Is the National Debt Just Money We Owe Ourselves?

You may have heard the argument that we shouldn’t worry about the national debt because we “owe it to ourselves.” Today, I want to break down what that actually means and why it’s not as reassuring as it sounds.

Let’s start with the facts. As of now, the US national debt is over $36 trillion and looks very likely to continue growing for the foreseeable future. Of that, about 75% is held by domestic entities-US individuals, mutual funds, pension funds, banks, the Federal Reserve, and even government trust funds like Social Security. The remaining 25% is held by foreign investors, including Japan, China, and the UK.

So yes, most of our debt is technically owed to ourselves. That’s where the phrase comes from. When the government pays interest on this debt, it’s basically moving money from taxpayers to bondholders — many of whom are also US citizens.

But that doesn’t mean the debt doesn’t matter.

In fact, one could argue it’s more troubling that we owe it to ourselves. Why? Because not paying back domestic debt would mean harming Americans, including retirees, directly or through effects on institutions counting on those payments. Think about the Social Security Trust Fund: if the government doesn’t make good on the bonds it holds, that would directly impact its ability to pay future benefits.

Of course, defaulting on foreign debt isn’t a good idea either. Any default — domestic or foreign — would shatter confidence in US creditworthiness and make future borrowing more expensive.

The real point is this: being our own lender doesn’t make the debt go away. It just changes who bears the burden. Interest payments still have to come from somewhere — usually taxes — and the larger the debt, the more strain it puts on the federal budget.

So no, we shouldn’t take too much comfort in “owing it to ourselves.”

Originally published at https://mytwocentsandcounting.substack.com.