Global Crisis/Innovation Blog

 “Desperation Rises over Debt Crises”:  It’s All a Sham!

By Shlomo Maital

US debt mountain?  $14.6 trillion?  Nope…less than $10 trillion.  

That is the headline in the Global New York Times, on the front page. Desperation. As Obama storms out of negotiations with the Republicans, again America walks to the edge, and global capital markets ponder the specter of American not able to pay for its bonds when they mature, after August 2.

   And it’s all a sham!  Because America is not even close to its legal debt ceiling of about $14.5  trillion.  In fact, it is $4.6 trillion below it!

   Here is why.   The current total public debt outstanding of the United States is approximately $14.22 trillion dollars.   Of this total, $9.6 trillion is “debt held by the public”, while the remainder (approximately $4.6 trillion) is in the form of “intragovernmental holdings”.   “Debt held by the public” is debt that has been purchased by pension funds, foreign governments, foreign investors, American investors, etc. If you buy a US savings bond, then this goes into the “debt held by the public” category.  This is real debt, owed by the U.S. govt. 

    But what are “intragovernmental holdings”?   It is “balances of Treasury securities held by over 230 individual federal government accounts with either the authority or the requirement to invest excess receipts in special US Treasury securities that are guaranteed for principal and interest by the full faith and credit of the US Government”.

   Translation: Money the U.S. govt. owes…to itself.  In other words: On a balance sheet, the liability is offset by an asset (the money that the debt was sold for). 

   According to the Government Account Office GAO:   “The majority of intragovernmental debt holdings are Government Account Series (GAS) securities. GAS securities consist of par value securities and market-based securities, with terms ranging from on demand to 30 years.”    As of September 30th, 2010, gross intragovernmental debt holdings totaled approximately $4.53 trillion.   A large majority of this intra-governmental debt (57 per cent) was held by the Social Security Administration Trust Fund, the sum of $2.399 trillion.  This is money the Federal Govt. owes to itself!   And the debt is backed by an asset – the money itself!

    So why is it included in the official legal definition of “US public debt”?  Why is it subject to the official U.S. govt. debt ceiling?  And why is this crisis over America’s debt occurring, over a hugely mistaken interpretation of what debt is? 

    If you, John Q. Public, owe $100, let’s say, and you have a $100 bill in your pocket, is your net debt $100?  Or is it zero?

   Why then is the U.S. Govt. treated differently?

  It beats me.  The whole U.S. debt ceiling crisis is a sham, a misunderstanding.

  That won’t prevent global capital markets from a major nervous breakdown, come August 2 and no agreement. 

    There is simply no end to the ways the world of finance complicates matters, to mystify innocent bystanders.  We are heading for a global crisis, because the way America’s public debt is defined is misguided, mistaken, misinterpreted and wrongheaded.

     Can someone please explain this to the Republicans?