Best-kept secret about the national debt: Nobody will ever have to pay it back.

That's right, "Nobody will ever have to pay it back."  How about that title?  I keep trying to think of new ways convey the idea of debt rollover; maybe this way of saying it will work better than the other 99 ways I’ve tried over the last two years here. 

Just to be clear, let me say it again, very explicitly:

Believe it or not, as long as we have a viable economy, nobody will ever have to pay back the national debt: not you, not me, not our kids, not our grandkids, not our great-grandkids, not any of their progeny.  Period.

If you know any people who don’t believe that—for example, Blue Dog Democrats—ask them if they can find a flaw in either the Walter Wriston quote below, or the animated graphic below that.  [Hint: There is no flaw in either one; this is how it has been working, and will continue to work, decade in and decade out.]

If we had a truth-in Government act comparable to the truth-in-advertising law, every note issued by the Treasury would be obliged to include a sentence stating: "This note will be redeemed with the proceeds from an identical note which will be sold to the public when this one comes due."

—Walter Wriston, former Chairman of Citicorp Bank

When the US Treasury does this with the federal debt, it's called “rolling it over.”  It's perfectly sound financial practice, and it's done all the time. 

Therefore, anyone who implies that any portion (let alone all) of the national debt will eventually have to be paid back—by us or by some future generation, via huge, crushing tax increases—needs to explain two things:

• why Walter Wriston’s statement above is inaccurate; and
• why debt rollover will become inviable, even though it’s worked perfectly well for generation after generation so far. 

I'll be all ears when anyone comes forward with an explanation.  But I won't hold my breath.  [Hey Blue Dog Democrats, are you listening?  How about explaining those two points in front of the C-SPAN cameras?] 

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End note: 
I’m taking this one step at a time.  This article was about the debt principal.   In the near future, I’ll address the interest on the debt—the favorite whipping boy of the fear-peddlers.  Synopsis: The much-maligned interest on the debt is in reality buying something extremely valuable.  Not only that, but it’s easily affordable, it’s worth every penny, it’s a transfer of wealth from the rich to the non-rich, and we should happily pay it (as well as collect it) with a big smile.
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UPDATE:  I noticed the following comment in an internet forum in response to the article above:

Oh you'll pay it back allright buddy, just like the Argentinians and us British had to.  Its called currency devaluation, mass unemployment, interest hikes and a boom bust economy.

Yes, that’s the familiar argument that always goes something like this: “Yeah, but just wait: disaster is just around the corner.”  It’s the argument that’s been selling a lot of books in America for at least the four decades I’ve been paying attention.  (One of many such lucrative books sticks out in my mind, because of the catchy title: The Great Depression of 1990, by Ravi Batra; there are plenty more books like that, and I've read most of them.) 

Nonetheless, my response now is the same as it has been for years and years:

“Right, uh huh; disaster is just around the corner.  I’m still waiting.  In the meantime, while the debt is steadily growing, I’m enjoying low inflation, low interest rates, and a steadily-growing economy that keeps the debt ratio in bounds and attracts capital from all corners of the world.” 

I’ve been saying that for two decades, and I’ll probably be saying it for as many more decades as I have left.

Comments

[snowballs]

Looking forward to the piece about interest on the debt. When I try to explain to the fearmongers the difference between a "debt sweet spot" vs. horrible asset management, it's like trying to spank a cat - it just doesn't work.

[muirgeo]

GREAT! So now we can fire up a National Health Plan and never have to pay for it. Everything the government buys is free!

We should have National Ice CCream night once a week and just charge it to the Treasury since we never have to pay the debt.

Seriously, explain it to a lay person like me if what you say is true why does it matter if democrats put in all kinds of new expensive programs since debt doesn't matter?

Why even have taxes since the debt just goes away by itself?

[muirgeo]

Is it like this?

Hey kids look..you don't have no debt to pay...and here's abunch of bills to play with...have fun?.....like that?

http://tinyurl.com/yjtnjp

[Syphax]

muirgeo, there is a big difference between saying "the national debt doesn't matter so spend as much as you want to!" and saying "the national debt never needs to be completely paid off, in fact it can grow and the debt burden can still be reduced!"(look at 1945-1970 for proof, the debt doubled, yet the debt burden fell from 120% to 35%).

So the real question is, do you think the national debt really ever needs to be paid off? If so why? Will it help the economy? Will it be worth the tax increases? Will it be worth the spending cuts(and what spending should we cut?)? What will be done with things like Social Security, health care and Medicare? Will funding for them be reduced, will taxes be increased or will they simply be eliminated?

I have heard good reasons as to why we don't need to pay off the national debt from Steve, but I haven't really heard good reasons for why we should pay off the national debt(from anyone). It seems like the idea is just accepted that we should... without any real reason as to why. "It's a huge huge number!" and "We can't leave this debt for our grandchildren!" aren't satisfactory.

So I invite someone... anyone to fill me in on why paying off the national debt is a good idea.

[Stephen Reed]

The debt is in effect paid for. When the debt is rolled over for infinity, the debt becomes the equivalent of a perpetuity. The net present value of those interest payments on the perpetuity is exactly equal to the value of the debt.

Think if it like a bond that never pays back the principle and never expires, with $50 interest paid every year. If this bond sells for $1,000, then the value of those future interest payments today is $1,000. Since those future interest payments are paid for by the future tax payers, and those future interest payments are worth $1,000 in the present, the future taxpayers do essentially pay for the debt.

It is true, however, that our "grandchildren" will not owe something of value equal to the debt. The part of the debt they have to pay for the current debt is equal to the net present value of the interest payments that they will have to pay for our current debt.

[Stephen Reed]

Syphax,

The answer to your question is that the debt _should_ be paid off in the situation where what the government is purchasing is expected to have a negative net present value to society, where the discount rate used is the market interest rate on the debt. In such a situation, society is better off by having the debt worked down.

Alternatively, the debt should be increased if the net present value to society is expected to be positive.

Unfortunately, there is no accurate way to measure this, and it can be quite subjective.

For those that say we should never pay off the debt, evidence needs to be provided that additional government spending has not reached this threshold. Steve has provided such evidence for the case of national defense, but the 4.5% of GDP is a little bit subjective, and I have not seen this number well defended. Why not 3% or 6%?

[Steve]

All,

Nobody is making the argument that it's impossible to have "too much" debt. But that begs the question, How much is too much, and which metrics tell us it's too much? I think inflation and long-term interest rates are the signals, and those are in great shape. Furthermore, they were in great shape after WW2, when the debt was 121% of GDP. So where is the tipping point? 150% of GDP 300% of GDP? I don't know, but I'm all ears if anyone has an argument that tries to quantify it.

In the meantime, check out the link at the upper right, titled "Fiscal Responsibility defined."

[muirgeo]

Does the debt have anything to do with the fact that it'll cost me dearly to travel and sleep and eat in Italy this summer?

Did Argentina have a collapse related to debt...post WW1 Germany?

What if the debt causes the dollar to plummet, inflation to soar and holders of the debt to cash in?

And most importantly what are we getting for our debt? Bombs that blow up once then go away, corporate welfare, mercenary armies...NOTHING...billions lost with no accounting? Or good jobs rebuilding our infrastructure and other institutions.

Heck I'm the Liberal here and I'm trying to convince you all there's NO FREE LUNCH??? Curiouser and curiouser....

[snowballs]

Muirgeo, you're sort of all over the place, but...

""Seriously, explain it to a lay person like me if what you say is true why does it matter if democrats put in all kinds of new expensive programs since debt doesn't matter?""

The question is what do these programs yield for anyone? In Steve's example, A Treasury Bond in the form of government debt serves as a growing asset for the investor. An asset that can be liquidated, borrowed against or just grow one's net worth until it's rolled-over.

If you're going to introduce a government program where the government buys say, automobiles for poor people, that's a bad investment. Why? Because for one thing, automobiles are horrible investments, that's why I'm using it as a contrasting example. Sure, it's an asset, but it's an asset that loses money very rapidly.

""Does the debt have anything to do with the fact that it'll cost me dearly to travel and sleep and eat in Italy this summer?""

A strong Euro has the same effect. There are always trade-offs with a strong or weak dollar. Would you rather have a strong environment for U.S. exports or, since it happens to be convenient for "you", a cheaper vacation? Tourism is always impacted by a strong or weak dollar one way or the other. Maybe you should consider going in the off-season if it's that big of a deal.

""What if the debt causes the dollar to plummet, inflation to soar and holders of the debt to cash in?""

Do you really think that foreign investors are really that scared of our debt? I don't think so, otherwise there wouldn't be owned by foreign entities, right?

After all, unemployment is down, GDP is steady and the stock market is growing at an acceptable rate, I honestly don't think that we're in that situation nor do I think that our economy is that fragile and/or inflexible.

""And most importantly what are we getting for our debt? Bombs that blow up once then go away, corporate welfare, mercenary armies...NOTHING...billions lost with no accounting? Or good jobs rebuilding our infrastructure and other institutions.""

I don't know on that one, again sort of all over the place - it certainly sounds like your glass is at least half-empty.

Don't be so scared by debt on an aggregate level, it's not as evil as it's been made out to be. If it were, 99% of Fortune 500 companies wouldn't use long term debt as a tool to fuel their growth, right?

[Tim]

I'm glad the economy is working for so many people such as yourself ("I'm enjoying low inflation, low interest rates..."), but there are also many people who it's not working for -- for example, those earning minimum wage who haven't had a pay increase in many years (could this be one reason that inflation rates for the rest of us are low?). Many people in the U.S. work hard but have horrible standards of living; we just don't often hear from them in the media or on the internet. So, no, the economy is not what I would call 'peachy'; I believe we have a lot of work to do to make things equitable for all Americans -- and reducing our interest payments on debt would free up more money to do that, through public and private investment.

[Ultrameme]

So, can I use monopoly money to pay my rent? Or, is there some government program for free cash? Maybe an ATM that gives out dollar bills if you know the secret password; or is it a secret knock?

The Dow Jones dropped 419 points today, and the blue dogs quoted a treasury document issued last week that states our debt to be 8.7 trillion and by the end of the administration it will be around 12 trillion. They then go on to state that the actual debt burden is around 50 trillion. The government lost 24 billion last year. It's unaccounted for anyway. Is there a program out there that will pay my student loans, or maybe give me hope of oneday becoming a landowner; or do I have to just watch all the rich kids whose daddies have been robbing me for decades be the only ones to prosper? I daresay if things continue like this I along with many others will gladly enact our second amendment rights upon the greedy pile of swine dominating and screwing not only this country but the entire planet. Enjoy your swill while it lasts.

[Ultrameme]

Oh, and as a follow up, I'm a University educated (3.2 GPA), Navy veteran (4 years), bi-lingual (Spanish/English) white boy native son of the USA whose last job offrer was for 8 bucks an hour; which I should have taken because I'm hungry and this isn't my computer.

I should have become a drug dealer instead of actually believeing in this once great nation. And yes I'm a gen-xer with no wife (she must have been aborted) and no kids.

[Sam Grove]

What really matters is that people keep going to work every day.

[Lou]

Another tempest in a teapot argument.

All this article says is it's ok to carry debt. Of course it's ok to carry debt. There is no argument here. There is no great revelation here either.

I'm just so glad to know that we won't have to make changes to medicare and social security. We can just borrow a bit more.

This must be the best possible of all worlds!

[Bogart]

"By 2045, if we stay on our current path, all federal revenue will be used to pay interest on the debt," said Josh Gordon, senior policy analyst at the Concord Coalition, a nonpartisan budget watchdog group in Washington.

[Steve]

Bogart:
What a coincidence; I used that same exact quote in the following (more recent) article:
http://www.optimist123.com/optimist/2007/03/the_single_scen.html