From: whitlock@vaxb.gbus.virginia.edu (Reid E. Whitlock)
Subject: Re: DEBT vs. DEFICIT
Organization: Darden Center, University of Virginia
Date: Fri, 28 Aug 1992 02:01:30 GMT

In article <thompson.714770880@daphne.socsci.umn.edu> thompson@atlas.socsci.umn.edu (T. Scott Thompson) writes:
>From: thompson@atlas.socsci.umn.edu (T. Scott Thompson)
>Subject: Re: DEBT vs. DEFICIT
>Date: Tue, 25 Aug 1992 19:28:00 GMT

>whitlock@vaxb.gbus.virginia.edu (Reid E. Whitlock) writes:

>[stuff deleted]

>>>It depends on how you define "the" debt.  Suppose we define the
>>>government debt to be the _net_ indebtedness of the U.S. Treasury.
>                            ^^^^^^^^^^^^^^^^^^
>>>This seems to be the most reasonable definition.

>>O.K. so, far so good.

>>>Then if the government runs a budget surplus, the debt is
>>>"automatically" paid down by that amount _by_ _definition_.

>>If the government generates the surplus by, say confiscating billions of 
>>drug money illegally laundered, or by getting incredibly good at 
>>collecting taxes from waitresses and hookers, or from raising taxes on 
>>booze and cigarettes, then the debt --- the obligation of the U.S. 
>>Treasury to make good on Treasury bills, savings bonds, etc..--- would, it 
>>seems to me, be unchanged (i.e. not "automatically" adjusted). A separate 
>>action would have to take place, that of making good on some bonds or T-
>>bills due and NOT issuing more new ones to replace them. Better yet, the 
>>government would use the new revenue (the "surplus") to buy back its debt, 
>>even if it were doing so prematurely (before maturity). The analogy here 
>>would be to buying back one's shares if one is a firm. The value of the 
>>shares remaining (using the analogy---the relative exchange rate---the 
>>perceived value of the U.S. dollar) would RISE. I'm not sure this separate 
>>action would necessarily take place at all. 

>Not true.  You seem to think of the national debt as being simply the
>sum total of U.S. Treasury liabilities in the form of T-bills and
>T-notes.  The point of my post is that this is not a very good
>definition, since it ignores the fact that the government holds assets
>as well.  This is why I started by defining the debt as _net_
>government indebtedness.  If the government brings in more revenues
>(by confiscating cash, selling confiscated goods, making the IRS more
>efficient, etc.)  then the assets of the U.S. government rise.  Since

>    net indebtedness = liabilities to other parties - assets held

>you can decrease the debt by increasing assets held.  There is no
>requirement to call in T-bills in order for the national debt to
>shrink.

>In fact, some economists (not me!) claim that the real national debt
>is very small, since many official assets (such as buildings, land,
>roads, submarines, etc.) are not counted in the official statistics.

>I'm not sure I get your point about exchange rates.  I never tried to
>suggest that the particular mix of assets and liabilities in the
>government's portfolio has no effect on prices.  Quite the contrary.
>It certainly matters whether the Treasury finances a deficit by
>selling gold vs. selling T-bills, for example.

>>>The deficit is _by_ _definition_ the change in net government
>>>indebtedness. 

>>In a given year, right?

>In any given period.  The official fiscal year for the U.S. government
>runs from Oct. 1 to Sept. 30.  (Fiscal 1993 will start on Oct. 1,
>1992, for example.)

>>> Thus a government surplus occurs if and only if the
>>>deficit is paid down by exactly the same amount.

>>Same amount as what?

>Sorry about the confusion.  I used "deficit" where I should have used
>"debt" in this sentence.  The idea is that the size of the surplus in
>any given period must be exactly the same as the reduction in the debt
>in the same period.

>>>Looking at cash reserves vs. T-bills does not change the basic
>>>argument that surpluses are equivalent to reductions in the deficit.
>>>The U.S. Treasury holds some cash because it needs cash to buy things,

>>what does the Treasury (U.S. government) need to buy with CASH? I'd think  
>>that it, of all entities, would work almost exclusively by checks and 
>>electronic transfers.

>You are right. I was using the term "cash" in a somewhat generic
>fashion.  Most economists make essentially no distinction between
>"cash" as in "currency" and "cash" as in checking accounts or other
>demand deposits in banks.

>>Even though I was the one who made the original posting as a confused 
>>person, I think you're maybe making matters worse here. Aren't you mixing 
>>up "profit and loss" with "assets and liabilities"?  Treasury reserves, as 

>How do you define "profit" or "loss" for the U.S. government?  For
>example, when the government builds a new highway, or pays out a
>welfare check, are these to be considered "losses?"  If the Internal
>Revenue Service brings in more money than it spends, is this a
>"profit".  I don't think these terms have much meaning when refering
>to government.

>I suppose that you could define the net profit of the U.S. government
>in any given fiscal year to be revenues received - expenditures (which
>we normally call "net cash flow").  This would just be the same as the
>budget surplus.

>>I understand it, whether gold, cash, foreign currency, Special Drawing 
>>Rights or whatever, are assets. They are part of the country's wealth. 
>>They have nothing (necessarily) to do with any current year transactions. 
>>It seems to me you could pay down the debt by "selling assets", but that 
>>does not affect the deficit.

>You are right that selling assets does not by itself affect the
>deficit.  However, selling assets does not affect the debt either.  It
>merely exchanges one kind of asset for another.  (The money received
>in payment is also an asset.) 
***********************************************************************
Ah HAAA!!  This was the key piece I wasn't getting!. Thanks for all the 
clarifications. I may use you again...8=)

Reid
************************************************************************

 On the other hand, if the government
>brings in more money than it spends through the "current year
>transactions" then the difference goes on deposit somewhere, is used
>to purchase a real asset, or is used to retire old debt.  In each
>case, net indebtedness falls.  Thus current year transactions are
>intimately linked to total net indebtedness.  The link to individual
>government assets (such as gold, etc.) is much weaker, since an
>increase in holdings of one asset may be offset by a decrease in
>holdings of another asset without any change in net indebtedness
>taking place.

>>Does it require Congressional approval even if it's the Treasury itself that 
>>brings in the windfall (rather than some other agency, not directly involved 
>>in the management of the country's money)?

>Yes.  The U.S. Treasury is not authorized to spend any funds, no matter
>what the source, without Congressional authorization.

>P.S. I tried replying by e-mail but it bounced.
>--
>T. Scott Thompson              email:  thompson@atlas.socsci.umn.edu
>Department of Economics        phone:  (612) 625-0119
>University of Minnesota        fax:    (612) 624-0209
Newsgroups: sci.econ