Tuesday, September 6, 2011

How're we gonna pay it back????

The phony debt crisis facing the United States is kept alive by this one, stupid, soundbite: "How are we gonna pay it back?"

The subtext, of course, is that the U.S. is deeply in debt to the tune of $14.5 trillion and there is no way we can ever pay it back. Indeed, even some great "minds" (NOT) like Jim Rogers have publicly said that the U.S. will never be able to pay back its debts.

Well guess what...not only can we "pay it back," but we've already paid it back four times over--THIS YEAR!!

That's right...the total amount of redemptions (public debt paid back) so far this fiscal year amounts to $58.8 TRILLION! That's trillion with a "T."

I am not making this up. Please see for yourself that number right off the Treasury's Daily Statement.

(All figures in millions $)

So we "paid back" nearly $59 trillion in the past 11 months without a hitch. The yield on 10-year Treasuries is below 2%. How did that happen? Simple...the Fed debits securities accounts and credits reserve accounts by whatever number it needs to. It's paid back by mere accounting entries. That's it. End of story. No digging up gold out of the ground, no mortgaging our future and best of all, no grandchildren involved. Please send to your Congressional representative.


PaulJ said...

Not only that but since WWII we've "paid back" $14.4 Trillion of the National Debt by producing $280 Trillion in GDP.

mike norman said...

Yup. And the archives of the Daily Treasury Statement go back to 1998 and I think that I once added up all the redeemed securities since 2000 or something like that and it was like $300 trillion. Paid Back!

wh10 said...

Sorry for the dumb question, but I am slightly confused here. When we say redeemed, is this the Treasury or Fed purchasing the security? I assume the Treasury? In which case, how is the level of redemption that high? Our deficit is only ~$1.5T, and we are spending ~$3T and taking in ~$2T. Where does the $59T fit in?

Deus.Ex.Machina said...


59T is the amount of treasuries that have matured and holders have received the face value. The holders could be anyone, the Chinese or my grandmother. Treasury or Fed purchases nothing. A computer spits out a number into reserve accounts and everybody is happy.

In light of this 14.5T "debt" is no sweat and U.S. credit rating should be AAAA++++....

wh10 said...


Unless I am crazy, doesn't the Treasury pay interest on the debt out of its deposit account at the Fed? I know this is true, I see it as a line item for Govt Outlays from the Treasury website. So where is the payment of principle accounted for? I actually can't find it as a line item.

Deus.Ex.Machina said...


The payment of principle is itemized under the "Redemptions" heading in
"TABLE III-A Public Debt Transactions" on the Daily Treasury statement.
As of Sept.2 2011 Total Redemptions are
59,067,719 million or about 59 trillion since Oct. 1 2010.

wh10 said...


Thanks for sticking with me, but I don't think we're on the same page.

Please see http://www.census.gov/compendia/statab/cats/federal_govt_finances_employment/federal_budget--receipts_outlays_and_debt.html

and more specifically Table 471. You can see payments on interest. It's only a couple hundred billion. Where is the payment of principle? And how does the 59T fit into all of this?

Anonymous said...

I'm afraid this post is a bit misleading, and that Tom is pulling our legs. If you look at them full Daily Treasury Statement you will see that almost that entire $58 trillion figure consists in redemptions of nomarketable securities in the Government Account Series.

And if you look at the YTD issues in the Government Account Series, rather than the redemptions, you will see that they total almost the same amount: in excess of $58 trillion. It's a wash.

These transactions are essentially bookkeeping operations, representing the transfer of funds from one US federal account to another. When funds are transferred from government account A to government account B, account B issues a "security" to account A. Then when the funds are transferred back, that security is "redeemed." Both the issue and the redemption are recorded in the Treasury statement.

These so-called security issues are part of the "debt not subject to limit." And for good reason: they are not really debt. They represent only an "IOU" from one government account to another. They represent no real asset or liability of the Federal government.

Because these transfers don't represent either the creation of money, or the movement of money between the governmental sector and the non-governmental sector, they really have no significant role in either monetary or fiscal policy.

So despite the fact that the redemption of these Government Account Series securities takes place through the same mechanical action of "crediting bank accounts", it would be very misleading to infer that the redemption of ordinary debt, the kind purchased by non-federal entities and subject to limit, is of the same inconsequential kind.

Redemption of real federal debt represents either a net increase in base money in the non-governmental sector (printing money), or if not, represents some compensatory money extinction from non-governmental sector accounts (taxation or borrowing).

In either case, although the operation is mechanically simple enough, important fiscal and monetary considerations are involved. The reason, for example, the national debt to the external sector at least might represent a tax burden for our posterity is because those future generations might be faced with a situation in which redemption of the debt through monetary means - though always an option operationally - might be bad monetary policy.

MMT is right to emphasize that there is no involuntary solvency risk in that debt, since simply creating the money is always an option. But that doesn't mean the debt doesn't represent economic policy risks.

Anonymous said...

Tom is pulling our legs.

Sorry, I meant Mike.

Anonymous said...
This comment has been removed by the author.
mike norman said...

Dan Kervik,

Tom didn't write this, I did. (Mike Norman.)

And you're right, they're "nonmarketable securities," but it is still quite relevant. That's because these are securities deposited in accounts such as SS Trust funds and such, and the public is told constantly that these trust funds will "run out of money," yet as you state, it is mere accounting that allows these accounts to get "paid." The amount is irrelevant and running out of money is impossible.

Deus.Ex.Machina said...

Dan Kervick:

Is not an IOU,even between different parts of the government identical to debt owed to let's say the Chinese? It all has to be paid back at redemption time(or rolled over).You seem to be suggesting that trillions of dollars of U.S. treasuries held by Social Security and other government agencies are meaningless.

Ralph Musgrave said...

In that debt is held by entities which have no intention of taking the proceeds of debt redemption out of the country, this redemption simply involves shuffling assets and liabilities between US citizens, other US based entities, etc (e.g. collecting tax from one lot of citizens and repaying debt owed to another lot). That may be politically difficult, but there is no overall “austerity” involved.

As to debt held by entities which do remove the proceeds of debt redemption from the country (e.g. possibly large debt holders like China), austerity WILL BE involved, because the US dollar is devalued as a result. But the amount of austerity is not of disastrous proportions: the British pound was devalued by 25% in 2008, and as a UK citizen, my impression was that scarcely anyone noticed.

mike norman said...


Nothing is "taken out of the country." This is debt paid in dollars and, therefore, it all rests in accounts at the Federal Reserve, whether that be the accounts of the Chinese or the Japanese or the British or whomever. Physical cash can be moved out of the country, but so what?

googleheim said...

And WHY would anyone want or think that interest rates need to rise ???

so we can pay back "more" than we need and create the very inflation that they are self-programming ????

Is there a way to revisit the 80's crisis and see that Volcker was wrong to raise interest rates ?

i.e. that MMT would have things under control in a very different way ?

Anonymous said...

I don't think the key distinction, where these Government Account Series securities are concerned, is between what is inside the country and what is outside the country. The distinction is between what is inside the government and outside the government.

A quick examination shows that the total volume of the daily, month-to-date and year-to-date transactions in these securities is obviously far, far in excess of the total amount of annual Social Security disbursements and revenues, and can't simply represent paybacks to the SS Trust Fund.

My assumption is that these large numbers represent a myriad of daily cash flow operations among all of the different federal accounts, as each account manages its revenues and payments. Because different funding streams are earmarked for various purposes, and because operating balances, payments and revenue flows go up and down - and possibly because of various statutory compliance constraints - a lot of money must be moved back and forth between different accounts on a daily basis. It's not really debt; it's just paper pushing and bean-counting. If you look at a sample of back-issues for the daily report, you will see that the daily "issues" and "redemptions" always nearly match. That doesn't mean it doesn't take some clever accountants to make it all work, but it all involves the mere movement of existing money's that are already in the government's possession. The accounts of existing money moving around inside the government are a very different matter from accounts of money moving between the government and non-government sector.

Loose talk about the operational ease of "crediting accounts" by the federal government can obscure a variety of important distinctions applying to the different circumstances and constraints under which the accounts are credited. Yes, of course the government can never "run out of money" in a technical sense, since the government is the monopoly producer of our money, and can produce virtually any amount it chooses to at negligible cost. But crediting accounts in ways that are not offset by taxes or borrowings from non-governmental accounts represents a net increase in the money supply, and net injections of new funds into particular sectors, and is thus subject to the constraints of prudent monetary policy.

Letsgetitdone said...

We'll pay it back with the $60 T coin. See: http://www.correntewire.com/its_changing_the_reality_that_counts_not_the_words_in_his_job_proposals#comments

Tom Hickey said...

@ googleheim

MMT would have treated it as supply side increase in price level rather than demand side monetary inflation. The Fed confused the two, inverted the yield curve wildly, resulting in an apparent correction of the problem. But as Warren notes, it was substitution of natural gas:

The second outcome, which is what happened, was for a general inflation to ensue, so while OPEC did get higher prices for its oil, they also had to pay higher prices for what they wanted to buy, leaving real terms of trade not all that different after the price of oil finally settled between $10 and $5 per barrel where it remained for over a decade. And from where I sat, I didn’t see any deflationary consequences from the “tight” monetary policy. Instead, it was the deregulation of natural gas in 1978 that allowed natural gas prices to rise, and therefore, natural gas wells to be uncapped. U.S. electric utility companies then switched fuels from high-priced oil to what was still lower-priced natural gas. OPEC reacted to this supply response by rapidly cutting production in an attempt to keep prices from falling below $30 per oil barrel. Production was cut by over 15 million barrels a day, but it wasn’t enough, and they drowned in the sea of excess world oil production as electric utilities continued to move to other fuels.
(7DIF, p. 7-8)

Clonal said...


further to my comment in the Greek thread, the Volker intervention forced the endogenous money creators (private banks) to hike their interest rates. This resulted in the interest rate charged by the banks to exceed the gdp growth rates. This had two impacts - firat it lead to a steady decline in the growth rates of real and nominal gdp. Second, it led directly to the gross income and wealth disparities we see today, because all the growth was absorbed by the financial sector. This has been highlighted in the article by TC - Monetary policy and Human misery - See also the graphs I have linked to in my comments.

The graph linked below very graphically illustrates the problem

Prime rate, nominal and real gdp growth rates vs time - Blue is prime rate, red is nominal gdp growth rate, yellow is real gdp growth rate

PaulJ said...

I must be missing something here because it looks to me like exchanging Treasuries for NFA is a non-transaction. No NFA transfer between the government and non-government sectors just a contract to pay interest on the amount. How this can be construed as "debt" is beyond me. I think of debt as a liability.

This entire process reminds me of Santa Claus. A belief in something that never really takes place.