  • Insurance Trust Fund
  • The Federal Supplementary Medical Insurance Trust Fund
  • Office of Personnel Management Retirement
  • Social Security or the Social Security Trust Fund and Federal Disability
  • Military Retirement Fund
  • Medicare, which includes the Federal Hospital Insurance Trust Fund

Trusts funds

These represent funds that are administered by the government, but the public owns the securities or the money. For example, the social security trust fund is owned by the taxpayer or beneficiaries who have been paying into this fund, paycheck by paycheck. This fund has the amounts that we have deposited over the years, and belongs to the citizens. The government, when it is short of cash, borrows from this fund. Because these trusts are part of the whole financial books of the government, in essence the government is borrowing from itself; or in this case, borrowing from citizens to pay for other things not related to social security.

The trust funds receive deposits (receipts) and incur expenses. These transactions are recorded in its own fund, like a separate entity within the government. Some of the receipts in these accounts are used to invest in public debt, and even Governmental Agency securities.

These trusts funds are created by law, and all expenditures and budget accounts are updated and established annually. The government authorizes the use of funds in these accounts.

Example of Trust Funds include:

  • Federal Old Age and Survivors Insurance Trust Fund
  • Unemployment Trust Fund
  • Civil Service Retirement and Disability Trust Fund
  • The National Service Life Insurance Trust Fund
  • Highway Trust Fund

The Nature of Trust Funds

The federal government is not the only one who creates trust funds. Trust funds are created by local government, and state government to administer monies that belong to someone else. In this case, the citizens of the particular jurisdiction. The monies in these funds do not belong to the general government, and should not be used for anything other than the specific intent.

However, in local, as well as federal levels, it has become customary to borrow from the trustees’ purse to pay for items that the government can no longer afford; this is where the term intergovernmental comes from. The government takes from one fund and deposits in another, so that it appears that the trust fund is not paying for anything, but instead just lending.

Trusts have existed in some form or another since roman times. It is a fiduciary relationship in which a trustee (government) secures the funds of the people (the beneficiary).

Some people claim that the government is actually breaking the law because it is circumventing the system to use the taxpayer’s (beneficiary) money to pay for items that are not related to the specific function of the fund. In the case of social security, it can be said that the government is using the fund to pay for things that have nothing to do with people’s social security benefits.

Some citizens claim that the government is prohibited from using social security funds to spend in non-related items by Subtitle C, of Section XIII of the Omnibus Reconciliation Act of 1990.

The Public and National Debt

So now that you know that the federal government uses your money to pay for a bunch of items in the yearly budget, and that these funds come from beneficiary funds, it is time to examine the second category from which the government draws funds to pay for excessive spending; intergovernmental holdings.

The Debt That Is Held By The Public

Don’t let the term “public” confuse you. By public we mean the amount of money that is not in the federal government’s possession. That is, these are funds that are obtained by borrowing from banks, mutual funds, insurance companies, and even other governments like state and municipalities. Some of these funds are borrowed from foreign nations as well. You may find the report on foreign investment here: Major Foreign Holders of Treasury Security. You will find that—no surprise—China is number one, then Japan, and number three is Ireland. The list of foreign holders is a little over 30. Russia and the United Arab Emirates made the list.

There are two broad categories within the Debt Held by the Public; Marketable and Non-Marketable.

The categories of holder of debt in the public include the following:

  • Private Pension Funds
  • State Governments
  • Banks
  • Local Governments
  • Mutual Funds
  • Federal Reserve
  • Foreign Nations
  • US Bonds
  • And all other personal dealers, estates and various entities

The federal reserve balances can be reached here. These do not represent printing bills as many would assume. These are balances that are required by banks. In a way, banks and The Federal Reserve match this amount to control inflation and interest rates.

The Marketable Securities of Debt

In marketable securities, we have Bills, Notes, and US Bonds and other securities. Of all these, the majority are the Notes.

The government raises money by selling marketable securities. They entice buyers by offering attractive interest rates while providing secure, liquid investment in the USA. Because we have remained a reliable debtor, we are still able to raise funds at low interest rates.

Notes pay interest, and are sold in denominations of years; currently the US offers two-, three-, five-, seven- and ten-year notes. These notes will pay you twice a year, and face value of the note is paid at the end of term—maturity.

Treasury Bills are sold for terms lasting less than 12 months. They differ from Notes in that the government pays you the face value at the end of term, because you purchase at a discounted rate (lower than the amount you will receive at the end).

If you are ready to invest for longer periods of time, the US Bonds are your perfect choice. Bonds are offered for a period of ten years or more. These offer rates at semiannual times.

Anyway, if you visit the Treasury Direct website, you may enroll as a buyer of government securities.

The Non-Marketable Securities of Debt

Non-marketable securities include all other governmental investment instruments, like government series and state and local series. Established in 1972, the state and local series was drafted to protect from market risk. In addition, because local government and state government are not allowed to reinvest funds of lower interest rates, these non-marketable securities provide the compliance necessary by these governments.

The Problem with Inter-Accounting

When you take money from your left pocket, and put it in your right, you end up with zero because the right pocket will eventually disburse the fund. That is, you move it from your left (Social Security) and place it in your right to make payments to vendors and outside parties. When we ask, you simply say “well, my right pocket spent the money and owes it to the left. The accounting just records a liability on the side, and a receivable on the other side. It zeroes out. However, the general fund also shows an expense, and cashes out to vendors. Brilliant.

The first issue is the practice itself; the ethical implications of depleting a fund that is not to be touched. Those funds belong to a sector of the public who pays taxes.

Another issue is the plain robbery of not paying interest on borrowed funds from tax payers. If we, all the taxpayers—yes, we, the people—decided to invest these trust funds in the bank, we would have interest payments deposited. So, in a way, the federal government is spending money that will eventually, hopefully, yield returns at face value—or it will be devalued because by the time we get it back, inflation will have finished its purchasing power.

Another issue with this accounting is that national debt borrowed from tax payers may not be recovered when needed. This is probably the most critical of all observations.

Sources

FAS

Federal Reserve

The Balance

Treasury Direct 1

Treasury Direct 2

Seeking Alpha

Fiscal.Treasury.gov

finance

About the author

Alonzo Echavarria-Garza

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