Tuesday, January 5, 2016

So You Think $19 Trillion Is a Lot of Money?

F/Y         Redeemed Amount

2005       $37,859,890,000,000
2006       $35,910,551,000,000
2007       $38,242,892,000,000
2008       $42,120,248,000,000
2009       $52,531,898,000,000
2010       $63,780,546,000,000
2011       $63,968,929,000,000
2012       $67,407,248,000,000
2013       $61,491,537,000,000
2014       $63,566,328,000,000
2015       $60,448,876,000,000

See the numbers above? The dollar amounts are in the trillions. What do you think they are?

The first column is the US government fiscal year.

The second column is the amount of federal "debt" that the government paid off in that fiscal year.* Note that each year's payment is far greater than the current federal debt.

Whaaat? Paid off? Wait a minute! The entire federal debt is only $19 trillion. Why would the government have paid such big numbers and, if it did, why is there still a $19 trillion debt?

The answer lies in the definition of federal "debt". The federal "debt" is not a credit card balance or a long list of unpaid bills no matter what Paul Ryan, Rand Paul, Ted Cruz, and Barack Obama may tell you. No. The federal "debt" is nothing like that. In fact, "federal debt" is a misleading code phrase for outstanding US Treasury securities. US Treasury securities are interest-bearing investments or savings accounts, much like bank CDs, sold by the Treasury to the public, primarily to lessen the number of dollars in circulation.

Treasury securities are classified by maturity length. Treasury "bills" mature in 1 year or less. Treasury "notes" mature in from 2 to 10 years. Treasury "bonds" mature in longer than 10 years. Each Treasury security sold is a separate "debt" of the Treasury to the purchaser of the security. Each time the security expires and the Treasury redeems it, the Treasury has paid off that debt. There are thousands of Treasury securities in existence. Thousands of Treasury securities expire every day, every week, every month and every year and when they expire, the Treasury redeems them, that is, the Treasury pays them off. For example, let us say I buy a 3-month $1000 T-bill for $950. At the end of three months, the T-bill expires and the Treasury pays me $1000. Boom! That federal debt is paid. I may turn around and buy another 3-month T-bill and the process repeats. If I buy a new T-bill each time one expires, I will have bought four $1000 T-bills in a year and been paid $4000 by the Treasury. Of that $4000 I received, $3800 was money I had originally invested and $200 was interest I earned. If I buy a fifth $1000 T-bill, the federal "debt" on my T-bill will be $1000 until that T-bill expires and is redeemed.

So it is with all so-called "federal debt". In 2015, for example, the Treasury paid off over $60 trillion ($60,448,876,000,000) in Treasury securities, largely short-term Treasury bills and notes, thus paying off that amount in federal debt. So why is there still $19 trillion in federal debt? Because there are $19 trillion in Treasury securities that have not matured yet. Those securities will be redeemed (paid off) as they mature, just like all Treasury securities have been paid off on maturity since the late 1780s. The US has never defaulted on a Treasury security, which means the US has never defaulted on its "debt". Notice that the bulk of the money the Treasury uses to "pay off" Treasury securities is the money originally invested by the buyers of the securities. The Treasury returns the investors' money and pays only interest. Most of the time, the investors opt to reinvest in new Treasury securities and renew the "debt". That's why the federal "debt" continues to exist even as it is paid off.

Many people worry about the size of the federal debt and demand that it be paid off. But they do not realize, or know, that federal debt is paid off every day, Treasury security by Treasury security, even as new securities are sold. It is virtually impossible for the US to renege on its debts unless Congress does something stupid by refusing to honor and redeem Treasury securities as they expire.

So the next time some political ying-yang warns that the federal debt is out of control, that we can't afford any more debt, and that our grandchildren will be saddled with the debt, remember that every year the government actually pays off federal debt many times larger than the current debt amount. In fact, in the last eleven years the US government has paid off the debt, that is, it has redeemed US Treasury securities, in an amount well over $600 trillion and the country has not gone bankrupt, has not defaulted on its "debt", and has not had to sell out to China. And we are worried about today's $19 trillion "debt", that is, $19 trillion in outstanding Treasury securities? Please. Get serious America and get on with the business of running this country.

Remember that the US government pays its bills as it goes with newly issued US dollars. It does not borrow money or run up a credit bill, or spend the Treasury security investments. The term "debt" is technically accurate because the Treasury does owe the holders of Treasury securities the money invested in those securities, but the government has no overdue bills or overextended credit or goods bought on layaway. And it always redeems its Treasury securities as they come due, to the tune of $60 trillion last year alone.



  1. I just don't understand why we aren't taught this in high school or college. NOONE else is saying anything even close to what you say. Do the have a theory as to why?

    1. Every MMT (Modern Monetary Theory) scholar and proponent knows and verifies this.