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"We owe it to ourselves" - what is wrong with public debt?

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Thisprogramhasnotbeenrated Posted: Sat, Jul 30 2011 2:01 AM

This may sound like an incredibly stupid question, but  I'm not very familiar with monetary theory and macroeconomics. I've tried to run a search on and elsewhere, but I couldn't find any explanation that I was satisfied with (there was a daily by Robert Murphy, which I have difficulty accessing right now due to a site error).

Many people seem to hold the view that since 40-50% of the national debt is held by the US public, then it means we simply owe it to ourselves. Default is not a threat, rising debt is not a problem, government should spend even more, and deficits equal private savings. I would like to hear the Austrian take on the following questions. Why is debt a problem? What will happen if US national debt will continue to rise in the future? What is, economically speaking, the difference between a foreign creditor and a domestic one?

Two things I can think of from a purely intuitive standpoint. One is that "we and ourselves" are in fact two different, fundamentally opposed things: government and private individuals. However many seem to fail to understand the distinction, so a more practical explanation is to be sought. Also if we do "owe it to ourselves" then how does the government pay domestic creditors? Taxation? Financing more debt?


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Murphy is the first author that came to my mind as well, as I can think of severl articles he has penned on the subject.  Perhaps you were thinking of "Government Debt Has No Upside"?  Usually when something is up with the main page you can often view it in the mobile version.  Check the article here and see if it adequately answers your questions.  Definitely come back with more if you have any.


"Misguided Bond Gurus" also addresses the "we owe it to ourselves" claim.  (Funny, I was just reading that one because it was linked in another I was reading from yesterday.  Gotta love the Mises Daily).



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Merlin replied on Sat, Jul 30 2011 6:44 AM


If you owe me 5 grands, and you can’t pay, is it immaterial since ”we (you and I) owe it to ourselves”? if not, what the difference between this 2-people scenario and the US? 

The Regression theorem is a memetic equivalent of the Theory of Evolution. To say that the former precludes the free emergence of fiat currencies makes no more sense that to hold that the latter precludes the natural emergence of multicellular organisms.
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Everything is wrong with public debt, because it increases the power of the federal government, not everyone consents to it, and not everyone consents to paying interest on it either.

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Part of the debt will be payed by the currently unborn.  Politicians are going on shopping sprees, while leaving the bill for a later politican who will raise taxes for people that didn't want the things that the origonal politicians bought.

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Autolykos replied on Mon, Aug 1 2011 10:21 AM

I'll illustrate the concept (really the canard) of "owing it to ourselves" with a real-life example: Social Security.

Social Security provides monetary benefits for people under certain conditions, the most common of which is reaching a certain age ("retirement age"). The benefits are funded by payroll taxes under the Federal Insurance Contributions Act (FICA). However, the title of the Act is a misnomer, as Social Security is not insurance at all. While benefits paid to retirees are determined by how much they "paid in", what this really means is that their benefits are determined by their total working income. The Social Security Administration can estimate this based on the taxes deducted from each individual. Basically that's the whole point of having a Social Security Number.

So if Social Security isn't an actual insurance program, what is it? Where do the Social Security taxes go? They go right out to present Social Security beneficiaries. This means, of course, that Social Security is just another welfare program, despite being passed off as some kind of insurance. Now up until 2010, more Social Security taxes were taken in than Social Security benefits paid out. Where is the surplus supposed to go? It's supposed to go into the Social Security Trust Fund, which it does. But this is where things get interesting. The money paid into the Trust Fund is immediately "invested" into non-marketable Treasury securities. Of course, where do Treasury securities come from? They come from the US Treasury, which is another branch of the US government - the financial branch. Essentially, then, the surplus from Social Security taxes has gone from the Social Security Trust fund right back to the operating fund of the US government, giving it more operational money to spend however it wants.

As debt instruments, Treasury securities require that the borrower pay interest to the lender until the maturity time, at which point the borrow pays the pay-off value of the security to the lender. None of this is any problem for the US government vis-a-vis Social Security, however. Interest paid to the Social Security Trust Fund is re-invested into non-marketable Treasury securities. When these securities mature, the pay-off money is rolled right over into non-marketable Treasury securities. This, in essence, is the meaning of "we owe it to ourselves". Social Security has been a shell game used to convince people that the government is "looking out for them" when the government has seen it as just a stealthier way to tax people and gain more revenue for itself.

The problem is, the government only looked so far in planning out the Social Security system. At this point in time, more Social Security benefits are being paid out than are covered by Social Security taxes. Not only does this mean that the Social Security Trust Fund is no longer a source of stealth revenue for the government, it also means that the government must withdraw securities from the Trust Fund and redeem them in order to pay out all existing benefits. All other things being equal, this would ultimately mean exhausting the Trust Fund. Based on current projections, this would happen before Social Security becomes 100 years old. So much for the long run!

Hope this helps!

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jay replied on Tue, Aug 2 2011 11:48 AM

"We owe it to ourselves" makes sense in a certain way: private individuals A get free stuff from other private individuals B using the state as an agent. The only problem is that it is coerced (otherwise individuals B would give freely).

It's just theft by proxy.

"The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated, but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience." -C.S. Lewis
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Clayton replied on Tue, Aug 2 2011 1:29 PM

We don't owe it to ourselves. We (taxpayers) owe it to them (bondholders). Some US bondholders may also be taxpayers but this is a point of no relevance to anything. Bear in mind that taxpayers did not agree to take a loan from the bondholders. Rather, the government made a deal with the bondholders to repay them from money taken from taxpayers. Imagine a local Wal-Mart offering a bond "to be repaid from monies to be forcibly collected from the community."

The government cannot rightly loan money which is not its to loan. But they've got us taxpayers strapped over a barrel so they'll do any damn thing they please.

Clayton -
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"We owe it to ourselves" makes sense in a certain way: private individuals A get free stuff from other private individuals B using the state as an agent. The only problem is that it is coerced (otherwise individuals B would give freely).  It's just theft by proxy.

Did you check out the links above?


"We owe the debt to ourselves" is the more fatuous solipsism. It's not that simple or even accurate. Over $4.4 trillion in US Treasury debt is owned by foreigners, and $2 trillion of it is owned by the governments of China and Japan. Yes, interest payments will flow to foreign holders, who buy US Treasury debt not as a favor to the United States but as a tool to manipulate their own currency in order to play the long-discredited mercantilist game. Nevertheless, those payments will flow back to the issuing country through investment in or consumption of domestic production.

That said, we could never owe it to ourselves anyway, even if all US Treasury debt were owned by US citizens. The United States isn't a thing or person who can move money from one pocket to the other.

Both purchasers — domestic and foreign — weaken property rights in the sovereign country issuing the debt. When "C" — a citizen — purchases debt from "G" — the government — G slaps a claim on C's and every other citizen's property in order to repay C. The property claim is no different if "F" — the foreigner — purchases the debt: C and his compatriots are on the hook. Both claims on the debt weaken property rights by allowing government to further encumber private property with its own lien. Claims are claims, whether they be taxes or borrowing. It is your liability.


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Groucho replied on Tue, Aug 2 2011 9:01 PM

Here's a good article by Frank Chodorov about the immorality of buying government bonds.  Bear in mind it was written in 1962.

An idealist is one who, on noticing that roses smell better than a cabbage, concludes that it will also make better soup. -H.L. Mencken
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Thanks for all the replies guys. It seems that when government sells a bond, it simply pays back the claim out of the pockets of everyone else in the country (over generations if needed). Supporters however claim that government spending offsets the crowding out it causes in the private economy.

As for crowding out, the wikipedia article that someone linked to states that government borrowing leads to higher interest rates which in turn discourages banks from lending out money.  But isn't higher interest rates what we want right now? Shouldn't the fact that more people saving money expecting a higher rate of return increase the amount of funds available to be lent out in the first place?

Also what about the chartalist/Post keynesian argument that borrowing increases the amount of money in the economy, therefore offsetting or replacing the effect of saving? I'll quote the statement from wikipedia:

Chartalist and Post-Keynesian economists critique crowding out because government bonds sales have the actual effect of lowering short-term interest rates, not raising them, since the rate for short term debt is always set by central banks. Additionally, private credit is not constrained by any "amount of funds" or "money supply" or similar concept. Rather, banks lend to any credit-worthy customer, constrained by their capitalization level and risk regulations. The resulting loan creates a deposit simultaneously, increasing the amount of endogenous money at that time.


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