The huge deficits of the federal government now and in the future have been and will be financed in large part by selling U.S. Treasury securities to the public. The present value of those securities is the national debt. It is useful for understanding the plans to limit the national debt being considered by the Congress to have approximate estimates of the size of the national debt and to avoid bad policies based on the Social Security lock box hoax.
Anyone who has examined the U.S. Treasury and the central bank (the Federal Reserve) records knows the national debt clocks on the internet and in New York City generally display one misleading number. The national debt, subject to a statutory limit that must be approved by Congress, was $14.014 trillion on January 4, 2011. (Daily Treasury Report). That number on the debt clocks is much larger than the debt the federal government owes the public, including foreign holders, who hold U.S. Treasury securities.
$4.629 trillion was recorded as "intergovernmental holdings", the money the government owes itself. This includes the Social Security trust funds that hold non-marketable Treasury securities. The estimate for "intergovernmental holdings "amount did not include $1.190 trillion Treasury securities held by the Federal Reserve, which is part of the government.(Federal Reserve Statistical Release, 2/17/11) The Federal Reserve actually sends back to the Treasury any interest it receives that it does not use for its operations. These intergovernmental transfers, taking money out of one government pocket and putting it in another government pocket, has no economic significance. It might help to inform dubious observers that the Federal Reserve is part of the government.
Subtracting all the money the government owes itself from the statutory limit that must be approved by Congress, the amount the federal government owes the public is approximately $8.195 trillion (plus other adjustments). That was 58 percent of the number usually displayed on the debt clocks and 55 percent of gross U.S. output (gross domestic product).
Part of the publicly held national debt are "Major Foreign Holders". They held approximately half the public debt, $4.4 trillion. The largest holder is mainland China ($1.16 trillion) and second place is Japan ($882 billion).
These estimates cannot be precisely made. The present value or market value of the Treasury securities is very difficult to estimate if the government decides to buy back some of its long term bonds, long before their final maturity. The price of the bonds could rise (with bids that are higher than current market values) or fall with (lower bids) to levels that are difficult to predict. This problem is crudely bypassed by using the final payment on Treasury bonds (their par value) as their value.
Not only do many people believe that the money the government owes itself is part of the national debt, some believe that the funds recorded in federal government trust funds are assets, items of wealth that will provide income in the future. For example, with all due respect for Vice President Al Gore, he campaigned for president in 2000 advocating the placement of Social Security taxes in the Social Security "lock box" to benefit future generations.
The Social Security lock box is an electronic record on a government computer. It represents no wealth from the Treasury assets it holds. The government can even pay itself more interest on that recorded number increasing its size. Why not double the interest payments and make people who believe in the lock box very happy. That would have some economic result until they tried to use it. Sending the Social Security recipient a printout from the computer that holds the lock box number without some money would not be well received.
When Social Security payments are made the government can print the money, use deposits from government accounts at private banks, borrow money (sell Treasury securities) or use current revenue sources such as tax collections.
Alan Greenspan helped fill the Social Security lock box, as I noted in my 2008 book, Deception and Abuse at the Fed. Greenspan was appointed by President Ronald Reagan to be chairman of a bipartisan commission to save Social Security, The National Commission on Social Security Reform, the Greenspan Commission, 1981-83.
Greenspan received praise for achieving a compromise solution in a crisis atmosphere. As the measure passed the Senate, it was reported that the changes would "assure the solvency of Social Security for the next 75 years."
A primary part of the Greenspan Commission's solution was an increase in the payroll tax rate over a phase-in period. The combined employee/employer payroll taxes (Social Security plus Medicare taxes) were raised 15 percent to 15.3 percent of wages for 1990 (still in effect in 2007). The tax fell only on lower incomes, $35,800 or less in 1984 ($97,500 in 2007).
The final plan actually collected more funds than were paid out to Social Security recipients for every year thus far so that on a pay-as-you-go basis it resulted in a larger than necessary tax increase on lower incomes. The tax collected helped to finance other government spending such as the Afghanistan/Iraq wars that began in 2003.
Taking the Greenspan Commission payroll tax increases and the Reagan tax cuts together, the result was a substantial shift in the tax burden to those on lower incomes.
In 2009, eight individuals, seven of whom "helped craft and secure" the recommendations of the 1983 Greenspan Commission reported the success of the Greenspan Commission to the Senate Budget Committee. (11/10/2009):
Social Security is currently in surplus. According to the 2009 Annual Report of the Board of Trustees, published May 12, 2009, Social Security ran a surplus of $180 billion last year and had accumulated a reserve of $2.4 trillion. (Even excluding the interest income, there was still a surplus of $64 billion.)
People advising the Greenspan Commission believed in the lock box: "Some have argued that Social Security's investment income should be ignored because it involves inter-fund transfers which are not shown when the federal budget is displayed on a unitary basis and are irrelevant for the limited exercise of macroeconomic analysis." What about naughty economists who don't want to be part of a "limited exercise of macroeconomic analysis" to support the Social Security lock box hoax?
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