Intragovernmental Debt and the “Trust Funds”

  We’re all aware (at least those of us who care, and thus are worth two cents) of our ballooning national debt. As of this writing –latest Treasury figures dated Oct. 6 — Total Public Debt stands at $14.836776T dollars. That is, rounded to the nearest million (chump change) 14 trillion, 836 billion, 776 million dollars. That figure is what the (in)famous debt ceiling applies to. Such a sum is hard to visualize, but remember the succession of “-illions” goes by factors of one thousand. A billion is a thousand million, and a trillion is a thousand billion, one million million. An astronomical sum.

But it turns out that Total Public Debt consists of two components. One component is known as “Debt Held by the Public”, which is sort of easy to confuse with “Total Public Debt”, but the two are different things. Debt Held by the Public stands, again as of Oct. 6 at  $10.126447T, 10 trillion, 126 billion, 447 million dollars, again rounded the nearest million. Debt Held by the Public represents “real money” that the federal government has borrowed, the form of Treasury securities, from the “public”, which consists of Americans as well as foreign governments and central banks. All the money we owe China is included in this component.

But what of the rest, the other component, which is known as “Intragovernmental Holdings”, which as of Oct 6. stands at $4.710329T, 4 trillion, 710 billion, 329 million? What is this? Well, it turns out this really something of an accounting scam, something that would make Enron and Bernie Madoff proud. What they did was illegal, however what the governement does is completely legal, because the law not only allows, but creates the whole thing.


Let’s consider a married couple. The husband is a spendthrift ne’er do well whose pockets quickly have holes burned in them by money. He blows everything he makes on booze, strip joints, and similiar. His poor wife works, making a salary of her won, yet she is responsible. She wants to put away savings to handle their retirement as well as their future medical care and the general rainy day that might come. That is, she wants to invest it.

Her husband makes her a deal. “Hey Honey, why don’t you invest your money with me”, he suggests. “I’ll even pay you interest, more interest than you’d make at the bank!”. And so she takes him up on it. She hands her paycheck, less current needs for groceries, and he writes he IOUs. She puts those IOUs in a  “lockbox” and counts those as her nest egg retirement investment. Hubbie just takes the money and blows it on more booze, hookers, and everything else. Every six months, he pays his wife interest just as he promised.

He pays those with more of those IOUs, of course, which the wife dutifully puts in her lockbox. On paper, she’s doing good. Her “investment” with her husband is paying her a nice interest rate and her little “trust fund” in her lockbox is doing well. On paper.

Now, even with his own salary, and his wife’s, the husband is still spending more than he takes in. He runs up the difference on the credit card. Let’s consider the household debt in the situation. The household owes the outside world the credit card balance. But the IOUs in the lockbox are something the husband owes the wife, a type of “intrahousehold debt” we might call it. One part of the household owes the other part.

Now is this arrangement between our husband and wife here worth anything? It’s a scam, a joke, you say, and there’s  no way the wife can consider those IOUs to be worth anything. And that’s true.  The only way the wife can get her money back is from the husband. And where will he get it? He’ll either have to somehow increase his own income or borrow it from the credit cards to pay her back. Are those IOUs any sort of real asset the wife  could sell to someone else for cash? Hell no. No one in their right minds would take those IOUs.

The whole thing is just a little Ponzi scheme the husband is running on his wife, blowing her money and tricking her into thinking it’s an investment. This is what Bernie Madoff did of course.

Who is this couple running this Ponzi finance scheme? Well, they’re relatives of ours, turns out. The husband is an uncle of ours, Uncle Sam to be exact, and the poor naive wife is Social Security, Medicare, military and federal civil service pension funds, and some other stuff.

This is exactly how the “trust funds” of Social Security, Medicare, and the rest are financed. The payroll taxes that come in are put in the general fund and spent, with Uncle Sam writing IOUs to the trust funds for the difference between what they had to pay out and what they took in. He makes interest payments every six months on these IOUs, in the form of yet more IOUs.

This is that intragovernmental debt. It is where the “lockbox” for Social Security and Medicare and the rest all live accounting wise. It is debt one part of the government owes another part. You may protest, surely that can’t be. The trust funds claim they hold US Treasury bonds, the “safest investment in the world”.  Well, they are called Treasury bonds, but a “special” kind, called Government Account Series (GAS).

These GAS bonds are only for the purpose of government accounts, and are non-marketable, which means they can’t be sold on the open market. Just like our wife above can’t sell her pile of IOUs, so Social Security and the other trust funds can’t sell any of their GAS bonds. Thus they are nothing but IOUs as worthless as the sorry husband wrote his wife.

So Debt Held by the Public is like the credit card debt the husband has run up, and Intragovernmental debt is the pile of IOUs he wrote to his wife.

The only way those GAS bonds can be made good is to be redeemed by the US Treasury. But where is it going to get the money? Only by borrowing from the public or raising tax, or both, (or worse printing money to pay for it).

There are no “trust funds”, just a pile of IOUs with fancy names. And the only funding for those trust funds going foward is the federal government’s ability to tax and borrow from the open market.

And incidently, something even more Enronish has been going on with the trust funds the last couple of years. Remember the payroll tax cuts which were part of the various stimulus bills that were supposed to be the medicine our economy needed and which failed miserably? Well, that’s like our sorry husband asking the wife take a pay cut. But he says he’ll make up the difference and pay her back he lost pay. How does he pay her back? Well, as I’m sure you guessed now that you’re wise to the game, he pays her back with more of the same IOUs.

Publius-SC – FedUpUSA

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