Tuesday, February 2, 2010

Public Debt and Private Debt

The United States Treasury will lose borrowing authority when the national debt reaches the legislated ceiling passed by Congress. Treasury Secretary Geithner will have to ask for an increase, which the Congress will grant, but he is bracing for the usual politics. Many in Congress use the opportunity to make government debt their number one worry in order to attach conditions eliminating programs they don’t support.

It is common for them to make comparisons between Government debt and personal debt. “My constituents pay their debts and keep their house in order and it’s time for the government to do the same.” That one is a favorite, but most of the announcements from members of Congress play on constituent anxiety and bias about their personal debts.

When people think of their private debts they worry they won’t be able to pay, but that is not the problem with public debt. The public debt must be managed as part of every administration’s duty to manage the economy. Federal Reserve Bank monetary and interest rate policy gets lots of attention, but without mention that it is also debt management.

When the Federal Reserve wants to lower interest rates to expand the economy, it begins buying outstanding Federal Bills, Notes and Bonds. Payments are by check and when the checks are deposited into bank accounts or converted to cash they become part of America’s money supply.

Buying Federal Bills, Notes and Bonds converts outstanding Federal debt to money and the government and Federal Reserve Bank can do that at anytime and in any amount.

Because the government and Federal Reserve Bank have money in any amount officials could retire the entire federal debt at anytime. They don’t do that because the increase in the money supply would generate inflation and retiring the debt is not a goal of economic policy.

The Federal Government also owns assets and has taxing authority and Federal officials could double or triple taxes and begin selling off its land and other assets to pay off the federal debt. They don’t do that either because it would depress the economy and cause deflation and retiring the debt is not a goal of economic policy.

The British government has done some of its borrowing using a bond called the British Consol, which has no maturity, but is sold in perpetuity. The owner gets periodic interest and can sell their Consol to someone else, but the government has no obligation to pay the principal, ever.

America does not have any equivalent to the British Consol. That’s because Americans think of debt as a symbol of excess that should be retired and they want a date when that will occur. They regard public debt as the equivalent of private debt.
Truth is America’s debt will never be retired, but will go up and down as meets the needs of economic policy. The politicians know this and they will raise the debt ceiling, but in the meantime we will have to listen to their excess.

1 comment:

Scott said...

The exponential growth and contraction of the money supply due to the Feds, master bank and primary banks ability to leverage forward during good times and shrink during bad also should be considered.

It is this leveraging that is not the opiate of wall street but the opiate of main street. The housing bubble was a direct result. No politician wants to try and take a drug that is that powerful from the voters.