So who do we owe it to?

As I said in my previous post, our government owes real money to real people. Who are those people? Well, you might be one of them! Do you have a United States Savings Bond? If so, the government owes you the face value of that bond. That bond is simply an IOU from the federal government. Every time you buy a bond, you are loaning the government money that it can use for things like building bridges and paying someone’s welfare check. Of course, you do not loan the government money out of the kindness of your heart or because you are feeling especially patriotic. You expect to get your money back and then some. The extra money you get back is the interest the government pays on your bond.

Besides bonds, the government also sells securities known as treasury notes, bonds, or bills. You can go to the nearest Federal Reserve Bank and buy these. A short-term treasury bill will require a minimum investment of $1000, and will currently cost you around $99 per $100 face value. You don’t make much money on these, but it pays better than just letting it sit in your bank, and treasury bills are considered one of the safest investments you can make. After all, they are backed by the full faith and credit of the Unites States government. As long as our government is secure, your money should be also.

The government sells its securities to individuals, institutions, corporations, and even other countries. The Chinese currently hold around 700 billion in U.S. securities, and the Japanese hold another 600 billion. That eleven trillion dollar debt is really spread around!

When I explained to my students that the government owes money to real people and not to itself, someone would always ask, “Well, can’t the government just refuse to pay it back?” Theoretically, they could. But that would be a disastrous mistake! Our government would lose all credibility and makes lots and lots of people very, very mad. How happy do you think the Chinese would be if we reneged on that 700 billion? Think there might be some ramifications? Besides, canceling all the debt would make it extremely difficult for the government to continue future operations, because it would be so difficult to raise money. After all, if you lost $1000 on a U.S. treasury bill, would you buy another one?

So the debt continues to grow – and grow, and grow, and grow! What’s the harm in that? Some people, but not many, would argue that there really is no harm. We can just keep on going the way we have been for the past few decades. Most economists are not so optimistic. They see many problems with an ever-increasing debt. I will address those in my next post.