Why Does the Government Owe Itself Money?

In response to the pie chart I linked to which shows who holds the US’ debt, reader PS writes in to ask:

Hey Mr. Economist,

What does it mean that the US gov’t “owns” some of the national debt?
How is that different from you and me owning a share?

Ok, so this is a bit complicated. There are essentially two different kinds of US gov’t debt that the government itself owns. I’ll run through them.

1) Federal Reserve—You’ll notice that the federal reserve owns a good chunk of the debt. That debt is owned in Treasury Bills, or T-Bills, promissory notes/government-backed bonds in which the Unites Government promises the holder of the note to pay them some amount of money at some date. Basically, since the US government is the world’s largest economy, and probably the least likely entity in the world to default on that promise, a t-bill is the the closest thing there is to cash without being cash. It has a very low yield and high security. Because of its high security, it’s what banks use to to back their lending. In fact the fed mandates that banks keep a certain ratio of t-bills to the amount of money they lend. This is to prevent overextension and bank collapses. Clear? Ok. So because banks need a certain amount of these t-bills and the Fed has a bunch of these t-bills, there’s a kind of exchange between the two and it’s the way in which the fed exerts control over the money supply. When the Fed buys t-bills from the banks, it is releasing money out into the economy and taking t-bills in, thereby increasing the money supply, then it sells t-bills, it is releasing those t-bills out into the economy and taking the money in. The t-bills that it owns, therefore, are essentially idle, or, as the Skeptical Optimist puts it: “For what it’s worth, I picture the Fed’s continually-growing inventory as a T-bond “boneyard.” The military parks its old, unneeded aircraft in the Mojave Desert, and the Fed parks the government’s old, unneeded T-bonds in the Fed’s boneyard: $780 billion and growing.”

2) Social Security Trust Fund—This is a big one and the source of much confusion. When payroll taxes are taken from your paycheck the government uses that money to purchase t-bills, which are put into the social security trust fund. The logic here is the same as that which underlies banks’ or the chinese government’s decision to hold t-bills: they are the safest kind of bond there is. So the trust fund builds up a huge amount of these t-bills to pay future obligations. Now, there’s been a lot of misinformation from the anti-social security jihadis about the trust fund. They argue that essentially, there is no actual money in the trust fund, it’s just a promise from one branch of government that it will pay the other. But that’s pretty deeply misleading. The promise is backed by the United States government, and it’s the same promise that backs the debt owned by private American citizens (who own 31% of the debt in government bonds), the Chinese government, Japanese investors, etc… The only condition under which that promise won’t be kept is if the United States government went bankrupt and defaulted on its bonds. This is not likely to happen, and if it were to happen, well it would mean the wholesale collapse of the current global economic order, and we would have a few more immediate things to worry about than social security. This gets into the second question PS asks, “How is the government owning the debt any different from a citizen owning it?” The answer is that it is no different, everyone owns US debt for the same reason: it’s the surest bet there is. That’s obviously not immutable, but it continues to be the case.

Despite PS kindly addressing me as “Mr Economist,” I am sadly no such thing, and I would say my confidence in the accuracy of this response is about 85%. Feel free to email with corrections.

Chris Hayes is the host of All In with Chris Hayes on MSNBC.


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