A True Gem

Krugman's recent piece on debt is a true gem and, more or less, torpedoes much of the doom and gloom we hear from conservatives and libertarians these days. He makes several key points which are worthy of highlighting.

First there is the central question of who owns our debt. Ask someone on the street and their first answer will likely be China. Of course, this is what the media and right wing pundits have conditioned them to believe but it's simply not true. In fact, the majority of our debt is owned by...us. Here is how it all breaks down.

Hong Kong: $121.9 billion (0.9 percent)
Caribbean banking centers: $148.3 (1 percent)
Taiwan: $153.4 billion (1.1 percent)
Brazil: $211.4 billion (1.5 percent)
Oil exporting countries: $229.8 billion (1.6 percent)
Mutual funds: $300.5 billion (2 percent)
Commercial banks: $301.8 billion (2.1 percent)
State, local and federal retirement funds: $320.9 billion (2.2 percent)
Money market mutual funds: $337.7 billion (2.4 percent)
United Kingdom: $346.5 billion (2.4 percent)
Private pension funds: $504.7 billion (3.5 percent)
State and local governments: $506.1 billion (3.5 percent)
Japan: $912.4 billion (6.4 percent)
U.S. households: $959.4 billion (6.6 percent)
China: $1.16 trillion (8 percent)
The U.S. Treasury: $1.63 trillion (11.3 percent)
Social Security trust fund: $2.67 trillion (19 percent)

So America owes foreigners about $4.5 trillion in debt. But America owes America $9.8 trillion.


Even the issue of foreigners holding our debt is offset by US claims on foreigners. Here's a chart that Krugman provides.

The blue line represents income from assets abroad and the red line represents payments on foreign owned assets. Since these assets often take the form of subsidiary US corporations, they often give a higher rate of return than do our liabilities as foreigners tend to put their money in safe, low yield assets, as Krugman notes.

The other thing that makes the doom and gloom crowd predict that we will all be thrown into a boiling pit of sewage is running debt to GDP of 100 percent (as we likely will for the next few years). Yet this chart says otherwise.

Look at all those years of 100 percent (and much higher) debt to GDP in the UK. Are they in a boiling pit of sewage? No. It makes you wonder how much of their current shift towards austerity is politically based as opposed to reality based. I certainly wonder that here although in our case it's more about "winning the argument" and "proving the Democrats wrong."

So, as Krugman aptly notes, nobody understands debt. Those who say that the government should just "live within its means like ordinary Americans do" don't understand that people owe their debt to a bank. American owes its debt to itself which is a very different thing.


First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation. 

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves. This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

Exactly right.

Where he is exactly wrong, though, is with this line.

So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.

Spend more than we are now? Or much more? How much? Where? This seems too vague and doesn't make much sense considering the unemployment has dropped in the last few months without increased spending. While I don't think we need the Draconian cuts called for by many on the right, we also don't need increased spending. In fact, we could cut spending in the Big Three (Defense, Social Security, Medicare) in a number of ways that won't erode employment as much as Krugman thinks and do quite a bit to reduce our long term debt and deficit. Throw in the end of subsides and tax cuts on the wealthy and things look even better. So, on this point, I simply can't agree with him.

But he is right about everything else. The next time a conservative or libertarian friend starts foaming at the mouth about our debt and how it's going to destroy us, show them this information, tell them to stop reading right wing blogs, and take a fucking chill pill.