Why can’t a government forgive it’s own internal debt?
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The government owes money to the people who loaned it money, likely your retirement account. If the government “forgave” that debt (it’s called a default in the banking world). You would lose money, as would all the other people, and that would make you super mad that the government stole your money. Countries have done that several times, and it makes their people super mad every time.
Because that would mean robbing everybody who lent the government money. Much of the government’s debt is in the form of Treasury Bonds where someone lends the government money and expects a return. It’s actually a good investment so long as the government is stable.
But if the government just made those bonds disappear then nobody would lend the government money ever again.
That’s basically printing money. It would devalue your currency and cause hyper inflation.
Like if you had $10 of value in the economy, represented by $10 in currency floating around, then you have a stable economy. If you take that economy and put in $90 more w/o increasing the value of your economy, then you aren’t increasing your value by 10x, you are reducing the value of each dollar by 1/10.
The same would happen if the government forgives its own debt. If the government is -$10 in debt to itself, that negative value is accounted for in the economy. If we were to just wave our magic wand and make that -$10 not exist anymore, it doesn’t add value to the economy, it just reduces the value of the currency in the economy by a proportional amount.
Why can’t I walk into Wells Fargo and tell them my mortgage and car loan is forgiven?
Because the FED makes 6% interest managing the debt?
It depends what you mean by “internal” debt.
As a lot of people are saying, a huge amount of US debt is in the form of bonds or something like them that are held by people as part of their savings and retirement plans (sometimes indirectly but the idea is the same).
But some of the internal debt is between parts of the government. We don’t want to forgive those debts either because they represent a promise to move money around to the particular places it will be needed in the future, like the Social Security Trust Fund.
Debt forgiveness would mean the government tells those who owe it money that they don’t have to pay it back. So you’d be talking only about situations where one part of the government owed money to another part (like the Social Security Administration holding T-bills). Sure, the SSA could tell Treasury “forget it, we’ll rip up the T-bills and you don’t have to pay them out” but then where would the SSA get funds to pay SS benefits?
Do you mean “Why can’t the government tell American citizens and organizations that are owed money by the government that they’re not going to get paid?” This is a default and would be catastrophic both for those owed money and for the ability of the US to borrow in the future. Just a bad idea, and politically it seems Treasury would be prioritizing non-US citizens and organizations who would presumably still get paid.
The government owes that debt to investors. It’s mostly owned by institutional investors like mutual funds, retirement pensions, university endowments… so what happens to peoples’ investments, retirement, higher education, etc. if they suddenly lose trillions of dollars? And if the government ever needs to borrow money again in the future? Who is going to trust them…
I mean technically they could but then no one would ever lend them money again or would do it at such high interest rates that it would make no sense to borrow.
So, “internal debt” is things like “The Federal Reserve holds a bunch of US Government Bonds” or “The government owes a lot of money to the social security trust fund”?
And, in answer to that question, it can forgive that own debt. But, there’s no reason to do so — it’s the left hand owes money to the right hand. So, at some level, it’s just accounting.
But, at least for the Federal Reserve, that would cause problems: One of the tools that the Federal Reserve uses to control the money supply, interest rates and inflation is buying and selling government bonds. If, for example, the Fed wanted to increase the money supply, it would buy bonds from the rest of the federal government and effectively print money in return. If it wanted to decrease the money supply, it would sell those bonds, sucking all that cash back in. If suddenly all those bonds were “forgiven,” it would no longer have something to sell.
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