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Guest Article

US "Debt Held by the Public" vs. Total National Debt


Gary D. Halbert

Today’s discussion is one I write about every few years because millions of Americans don’t understand that they are being misled by the government and the media about the true size of our national debt. According to the US Debt Clock, our national debt is now in excess of $21.7 trillion, and is expected to rise by over $1 trillion per year over the next decade starting next year.

Debt Clock)

No nation in the history of the world has ever amassed a national debt remotely this large. Thus, no nation has ever repaid a debt of this size. There is widespread agreement today, and has been for years, that it will be impossible for the US to ever repay this enormous debt, much less the $30+ trillion it will be at in a decade –assuming we make it that far before the next financial crisis.

They actually suggest that the Intragovernmental Debt should not be counted toward the national debt because they say this is debt that “we owe to ourselves.” I’ll explain the differences between the two types of government debt below. I’ll also explain their argument for why Intragovernmental Debt shouldn’t count as part of the total national debt. And I’ll tell you why that argument is utter hogwash!

Debt Held by the Public vs. Intragovernmental Debt

The Debt Held by the Public is currently at apprx. $15.5 trillion. It is largely owned by individuals, corporations, state and local governments, Federal Reserve banks, foreign central banks, foreign governments and other entities outside the United States. This debt is normally issued in the form of Treasury securities (bills, notes and bonds) and TIPS (inflation protected bonds).

Intergovernment Holdings

Intragovernmental Debt, on the other hand, is Government Account Series (GAS) debt securities issued and held by various government agencies, including the Medicare Trust Fund, the Social Security Trust Fund and the Federal Financing Bank, among others. This is debt that government trust funds, revolving funds and special funds owe to one another. Intragovernmental Debt is currently at apprx. $6.2 trillion.

Notice in the chart above from the Treasury Department how they fail to acknowledge that government-held debt is actually debt; instead they refer to it as Intragovernmental “Holdings.” But don’t let that fool you – debt is debt!

The Flimsy Argument For Why Intragovernmental Debt Shouldn’t be Included in the National Debt

There has long been a debate, mostly in liberal circles and the media, that Intragovernmental Debt should not be counted toward the national debt since, they argue, “this is money we owe ourselves.” This argument is ridiculous, and I have debunked it for years. Yet with our debt headed for $22 trillion by early 2019, it’s time to debunk it again.

The bulk of Intragovernmental Debt is owed to the Social Security Trust Fund and the Medicare Trust Funds, with the balance owed to other government trust funds. Most of these trust funds have run surpluses for many years, as planned. Yet the government has chosen to borrow and spend these surpluses and replace them with Treasury IOUs.

Those who argue that Intragovernmental Debt should not count toward the national debt rest their case on the idea that even though the government has confiscated the trust fund surpluses to fund other spending priorities, they don’t have to pay it back. That’s false!

Intragovernmental Debt GAS bonds, just like Debt Held by the Public, matures periodically and has to be rolled over and replaced with new securities, just like Treasury bonds. Debt is debt no matter how it is labeled or separated.

Put differently, does anyone doubt that the trillions of dollars Uncle Sam has borrowed from Social Security will have to be repaid at some point? Of course it will have to be repaid in one form or another as the SS bills come due, lest the government default.

The bottom line is that it is ridiculous for anyone to argue that Intragovernmental Debt should not count toward the national debt. This debt must be repaid at some point just like Debt Held by the Public.

If anyone tells you that Intragovernmental Debt should not be included in our national debt, just know that they are either uninformed or intentionally misleading.

National Debt as a Percent of Gross Domestic Product

The government and the media love to report the national debt as a percentage of Gross Domestic Product. The problem, once again, is that they almost always include only the Debt Held by the Public amount for our national debt, and conveniently ignore Intragovernmental Debt.

The Commerce Department reported that annual US Gross Domestic Product, the value of all goods and services produced, was $20.7 trillion at the end of the 3Q of this year. In calculating the Debt-to-GDP ratio, if you only include the Debt Held by the Public, currently at $15.5 trillion, the Debt-to-GDP ratio is only 75%.

But if we include the Intragovernmental Debt of $6.2 trillion, as we should, our national debt becomes $21.7 trillion. In that case the Debt-to-GDP ratio soars to 105% of GDP. That’s a huge difference! And it’s only going to get worse since we are anticipating annual budget deficits of $1 trillion or more for the next 10 years according to the Congressional Budget Office.

Take a look at the International Monetary Fund’s Debt-to-GDP projections below:

IMF Projections

Why is the Debt-to-GDP ratio this important? Generally speaking, most economists consider countries with Debt-to-GDP ratios above 100% to be insolvent “banana republics” that can’t pay their bills. Yet that is the exact position the United States is in and has been for decades. Our budget deficit was $779 billion last year and is expected to be a trillion or more per year going forward.

Our government does not want the world to think of America as a banana republic so it chooses to report only the Debt Held by the Public when calculating our Debt-to-GDP ratio. And the media follows along. It is rare to see the Debt-to-GDP ratio include our total national debt.

Conclusions: The Real National Debt & Debt-to-GDP Ratio

Our real national debt and the real US Debt-to GDP ratio absolutely must include both the Debt Held by the Public and Intragovernmental Debt. Including both, our national debt is $21.7 trillion, not $15.5 trillion as is widely reported. Our true Debt-to-GDP ratio is 105%, not the 75% that the government and the media would have us believe.

The question is, how long can this explosion of US debt continue? Our debt has more than doubled since Obama became president in early 2009, from just over $10 trillion to $21.7 trillion today. It is projected to reach $30 trillion by 2028, and that estimate is very likely too optimistic.

The more important question is, when will investors decide that investing in the US is not worth the risk? Put differently, when will investors decide that the US promise of “full faith and credit” in repaying our debt securities is no longer trustworthy, leading to another financial crisis or worse?

As noted at the beginning, I have been warning about this impending debt crisis for over 20 years. So far, I have been wrong. We’ve been able to continue piling up record amounts of government debt, without severe consequences, for decades.

But does anyone reading this believe that we can continue to pile on debt at the rate we have the last decade indefinitely? I would think not. Yet the Congressional Budget Office and the White House Office of Management & Budget both project that our budget deficits will be a trillion dollars a year or more starting next year for the foreseeable future.

If so, I believe we’re headed for another huge financial crisis, perhaps even worse than the Great Recession of 2008-09. If we do this, the question is not if, but when. Our political leaders on both sides of the aisle are aware of this risk, but they continue to spend more and more every year. At some point, maybe sooner than later, this will end very, very badly.

Again, feel free to share this E-Letter with as many people as you wish. This is important information that all Americans should understand. They need to know that our government is misleading them about the true size of our national debt, irrespective of which political party is in control. And the media plays right along. I hope this helps.

Reprinted with permission from Gary D. Halbert

Article Copyright © 2018 Gary D. Halbert All Rights Reserved

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