Is Federal Debt Too Big?: Public vs. Private Debt

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The cash in your wallet used to be government debt. What the government owed you before 1971 was an ounce of gold for $35. In 1971 President Richard Nixon took the United States off of the gold standard. Now the government owes you absolutely nothing for $35 or any amount of money. If you are nervous about using money that is backed by nothing, don’t use it.

Question 1: But what about US Treasury bills and bonds? Doesn’t the government owe you for the principal and the interest on those bills and bonds? Answer: They owe you the interest payment (coupon value) and the principal at maturity, but if you want to cash out any of your government-issued bills and bonds, just go into the New York financial markets and sell them for whatever price they are currently selling for.

Question 2: Does that mean that the government never has to pay back the debt that it has issued? Answer: As long as there is a market for government bills and bonds, the government doesn’t have to worry about it. As long as there is someone else willing to buy the debt, then it isn’t a problem. The government just issues replacement bills and bonds when the old ones reach maturity.

Question 3: Can’t government debt go bad just like private debt sometimes does? Answer: The analogy between public debt and private debt doesn’t hold up very well. Private businesses can’t print their own money or raise taxes to pay off their debt. Government has powers that go way beyond whatever a business might have. However, a government could get so carried away in monetizing its debt that it causes hyperinflation.

Question 4: How do we know when a government debt problem might be developing? Answer: When people start losing faith in government debt, the interest rates on government debt will begin to rise. A safe and secure debt can offer a low interest rate. Risky debt requires that the issuer pay a high interest rate. If the interest rate on government debt starts rising above that offered on corporate bonds, then it would be time to start worrying, mainly because the government would need to sell more and more debt to get the money to pay the interest rate on the increasing debt load. It is very unlikely that the government would let this get to the point where they couldn’t keep up. In an emergency the Federal Reserve would monetize some of the debt (buy up enough of it to alleviate the crisis) to bail out the government just as it bailed out the banks on Wall Street in 2008-2009.

Question 5: What if there was a situation (such as the current situation) where wealthy people and wealthy corporations had a huge amount of money in the financial markets and there were no reasonable real investment opportunities (except maybe overseas) so the money just drove up stock and bond prices and drove down interest rates? Answer: Yes, this is the current situation. There is a huge amount of money in the financial markets that is sitting idle. Corporations are using the money they get to issue stock buybacks and increased dividends and driving up stock and bond prices. Right now the chances that the interest rates on government debt are going to spike are next to none. It is definitely not an immediate problem.

Question 6: But what if the government went wild by issuing a huge amount of government debt? Answer: That would be a problem, because eventually all market interest rates would start to rise and private investment would be choked off. This is what is sometimes referred to as “crowding out.” But a moderate amount of “crowding out” is not a bad thing if the money is being used for important public investments such as infrastructure repair and other important priorities that voters have determined are more important than what the private sector would spend the money on. The term “crowding out” is prejudicial in that it implies that private spending is good and government spending is bad, but that is not always the case. Some reasonable amount of government spending is needed, even if it replaces private spending.

Question 7: What if the government issued the debt but didn’t spend the money? Answer: Although the chance that this would happen is absolutely zero, it is an interesting question. It would mean that the government was reducing the money supply. Controlling the money supply is supposed to be the responsibility of the Federal Reserve. But if the treasury department did it, the effect would be the same as the Fed purchasing securities in the financial markets. It would reduce the money in the economy and slow the economy, and, if extreme enough, cause a recession.

Question 8: The real question is how much money is flowing through our economy and where is that money going? Right now, there is too much money flowing into Wall Street and too little money flowing to the people on Main Street. The people on Main Street don’t have enough money to buy back the value of the goods and services they are producing so the federal government has to use deficit spending to make up the difference to keep the economy from falling into a recession. Deficit spending is here to stay until we correct the money flow problem (remove tax loopholes and inappropriate subsidies, etc.) where too much money is flowing to the wealthiest people and biggest corporations and too little money is going to everyone else.


Lawrence C. Marsh is Professor Emeritus in Economics at the University of Notre Dame and author of the 2020 book: “Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone.”

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