The Fallacy of Intragovernmental Debt

By John Cassimatis  MAR 24, 2010 11:40 AM

Some believe intragovernmental debt doesn't count toward total US debt -- but it does.


Total Debt

There seem to be some myths floating about, concerning this hardly-talked-about, difficult-to-understand concept of intragovernmental debt. Obviously, the debt issue has attracted much debate and consideration over the past year. For some it’s simple: For how long can a government spend significantly more than it brings in? Others feel that it’s simply a question of meeting yearly interest payments. Others still understand that the piper arrives before that, namely when debt markets struggle to roll over existing liabilities. In this piece, I aim to take a fair look at the United States debt problem.

Let’s first define what a debt is. According to Wikipedia, the most apropos definition is that debt is a means of using future purchasing power in the present before a summation has been earned. It’s in this light that this author considers debt to generally and realistically be the total amount of money that’s been borrowed to fund the collective present, a monies to be paid back with a certain interest in the future. Namely, consumption has been front-loaded. And, as in the case of startup business, the investment, through increased capacity and productivity, is expected to be paid back.

Okay. A thesis could be written on debt, so we’ll have to pick and choose. One hot subject seems to be this concept that the “Total US Debt” is 12.5 trillion dollars and going up. Everyone, mind you, agrees on the going-up part. Certain folks point out that the 12.5 trillion figure is composed of two parts, namely the “Debt Held by the Public” and “Intragovernmental Debt” and that, somehow, loosely, intragovernmental debt doesn’t count because it represents offsetting agency positions. This is the fallacy that I’ll attack in this article.

What Is Intragovernmental Debt?

Intragovernmental debt essentially is a term used to define the flow of money between the federal government and specific government agencies, the largest being the Social Security Administration (50% in 2007). There should be no mistaking this: The federal government has spent, i.e. consumed in advance, the difference in Social Security Inputs (premiums) vs. Outputs (benefits). Essentially it works like this. The federal government claims all of the premiums as income and pays out the beneficiaries, and has, until now, pocketed according to the CBO a 22-year surplus of 2.15 trillion dollars (1986-2007) as the Baby Boomers have been working and paying in for their eventual retirement. Applying it as an offset to the annual deficit, it’s reduced the real shortage between federal receipts and spending. Yes, with identical spending, GAS (Government Account Series) securities represent exactly how many more Treasury bonds, bills, and notes we would have had to issue to obtain the necessary funds for like spending. The only difference is the counterparty.

Is GAS Debt a Federal Liability?

To say that GAS is simply a debt among domestic government agencies that should thus be ignored is naïve. In every case, GAS is a debt that the Federal government owes a specific government agency, bonds redeemable (securities, IOUs, whatever you want to call them), that the agency then owes its beneficiaries. It can even be worse than that. For a moment, let’s accept the claim that a benefit due is no different than a bond redeemable. Yes, if we accept that the government, by implicitly or explicitly guaranteeing benefits (not just the nominal amount of GAS securities outstanding), then future federal liabilities grow substantially. According to the esteemed Peter G. Peterson Foundation, the difference in current and future benefits versus related revenues is 6.6 trillion for Social security and 36.3 trillion for Medicare, all pre-health-care reform. Surely, to be fair, critics argue that eligibility ages could be raised in this example, benefits cut, payroll taxes raised. But who amongst our incumbent re-elect political system is willing to vote on such measures short of a crisis? Their argument does, however, mitigate those numbers somewhat in my opinion. A growing problem: Baby boomers are beginning to retire. Add in early retirements due to the weak economy and S.S. beneficiaries climbed by nearly 20% from 2008 to 2009. Revenues (taxes in) have steadily dropped. The CBO is now forecasting a small annual Social Security deficit through 2012. With no surprises, 2017 is the year where benefits and revenues begin to “structurally” separate for the worse. This is a real problem, but there’s still time before any crisis in this regard.

Remember, Social Security is just one form of GAS. Veterans, the disabled, military and civilian pensions, and retiree health benefits, etc. are all covered by various government agencies that hold GAS securities. Unmistakably, this is part of the public debt; the debt that the federal government is responsible for paying with tax dollars. The Treasury itself says on its website, “The Treasury securities issued to the public and to the Government Trust Funds (Intragovernmental Holdings) then become part of the total debt.” Monies due, very simple.

For those that attempt to understate the debt problem in the United States, one must embrace the notion that it’s easier to break a benefit due than monies due on a bond. And there’s a degree of truth in this. For instance, as citizens, ultimately we’re subject to the rules the government makes. Foreign creditors, however, may not be so accommodating. Perhaps it will be easier to break a promise over a bond. But still, the intragovernmental debt is held in GAS securities, so this is more untouchable than a benefit.

The Wildcards

I believe there’s time before the United States would potentially face a showdown with credit. Many countries and continents would probably struggle first. We’re seeing this now in Greece and Portugal, and with the European Union in dealing with these issues. With all the talk about liabilities, I never hear people talk about US assets. Remember, in a crisis, everything is on the table. There are Federal Lands and advanced weaponry that could all be used as collateral to mollify a crisis, and this is important to consider. It should be clear I’m not sounding the final bell on debt here. But there are disturbing developments as well. According to the Treasury Dept, the average maturity of US debt has fallen from between 60 and 70 months (from the mid-80s to 2002) to approximately 48 months currently. This data suggests that new debt auctions are a fixture of the future. More than anything for small businesses, it was an inability to find new buyers of expiring debt that forced upwards of 50% of small businesses to file bankruptcy in 2009. It’s happening to Dubai and Greece.

This is a long road, this debt worry. The dollar’s emergence as a flight-to-safety trade suggests the piper isn’t yet around the corner. True as this may be, any claim that America’s debt is not a “structural” problem facing our country today is highly questionable. To suggest that those that believe the US debt is around 80-95% of GDP are fear mongers is simply inaccurate. Ultimately, a government and generation that have claimed an inalienable right to living by a standard beyond one’s means for decades is truly immoral. One could argue that it’s tantamount to stealing. Make no mistake: Taxes are going up, and promised benefits are going down. Many people don’t seem to fully grasp who pays for the largess -- we do. Yes, in the end, we do, that’s who.
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