As of 11/28/2012, 4.8T of the 16.3T of debt outstanding was classified as “IntragovernmentalHoldings”…a full 30%. It is my opinion that this is pure silliness. In reality, the internal debt is just an up to date tab of money that has been stolen and spent….primarily related to Social Security and government/military retirement funds. Here is an example. Let’s say that in a given month, the government collects $100B in Social Security taxes deducted from paychecks. If in that same month they pay out only $50B for Social Security benefits, the $50B balance is used by the general fund, and they pencil in a $50B liability on the federal balance sheet. An I.O.U. if you will…to ourselves. So the question becomes….can you really owe yourself money? I think not….here is another example.
Let us suppose that a bright young 22 year old with a University of Phoenix degree (and $50k of student loan debt) decides to employ a similar retirement strategy. Out of each paycheck, he sets aside 10% for his retirement….but them promptly spends it on pizza and beer. But not to worry…this bright young graduate diligently records these liabilities on his personal ledger as both an asset, and a liability. 45 years later, he reaches retirement with well over $1M “saved” He then goes on to enjoying his dream retirement right??? Of course not….because the very notion of owing yourself money is slightly moronic…. And yet here we are. The answer is NO!!
So what does this mean? Should we all breath a sigh of relief and simply write off 30% of the debt on our books. No on the relief…yes on the write off. The truth is…the internal debt has never really mattered, so admitting to ourselves what it truly represents doesn’t really change anything. As it stands, we have a structural deficit in excess of $1T per year and no realistic plan to materially change this. The truth is, that sometime in the future, both on and off balance sheet liabilities will be defaulted on one way or another. The sooner we realize this…the better.