Bitcoin Magazine 3 Misconceptions About US Debt A version of this newsletter was originally published on lynalden.com. This newsletter issue analyzes three common misconceptions about the US federal debt and deficits. The ongoing nature of the deficits has several investment implications, but along the way it’s important to not get distracted by things that don’t add up. Fiscal Debt and Deficits 101 Before I jump into the misconceptions, it’s useful to quickly remind what the debt and deficits are, specifically. -In most years, the US federal government spends more than it receives in tax revenue. That difference is the annual deficit. We can see the deficit over time here, both in nominal terms and as a percentage of GDP: -As the US federal government runs deficits over years and decades, they add up to the total outstanding debt. That’s the stock of debt that the US federal government owes to lenders, which they pay interest on. When some of their bonds mature, they issue new ones to help pay back the old ones. A couple of weeks ago at a conference in Las Vegas, I gave a keynote talk about the US fiscal debt situation (available here), which serves as an easy 20-minute summary of the situation. My view for a while, as outlined in that talk and for years now, is that US fiscal deficits will be quite large for the foreseeable future. I’ve discussed that in numerous pieces and formats, but my September 2024 newsletter was the most detailed breakdown of it, along with Sam Callahan’s January 2025 report. Misconception 1) We Owe it to Ourselves A common phrase, popularized by Paul Krugman and others, is that “we owe the debt to ourselves”. Proponents of Modern Monetary Theory often make similar statements, e.g. saying that the cumulative debt outstanding is mainly just a tally of surpluses that have been given to the private sector. The unsaid implications from this is that the debt isn’t a big deal. Another potential implication is that maybe we could selectively default on portions of it, since it’s just “owed to ourselves”. Let’s examine those two parts separately. Who It’s Owed To The federal government owes money to US Treasury security holders. That includes entities in foreign countries, includes US institutions, and includes US individuals. And of course, those entities have specific amounts of treasuries. The government of Japan, for example, is owed a lot more dollars than me, even though we both own treasuries. If you, me, and eight other people go out to dinner in a big 10-person group, we owe a bill at the end. If we all ate different amounts of food, then we likely don’t have the same liabilities here. The cost generally has to be split in fair ways. Now in practice for that dinner example, it’s not a big deal because dinner groups are usually friendly with each other, and people are willing to graciously cover others in that group. 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Three Common Myths Regarding US National Debt
