Are Intragovernmental Holdings Real Debt?

by: Scott Anderson

As everyone who is paying attention knows, the amount of US debt outstanding is fast approaching the $16.4T limit. But whom do we owe it to? Most of the debt, about $11.6T of it, represents debt held by the public. This portion of the debt is easy to comprehend. It could be bonds held by investors, savings bonds given to children, bonds purchased by the Chinese government, or even bonds purchased by our good buddies at the Federal Reserve. The remaining balance of $4.8T, known as "Intragovernmental Holdings," is what I would like to discuss today.

Intragovernmental Debt represents money we owe to ourselves. At $2.8T, the Social Security Trust Fund is the largest and most recognizable portion, with most of the balance being similar programs for government employees and the military. All of this adds up to $4.8T. At this point, you may be wondering how exactly one would go about getting in debt to his/herself. For an example, let's take a trip back in time and assume that in a given month, the government collects $75B in Social Security taxes deducted from paychecks, but only makes Social Security payments of $50B. The $25B balance is spent by the general fund, and a $25B I.O.U. is penciled in on the balance sheet as "Intragovernmental". So the real question becomes, can you really owe yourself money? I think the answer is no, and that the whole concept of Intragovernmental Holdings is just an accounting farce. In reality, the $4.8T balance of Intragovernmental Holdings simply represents an up to date tab of the amount already spent.

Let us suppose that a bright young 22 year old accounting graduate decides to employ a similar retirement strategy. Out of each paycheck, he sets aside 10% for his retirement, but then promptly spends it on pizza and beer. But not to worry, this bright young accountant diligently records these transactions 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 enjoy his dream retirement, right? Of course not, because the very notion of owing yourself money is slightly moronic. And yet here we are talking about $4.8 Trillion we supposedly owe to ourselves.

So what does this mean? Should we all breathe a sigh of relief and simply write off the $4.8T of Intragovernmental 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 change anything other than the magnitude of lies we tell ourselves. The problem is, if we stop pretending that we owe ourselves money, we also have to stop pretending that the social security trust fund exists. Then, we would have to stop pretending that social security isn't a run of the mill welfare program and stop pretending that FICA isn't just a regular old ~15% income tax. Are we allowed to say any of that out loud?

Are we, as a nation, ready to start telling ourselves the truth staring us in the face? I really doubt it. But pretending something isn't true doesn't change the facts. As it stands, we have a debt outstanding of somewhere between $11T, and $100T, depending on what accounting standards you happen to believe in. On top of that, we have a structural cash deficit in excess of $1T per year and no realistic plan to materially change any of this. And yet if something doesn't change, it virtually guarantees that sometime in the future, both on and off balance sheet liabilities will be defaulted on, one way or another. 30 years of history suggests that whatever "fiscal cliff" compromise is reached over the next few weeks will be woefully inadequate, but most of us will probably pretend otherwise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.