That's a concept that we need to keep in mind as we think about the federal government's debt. The federal government debt is much in the news, but the federal government also has what is known as "agency debt" that isn't talked about as being part of the picture. But it is, as Andrew Pollock at AEI shows:
Over the last four decades, the U.S. government has engaged in a financial experiment, or adventure, of exploding agency debt relative to Treasury securities.
The huge debt of Fannie Mae, Freddie Mac, other government-sponsored enterprises, and other off-budget government agencies (“agency debt”) fully relies on the credit of the United States. This means it by definition exposes the taxpayers to losses, but it is not accounted for as government debt. As the Federal Reserve carefully notes in its “Flow of Funds” report, non-budget agency and GSE debt is not “considered officially to be part of the total debt of the federal government.”
Not “considered officially,” as they say—but what is it really? It puts the federal budget at risk, subjecting it to uncertainty of defaults. It has proven its ability to generate huge losses for the taxpayers. In other words, it is really, if not “officially,” government debt.
The vast majority of agency debt goes to subsidized housing finance though Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the FHA/Ginnie Mae combination. It represents off-balance sheet financing and hidden leverage for the government. Fannie and Freddie in particular have reasonably been characterized as “government SIVs,” (“structured investment vehicles”) which failed, just as did the SIVs of Citibank and other bailed out banks.
In 1970, Treasury debt held by the public (“Treasury debt”) was $290 billion. Agency debt was small by comparison: it totaled only $44 billion.
But by 2006, at the height of the housing bubble, while Treasury debt was up to $4.9 trillion, agency debt had inflated to $6.5 trillion. Treasury debt had increased 17 times during these years, but agency debt had multiplied 148 times!
At the end of 2010, Treasury debt was $9.4 trillion, and agency debt was $7.5 trillion.As I said, I'm alarmed. Are you?
Then, of course, there's Kevin Williamson's view of the federal debt:
The debt numbers start to get really hairy when you add in liabilities under Social Security and Medicare — in other words, when you account for the present value of those future payments in the same way that businesses have to account for the obligations they incur. Start with the entitlements and those numbers get run-for-the-hills ugly in a hurry: a combined $106 trillion in liabilities for Social Security and Medicare, or more than five times the total federal, state, and local debt we’ve totaled up so far. In real terms, what that means is that we’d need $106 trillion in real, investable capital, earning 6 percent a year, on hand, today, to meet the obligations we have under those entitlement programs. For perspective, that’s about twice the total private net worth of the United States. (A little more, in fact.)Be afraid. Be very afraid.
Suffice it to say, we’re a bit short of that $106 trillion. In fact, we’re exactly $106 trillion short, since the total value of the Social Security “trust fund” is less than the value of the change you’ve got rattling around behind your couch cushions, its precise worth being: $0.00.