The National Debt Doesn’t Matter?

The national debt stands at $30.3 trillion and the US government continues to run massive deficits. But does it really matter?

Some people say that it doesn’t because “we just owe the debt to ourselves.”

The real question, as framed by economist Murray Rothbard is who are “we” and “ourselves.”

Historian and libertarian commentator Tom Woods recently responded to an emailer making this argument.

The emailer said the government is “the ultimate higher up.” Therefore, the debt is only “on paper.”

So we borrow? How can you borrow from yourself in other words? The ‘debt’ as I see it is only on paper and has to be therefore fictitious, mentioned only for the people to sound important.”

But this simply isn’t true.

Stop and think about how the government finances the debt. It sells Treasury bonds. And it sells them to real people and institutions around the world.

If you hold Treasury bonds in your investment portfolio or 401K – and you probably do, the US government owes you money. If the government were to default, you would be out whatever you invested. Your loss would be very real – certainly not “fictitious.”

It would be no different than lending your neighbor $300 and never getting paid back.

And it’s not just Americans who buy Treasuries. Foreign investors own about 25% of the US debt. Again, these are real people and institutions who have lent money to the US government. They expect to be paid back. And they would suffer financial harm if they weren’t.

It is true that the government owes some of the debt to itself. For instance, the Social Security administration holds around $3 trillion in US debt. Other government agencies also hold Treasuries. But the largest holders of debt are American citizens and private institutions. US investors own about $10 trillion in US debt. Those people did not loan money to themselves.

I think people get confused when they conflate the US government with the American people. They are two distinct entities. You are not the government. And the government isn’t you.

So, the national debt isn’t some kind of fiction.

And even if there is no danger of default, the debt has real economic consequences. It puts a big drag on the US economy. Studies have shown that a debt to GDP ratio of over 90% retards economic growth by about 30%.

Some people will argue the US has been running massive deficits for decades. Nothing bad has happened, so, it must not be a big deal. This seems plausible. But you have to remember that when you kick the can down the road, you eventually run out of road. At some point, there is a tipping point when the debt will become so large that it will be impossible to maintain.

That’s going to be a problem. And not a fictitious one.