There is no national debt
October 18, 2016 § 33 Comments
Everything you think you understand about government finance is wrong. (You aren’t alone: everything that everyone thinks they understand about government finance is wrong. There is literally no way to accurately understand government finance: the accounting framework to do so does not even exist conceptually).
The ‘national debt’ isn’t debt. Debt is when an institution owes some property (actual property or third party securities) to a creditor. (Institutional ‘owing’ isn’t like personal debt: it is an impairment of the balance sheet of the institution).
USG owing dollars to China is like a company owing shares of its own stock to China. T-bills are more like stock options than notes payable: they represent a claim for the future issuance of USG securities, not a claim against actual property or third party securities.
Dollars are securities which impair the balance sheet of USG. But nobody knows what the balance sheet of USG ought to look like, not even in theory as a conceptual matter, let alone what it actually does look like as populated with sound real world data.
That doesn’t mean ‘everything is fine, go back to sleep’. What it means is that neither the folks who say that everything is fine nor the folks who think we are on the brink of apocalypse can possibly know what they are talking about.
They are just expressing their feelings.
Zippy Catholic 
I remember reading the same analysis from Mencius Moldbug years ago.
I’m fairly familiar with stock options but I don’t quite follow you on how T-bills are similar to them.
T-bills are the right to receive more USG securities at some point in the future, but there’s no strike price?
Also, options trading is zero-sum, when someone gains someone else loses. If T-bills are always in-the-money USG securities options then who loses? The USG?
Perhaps you should read the Congressional Record. What “Backs” up this moneyary insanity? It right there in black and white. A “lien” on every single thing in this country, both public and private. That’s what the “full faith and credit of the United States” is in legal terms.
Why do you think there are warrenty deeds instead of allodial titles on real property now?
Look it up.
donnie:
The similarity is only inasmuch as stock options represent a commitment to issue a certain number of a different particular security (capital stock) under certain conditions. Normally this is tracked in a cap table, which sort of derives from the balance sheet; but USG has no balance sheet or cap table.
The question (and in particular the phrase ‘in-the-money’) illustrates the conceptual difficulty you are having: you are trying to measure the value of the security in units of itself.
A T-bill works like this:
You give USG Inc 1000 of its own coupons today. It gives you a receipt in which it promises to issue you 1001 of its coupons one year from now. This is only ‘in the money’ inasmuch as you get one more coupon a year from now; but it says nothing about whether you will be financially better off for having made the exchange.
John:
Thank you for expressing your feelings.
I describe what backs sovereign-issued securities partially and abstractly in this post.
Also, you may be interested in my take on property taxes, which speaks to your mention of different kinds of real estate titles.
Moldbug made something resembling a start at understanding government finance here: http://unqualified-reservations.blogspot.com/2008/09/clean-slate-accounting-of-dollar-part-1.html
Though you and he differ on what a dollar entitles a bearer to.
The Moldbug piece is pretty good as a conversation starter, though as usual I find his prose meandering.
We do differ on several things — in fact his whole framework is not really correct.
All securities are equity (in his sense, as best as I can tell). There is always risk that what he calls ‘warehouse receipts’ and ‘redeemable security’ will not produce what is anticipated of them. Even actual property in hand remains at risk and subject to decay. Nobody escapes from the second law of thermodynamics. It always takes work, risk, and expense to stave off decay; and death awaits us all.
And yet none of it is really equity, in his sense, as best as I can tell. Though it is useful to ask ‘what do you own if you own all of the dollars which exist right now’ as a forensic accounting question, especially if you carefully distinguish between dollars and claims against private banks (which he doesn’t, unless I missed it in the meandering), dollars do not confer any sort of management control and do not empower you to prohibit USG from issuing more: they merely entitle you to the settlement of tax liabilities in sovereign markets/territory under the current tax structure. Owning all of the Mouse Groats currently in circulation does not mean that you own Disney or can prohibit Disney from issuing more Mouse Groats. In fact the more Mouse Groats you own the more vulnerable you are to Disney’s financial choices, which will probably not be in your best interests.
He also seems fixated on dead assets in warehouses (pianos, gold, etc) as opposed to where most modern wealth is concentrated: that is, in productive businesses and the markets in which they operate.
So, yeah, that piece may be a beginning of insight. But it is just a beginning and has several obvious flaws.
This sounds similar to Modern Money Theory – that tries to describe what happens, not necessarily why.
Tom:
I think all mainstream economic theories are anti-realist and insane, including MMT. But I have gained insights from them all. So the resemblance you see is no doubt genuine.
“especially if you carefully distinguish between dollars and claims against private banks (which he doesn’t, unless I missed it in the meandering)”
I think he did elsewhere. His “equity” thing is not very useful, but I think I got the idea that the value of the dollar is as a settlement of tax obligations from him. I can’t remember what I got from Moldbug and what was from MMT. I have no desire to reread either one.
This one has a silly libertarian prescription, but at least he is trying to understand what is going on and seems to realize the enormity of trying to make sense of sovereign accounting.
http://unqualified-reservations.blogspot.com/2010/01/on-sovereign-financial-reconciliation.html
“That doesn’t mean ‘everything is fine, go back to sleep’. What it means is that neither the folks who say that everything is fine nor the folks who think we are on the brink of apocalypse can possibly know what they are talking about.
They are just expressing their feelings.”
In a way, you remind me quite a bit of Moldbug. While your prose is more concise, it tends to be somewhat opaque (at least I find it hard to follow because I always have to go back to your previous posts that you link to in order to look up your own idiosyncratic definitions for everything.) It takes work to speak Zippy-language!
Anyway, to push back against this particular post, while I like the general idea that national accounts are confused about many things (read enough Arnold Kling and he’ll get you to think modern macro economics and their models are all deeply misguided), I think there is a general sense in which the concept of our national debt is useful. The U.S. government taxes and spends money — when our spending exceeds our revenue we have to “borrow” from someone (or print money, which involves different problems.) We also have to finance the borrowing we already have made. As you know, this borrowing as a percent of our budget has been increasing over the recent years — so as a practical matter, the debt influences tax and spending decisions in Washington.
I agree that we cannot know with any certainty what the impact of these decisions will be three, five, or ten years from now — but we do need to craft budgets and make tax and spending decisions now. To that extent, the amount of our current debt and our future tax/borrowing decisions will impact whether or not we cut spending now (and where?), raise taxes, borrow more, etc.
Jeffrey S:
That is a fantastical myth that you have been led to believe, by people who don’t understand what they are talking about. There is just enough truthiness in it to make it sound plausible to ignorant ears.
[…] Source: Zippy Catholic […]
“That is a fantastical myth that you have been led to believe, by people who don’t understand what they are talking about. There is just enough truthiness in it to make it sound plausible to ignorant ears.”
Do you know who originated it?
Patrick:
No. People have believed that sort of thing since the time they believed in Zeus. And it is just as mythological.
“That is a fantastical myth that you have been led to believe, by people who don’t understand what they are talking about. There is just enough truthiness in it to make it sound plausible to ignorant ears.”
As I said, a bit opaque for my tastes. But once in awhile I try 🙂
I am sure the international bankers will announce the cancellation of all debt because Jubilee year.
Jeffrey S:
Back at my desk, so let me try to break it down for you.
Most not-financially-literate people think that sound financial management is about cash flow. This is wrong, even badly so, but it is at least somewhat workable for a household to a first approximation: as long as you keep bringing in more cash than you spend, the wheels stay on.
Institutions are nothing like that. (Even households aren’t like that, but it kinda sorta works to a first approximation). What is more, what looks like cash flow for USG isn’t. So everything you think you know about USG finance is wrong: an illusion created by a superficial and false analogy.
In layman’s terms, a balance sheet is an inventory of all of the property that the institution controls and all of the various financial claims against that property. It is impossible to know the financial health of an institution, including whether things are getting better or worse financially, without understanding (under whatever labels) the institution’s balance sheet and the trajectory of its balance sheet, that is, the changes happening to its balance sheet.
In traditional accounting these are reported as balance sheet (at a point in time), profit and loss (over some interval), and cash flow (over the same interval). The first is a fundamental snapshot of the state of the institution; the latter two tell us specifically how the institution is changing financially.
Profit and loss measures (roughly speaking) the operating gain or loss in ‘equity’ — not in Moldbug’s sense, but in the sense of “what has happened to the value of all of the property on the balance sheet, minus the satisfaction of all of the financial obligations against that property?”
Cash flow measures the flow of liquid property: property which can be easily and quickly traded for something else. Cash flow is of secondary importance: you have to keep an eye on it to make sure you have enough liquid property (cash) to pay your bills on time, but in general liquid property is not as productive as other capital so it is best to keep it to a manageable minimum.
People think that USG revenues, expenditures, deficits, and debt numbers give meaningful insight into cash flow. They don’t. Those things don’t constitute cash flow, and the balance sheet and P&L are a complete black hole.
The reason they don’t constitute cash flow — as I have explained many times now — is that you can’t measure the cash flow (change in balance sheet liquidity) of an institution by using the securities of that very institution as a metric. And in the case of USG we don’t even know what kinds of things we ought to be using — though I’ve made a few pointers here and there — to measure, or what specifically we ought to measure, etc.
That is, we cannot answer the question “what is happening to the liquidity of USG’s balance sheet?” — BECAUSE WE DON’T HAVE A BALANCE SHEET.
So what we actually have in terms of real information is no balance sheet, no P&L, no cash flow, and some back-and-forth in the institution’s own securities which create the illusion of something kinda sorta similar looking to cash flow as long as you don’t pay attention.
And the biggest danger here is not the things we don’t know. As some wag said, the biggest danger here is the things we know that aren’t true.
Zippy –
Thoughts on Economic Distributivism whose genesis was in Quadroissimo Anno?
[…] more, what looks like cash flow for an institution like the United States Government, isn’t. So everything you think you know about USG finance is wrong: an illusion created by a superficial, outright false […]
John:
I have good feelings about it. (That is a serious answer. I couldn’t say more without doing a lot of due diligence which I have not done). I rather suspect that I would have to make a bunch of modifications and clarifications to make it commensurable with my own understanding of things. But that also is just a feeling.
Zippy,
I think there is at least one large nugget of truth in what Jeff said. That is, these factors can be used to model what monetary policy will have to look like based on current and projected polices such as entitlement spending. So it may not mean as much or even quite what people think they mean, but in reality they can at least show the relevant authorities that if they don’t change course on spending patterns they will have choose to either raise taxes to debilitating levels or go into an openly inflationary policy.
Mike T:
Thanks for sharing your feelings.
Ok, enlighten me. What is wrong with what I said?
What is wrong with it is that it is entirely your intuitions and feelings, disconnected from actual facts.
My own intuition and feelings are that the situation is probably simultaneously much more complex and much less politically correct than that. For example I feel that it is likely that the same entitlements produce different equity results across different groups, some positive and some negative.
But without data – without even a conceptual framework from which to derive an accounting structure into which to collect data – my feelings and five bucks will buy you a Starbucks latte.
If national debt is a myth since immemorial times, then why did Louis XVI call Estates-General and seal his own fate? Was he entirely deluded that his state has run out of money?
vishmehr24:
If it is impossible to accurately account for sovereign finances then by definition historical sovereigns have not properly understood their own financial position.
The fact that the finances of an institution are not properly understood (and literally cannot be properly understood) doesn’t mean they are healthy by definition, of course. As I say at the end of the OP, feelings about the financial state of USG are just feelings, not fact.
More generally, an historical example of a sovereign beheaded at least in part because he didn’t understand his own finances seems to support rather than undermine my contention that sovereign finances are opaque. What would undermine my contention would be an actual example of an accounting system which adequately captures sovereign finances. Show me the black swan and I’ll believe in their existence; then perhaps we could work on applying it’s principles to USG.
Absent a clear counterexample though I think folks ought to be willing to at least provisionally accept my contention that a metaphysically realist way of accounting for sovereign finances does not exist.
And you contention is independent of whether the sovereign financing is done in gold, silver or fiat currency?
What does it say on the fiat dollar note? That the note entitles the bearer to a dollar. So the note itself is not a dollar. The dollar itself actually is a weight measure of silver,
The opacity argument could hardly work for gold or silver,. As physical things, they can be counted and weighed.
The opacity contention also means that not merely one sovereign but all of them, from the time immemorial were deluded. Not merely them but all their minsters and accountants and economists too ( The Wealth of Nations is filled with data on state finances).
Even if the sovereign is nothing more than a glorified household ruling over a mountain village. His finance must be necessarily opaque.
Not terribly easy to believe.
vishmehr24:
I can always count on you to miss not only the central point but also crucial qualifiers.
[…] are just fiat dollars once removed, as stock options are just shares of capital stock once removed: they are not debt, and the sooner you banish the idea that they are debt from your mind the better you will […]