Letter: When it comes to the US national debt, ‘the devil’s in the details’

Vancouver resident Joseph Wagner offers his thoughts on the national debt

Editor’s note: Opinions expressed in this letter to the editor are those of the author alone and do not reflect the editorial position of ClarkCountyToday.com.

Joseph Wagner
Joseph Wagner

Local money manager Ken Fisher recently wrote an op-ed for USA Today. [1] In his article, Mr. Fisher claims the US national debt “troubles are no closer now than decades ago” and says a “debt doom doesn’t loom over America.” As the saying goes, the devil’s in the details, so let’s look at the details to see if Mr. Fisher’s analysis holds true. 

Mr. Fisher starts by saying that one-quarter of the $23 trillion national debt is money the federal government owes itself – intragovernmental debt – which is “an asset and a liability” that “effectively cancels out.” Well, you can cancel that out if you want, but doing so means that Social Security has no assets. 

The intragovernmental debt is Social Security surpluses. However, those surpluses don’t sit on deposit at the Federal Reserve (“Fed”). They are loaned out to other departments, through non-marketable US Treasuries, and those departments in turn spend the money. What happens when Social Security needs to cash out those surpluses? Whether you consider it real debt or simply “an accounting entry,” it’s money that isn’t there, so from a purely functional perspective, it is money that will need to be repaid. Mr. Fisher continues by saying, “For debt to become a problem … interest rates must skyrocket and stay there” but then downplays any risk of that happening soon by asking, “Do you see any signs of that now?” Actually, I do. 

On Tue., Sept. 17, the Fed started repurchasing US Treasuries (“repo”) from banks, a move it hasn’t made in 10 years when the US had its last financial crisis. Overnight interest rates rose as high as 10 percent, because “there is often not enough cash on hand at major Wall Street firms to meet the funding demands of a market trying to absorb record Treasury bond sales needed to cover U.S. budget deficits.”

[2] In other words, there’s so much US debt that – at current interest rates – Wall Street can’t find the cash to buy it. At this point, the Fed had a choice: raise interest rates to attract more cash for buying government debt; or repurchase government debt with printed money, a move the Fed prefers to call “quantitative easing.” The Fed chose the latter. In fact, the Fed scheduled repo operations for every day through October 10th. 

[3] CNBC went so far as to say, in the headline, “Fed loses control of its own interest rate.” 

[4] Clearly, all that government debt is spelling doom right now, but doom is not limited to manifesting itself as a government unable to pay the interest on its debt. Doom can manifest as higher inflation, which is clearly the Fed’s preferred route when it chose to restart repo operations, aka quantitative easing, aka printing money. 

Joseph Wagner

[1] https://www.usatoday.com/story/money/columnist/2019/09/22/debt-debt-doom-america/2384550001/ 

[2] https://www.bloomberg.com/news/articles/2019-09-17/with-repo-market-still-on-edge-fed-preps-second-blast-of-cash 

[3] https://www.washingtonpost.com/business/fed-announces-plans-to-provide-more-support-for-repo-market/2019/09/20/233031f0-dbe1-11e9-a1a5-162b8a9c9ca2_story.html 

[4] https://www.cnbc.com/2019/09/18/fed-loses-control-of-its-own-interest-rate-on-day-of-big-decision-this-just-doesnt-look-good.html

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