Private Debt vs. Government Debt

The Great Recession of 2007-2009, which has been morphing into a Depression, has been different from most recessions of the post-World War II era.  It has been what economists call a “balance-sheet” recession.  Normally (at least since World War II), recessions were the result of the central bank (The Fed in the U.S.) raising interest rates because it thought the economy was growing too fast or that inflation was too high.  This time, though, the triggers were a financial crisis brought on by a banking and financial sector that gorged itself on risky debt: subprime mortgages, derivatives, and bizarre financial products bought with borrowed money.  The financial crisis and resulting recession then brought an end to the debt game for ordinary households.  For thirty years or so, ordinary households, middle class folks, have struggled with declining real incomes and real wages.  To maintain a middle class lifestyle, ordinary folks took on huge debts: mortgages, home equity loans, credit cards, and student loans.  As deflation and unemployment hit in 2008 and the housing price bubble burst in 2007, the debt became unbearable, driving many to bankruptcy, foreclosure, and to drastically reduced spending*.

With this backdrop, it’s no surprise that debt has become an emotionally-charged word laden with negative feelings for most people.  People who are struggling with too much debt naturally are averse to the idea of debt. People who aren’t struggling with too much debt are resentful of those who do owe because they blame the debt-burdened for the recession (strange that the lender never gets blamed).

Unfortunately, politicians and news media with a political agenda have tapped into these negative emotions about debt to push their agenda to end the modern social support services that government provides.  They have done it by drawing false parallels between households and the government. Politicians from both parties have spent most of this year (and last) agitated about government deficits and debt. Even President Obama has done this in his July 3 radio address.  But the government is not like a household. There are many reasons why financially, governments are not like households. In this context, I am speaking solely of sovereign, currency-issuing governments with floating exchange rates.  This means Greece, Ireland, Portugal, Italy and the other Eurozone countries are excluded.  I’m talking about the U.S., the U.K., Canada, Japan, Australia, Brazil, and others. There are many reasons why governments are not like households ranging from tax powers vs. wages to unlimited life. But I want to emphasize one in particular: governments are the sole monopoly issuer of their money.  Households cannot issue money, only governments can.

So what does this have to do with debt?  It means government debt is not like private debt. Government debt need never be paid off.  It can be rolled-over.  As bonds become due, they are replaced with new bonds. Households can’t always do that. Governments cannot be “foreclosed” or “repossessed”.  Households and their goods can be.  Households and private firms can go bankrupt and default.  Sovereign governments only default when they choose to do so.  Historically the only known instance of a sovereign, floating currency issuing government defaulting was Japan in WWII, but that was deliberate.  U.S. and British banks held much of the debt and they were at war.  Some Republicans (example: Ron Paul) have recently been suggesting the U.S. default, but it’s still possible that grown-ups will prevail.  Politicians and ideologically-driven economists and news media have whipped up a frenzy about government debt as being evil.  But it isn’t.  In fact, government debt is necessary to the functioning of a modern financial system. It provides a safe, interest-bearing financial asset.

So if government debt isn’t evil or bad for us, how should we think about it?  Government bonds are best thought of as currency that pays interest and can’t be used at the 7-11 store. So rather than thinking of government debt as just another form of debt like private mortgages, corporate debt, student loans, and credit cards, it’s better understood as just another form of money. It’s a holding pen for idle money.

Much is made in the media about the fact that many “foreigners” hold US government bonds.  Again, the media is trying to create a scary feeling by drawing a false analogy to private debt.  If you’re a homeowner, the bank who holds your mortgage has some power over you, particularly if you don’t make regular payments.  The media want us to feel like some how the “foreigners” have power over our government because they hold the debt.  But that’s false. The foreigners can’t repossess or foreclose on the U.S. government, regardless of whether the government makes payments or not.  Again, government debt is not like private debt.  Private debt is the result of lenders making loans at interest with the goal of making a profit. But government bonds that are owned by “foreigners” are primarily owned by foreign central banks and banks.  They are used as safe reserves, not for the primary purpose of making a profit.  US government bonds are the modern banking world’s substitute for gold.  Foreigners want US bonds because they want a safe, secure asset that earns more interest than stacks of idle paper currency.  It’s not because primarily for profit-making.  If they wanted profits, they would use the money to make loans. Instead they want security.  That’s why they accept interest rates in the 1-3% range.

When somebody tells you that government debt is bad and harmful and we must do everything we can to reduce debt, even if it means high unemployment, remember they have another agenda that they aren’t talking about. It’s scare tactics.

* remember that drastically reduced spending might appear to help make the payments on debts, it also means that somebody else loses their job because their employer isn’t making a sale.  That newly unemployed person now has debt problems too.

5 thoughts on “Private Debt vs. Government Debt

  1. According to the U.S. Treasury:

    Percentage of U.S. national debt owed to U.S. institutions and individuals: 42.2%

    Percentage of U.S. national debt owed to the Social Security Trust fund: 17.9%

    Percentage of U.S. national debt owed to China: 9.5%

    So there is no need to fan the flames of fears about our supposedly “massive” debt to China.

  2. Greed is good or should that be debt is good. The idea that it is good for the US Government to be in debt to 100% of GDP is very concerning. In fact alarm bells are going ringing and nobody is listening. This debt can not be rolled over indefinitely. Eventually inflation, hyperinflation, recession, debt-default or war inevitably occur. A sovereign nation has the power to create and supply its own money/currency and does not need to borrow the money into existence with interest via a privately owned cartel bank such as the Federal Reserve Bank.

  3. You are correct in that If I run up massive debt and the die my kids wont have to pay my debts off. Not so with Government debt.

  4. On a basic level this doesn’t make sense. If a country can keep producing money, as you have pointed out, then there is no need to ever borrow it. On the other hand if a country can borrow as much as you like without the burden of ever paying it back then why on earth would anyone do anything but that?
    I am not, as you may have guessed, an economist or have even taken an economics course. I am a scientist in the chemical industry. One of the basic principles we use daily, whether intended or not is what is known as The Conservation of Energy. Energy in a system can neither be created or destroyed. This is much like the total value of money. The total value of money in a country essentially remains the same. If you print more money it seems to me that the value of each unit (dollar) will be worth less but the total will remain the same so printing more seems futile.
    Borrowing money without the need to repay seems like the solution. If if were, however, why not borrow an infinite amount and lower or eliminate taxes. Hell you may be able to eliminate poverty as well. Why? because what you are saying cannot be true. At some point these debts are going to come due. Just like they do each month for folks who borrow money. I suppose the time frame is different but not much else in the end.

  5. Private debt is over twice as much as federal debt. If households had to balance their budgets every year, our economy would suffer. If families had to pay cash to buy a home, a car, furniture, and everything needed, the economy would sink into depression. As for the national debt, some comes due all of the time. If there is insufficient revenues to redeem that debt, the government can borrow from other investors.

    EDTHEREDPILL posted some very important facts that more people need to understand.

    Jim Luke was absolutely on point on every issue he covered. We need more people who think like him and are in a positions to spread knowledge.about government debt and the investments that they allow. To reduce federal deficits, the best avenue is through tax law revisions that bring in more revenue. For too long, the government has run deficits due to bad tax laws that transfer money to huge corporations and due to tax cuts for the wealthiest people in this country.

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