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The Fallacy of Intragovernmental Debt

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

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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.
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