United States public debt
The
United States public debt, commonly called the
national debt,
gross federal debt or
U.S. government debt, is the amount of money owed by the
United States federal government to creditors who hold
US Debt Instruments. This does not include the money owed by
states,
corporations, or individuals, nor does it include the money owed to Social Security beneficiaries in the future. As of August 6th, 2006, the total U.S.
government debt was $8.45
trillion.
The CIA's World Factbook estimated the U.S's 2005
GDP at $12.49 trillion, ranking it at the time as the 35th most indebted country in the world by percentage of GDP at 64.7% of GDP. By comparison, the Factbook's 2005 estimate of
China's external debt was $242 billion with an estimated 2005 GDP of $2.225 trillion, or 10.9% of GDP. Of the 206 listed countries in the Factbook the combined debt was $38.54 trillion. Of that world wide debt, the US owes approximately 22%.
The
Bureau of the Public Debt, a division of the
United States Treasury Department, calculates the amount of money owed by the national government on a daily basis. [[Image:National_debt_as_a_%_of_gdp.jpg|thumb|right|500px|The history of the United States national debt, relative to gross domestic product, since 1900.]]
The Bureau of the Public Debt divides the national debt into two main categories: debt held by the public, and intragovernmental holdings. Intragovernmental debt includes money for government
trust funds, such as pension plans and the debt for
social security, which is about $1.7 trillion as of May 2005. Overall, intragovernmental holdings account for over $3.1 trillion of the total debt at this time.
The remaining $4.6 trillion or so has been purchased by the public, including foreign entities. This largely comes from the issuance of
U.S. Treasury securities. Nearly half ($2.2 trillion) is composed of Treasury notes (aka T-notes), while T-bills and T-bonds (including savings bonds) cover most of the remaining public portion of the debt. Bonds sold for
infrastructure projects are also part of the national debt.
It is common for individual Americans and businesses to buy bonds and other securities, though much of the debt is now held overseas. At the end of 2004, foreign holdings of Treasury debt were $1.886 trillion, which was 44% of the total debt held by the public. Foreign central banks owned 64% of the Federal debt held by foreign residents; private investors owned nearly all the rest (figures are from the Analytical Perspectives of the 2006 U.S. Budget, page 257).
The country holding by far the most debt is Japan which held $639 billion at the end of April 2006. In recent years the
People's Republic of China has also become a major holder of Treasury debt, holding $323.5 billion at that time.
The Bureau of the Public Debt keeps track of money owed by the U.S. government on a daily basis, also issuing monthly and yearly reports. While the numbers provided by the bureau are the most-commonly used, some
economists prefer to use other methods and include additional debts.
Tracking current levels of debt is a complex but rather straightforward process. Making future projections is much more difficult for a number of reasons. For example, the Bush Administration projected that there would be a $1.288 trillion surplus from 2001 through 2004 in the
2002 U.S. Budget. In the
2005 Mid-Session Review, however, this had changed to a projected deficit of $850 billion, a swing of $2.138 trillion. Table 7 in this latter document states that 49% of this swing was due to "economic and technical reestimates", 29% was due to "tax relief", and the remaining 22% was due to "war, homeland, and other enacted legislation". Hence, three reasons for the inaccuracy of future projections are changes in conditions (as with the unexpected recession), changes in policy (as in the tax cuts and additional spending), and the inherent inaccuracies of predicting the future.
In addition, projections between different groups will sometimes differ because they make different assumptions. For example, an
August 2003 CBO document projected a $1.4 trillion deficit from 2004 through 2013. However, a
joint analysis put out by the Center on Budget and Policy Priorities, the Committee for Economic Development, and the Concord Coalition a month later stated that "In projecting deficits, CBO follows mechanical 'baseline' rules that do not allow it to account for the costs of any prospective tax or entitlement legislation, no matter how likely the enactment of such legislation may be". The analysis added in a proposed tax cut extension, AMT relief, prescription drug plan, and increases in defense, homeland security, international, and domestic spending. This raised the projected deficit from $1.4 trillion to $5.0 trillion. Hence, the assumptions on which the projections are based are also very important.
Despite the drawbacks of making future projections, however, a responsible government must arguably make long-run projections so it can prepare the country for future possibilities. The federal government does provide long-run budget projection in Table 13-2 on page 209 of the
Analytical Perspectives of the 2006 U.S. Budget. It projects that the federal debt held by the public will reach 249 percent of GDP in 2075. This is more than double the maximum reached during World War II and nearly four times its current level. Most of this increase is due to projected increases in entitlement spending and the resulting interest on the debt. It is worth noting that this is a projection, not a prediction. This projection assumes normal economic conditions and that government policies will follow current law. The stress of a quadrupling of the debt would likely cause one or both of these items to change.
As is obvious, when the total amount of money collected by US Government is exceeded by the amount of money it spends, the amount of debt is increased. This debt typically takes the form of new issues of government bonds which are sold on the open market. However, the debt can also be
monitized by which the US Government essentially sells the debt to itself (technically the Federal Reserve). Monetized debt expands the money supply because these government securities become bank reserves held by the
Federal Reserve that, under the scheme of
Fractional Reserve Banking becomes an asset that the bank can then lend against. The ultimate consequence of monitizing US debt is that it expands the
money supply which, according to the
Austrian School of economics, results in inflation. In this way,
inflation can be thought of as a "hidden tax" used to make up the shortfalls when the government can't balance it's books. As
Murray Rothbard points out in his book. "The Case Against the Fed" virtually all money in circulation today is a result of monetized government debt. As of April 2006, the ratio of government debt to money supply (M3 is at $10.012 Trillion as of April 2006) [
1] can be estimated at $1:$1.28; that is the M3 money supply expands by roughly $1.25 for every dollar of new government debt.
During those increasingly rare occassion when the US Government actually has a surplus, it must by law pay down its outstanding debt. It does this by paying back the principal of the outstanding bonds redeemed for payment while not issuing new bonds. The US Government could also purchase its own outstanding securities on the open market if it was searching for a way to use a surplus to reduce outstanding debt that was not due for redemption in a given year.
Because the money supply expands each time US Government debt is monitized, the natural result is an inflationary boom caused by the expansion of new credit from the additional "reserves" that the Federal Reserve now has which will then result in a deflationary bust to complete the
business cycle.
Since the
money supply contracts when the US Government pays down its debt, the unintended result of a government surplus is a deflationary recession as the money supply contracts as the government bonds that were functioning as bank reserves get paid off. The government can avoid this unfortunate consequence by instead focusing on expanding its GDP and thereby "reducing" percentage of GDP that debt represents. The hope is that the
deficit spending that increases the debt will increase GDP by a greater amount, and thus â€" in relative terms, at least â€" the debt would decrease. This worked to great effect in the U.S. between the end of
World War II and
1980, even though the debt showed a net increase in absolute value over the same period.
Alan Greenspan, a long time advocate of reducing the U.S. national annual budget deficit, argued against reducing the deficit too quickly in his remarks before the Bond Market Association on
April 27,
2001 when he said:
Still, the lack of Treasury securities might be a bigger problem for international investors than for domestic investors, because they may be less well informed about U.S. corporations. As a result, international investorsmay have a strong preference for U.S. government instruments. In such circumstances, foreign investors may reduce, on net, their holdings of overall dollar assets as Treasury securities are paid down. By itself, such diminution in the demand for U.S. dollar assets would tend to raise interest rates for U.S. borrowers and, conceivably, put downward pressure on the dollar's exchange rate. Source: [2]
Those who would argue that an expansion of the money supply is necessary to expand the economy need to explain the collosal failure of Japan's Central Bank to do just that. In an attempt to follow
Keynesian economics and spend itself out of a recession, Japan's central bank engaged in no less than 10 stimulus programs over the 1990s that totalled over 100 trillion yen. [
3] This did nothing to cure Japan's recession and has instead left the nation with a national debt that is 158% of GDP. [https://www.cia.gov/cia/publications/factbook/geos/ja.html#Econ]
In regards to the Greenspan quote, it should be remembered that Greenspan said in that same speech that
"I have long argued that paying down the national debt is beneficial for the economy: It keeps interest rates lower than they otherwise would be and frees savings to finance increases in the capital stock, thereby boosting productivity and real incomes."
That is to say, when the Government borrows money it consumes the amount of savings there are to lend. If the government were to borrow less, that money would be freed to work in the private sector and would lower interest rates overall. Lastly, raising interest rates is one of the traditional ways that the U.S. Federal Reserve uses to combat inflation (which can be brought on by government debt), but a large national debt figure makes it difficult to do so because it raises the interest paid in servicing that debt.
The relationship between risk and interest
Any time money is loaned to a debtor, there is a chance it won't be repaid. These are the risks that all
commercial lenders face, even lenders to nations. Lenders calculate the risk of nonpayment versus the return on the money they lend. If the U.S. is viewed as a
credit risk then it will have trouble borrowing money.
The U.S. issues
government bonds. The bonds are then bought by investors. If the U.S. can't entice investors to buy its bonds, it will have to increase the interest rate of the bonds (strictly speaking, the bonds are issued at auction, so the U.S. does not make a conscious decision to raise the interest rates, but this is the effect of unwillingness by large investors to buy bonds at lower rates). On
December 13th, the U.S. 30 year treasury note had a rate of 5.375%. In general, the higher bond rate the greater the
credit risk of the issuer, in this case the United States.
Who may hold U.S. debt instruments
National debt can be held by the citizens of the country, or by institutions outside of the country. However, unlike the debt of a corporation, a holder of the debts owed by governments can't force the government to pay the debt. This is due to national sovereignty.
With smaller nations, the modern financial system overseen by
International Monetary Fund and
World Bank, will however most likely enforce measures that resemble the
Chapter 11 bankruptcy proceedings of an ill-faring private company. The nation in default makes periodic repayments.
Can the U.S. actually go bankrupt?
Recently, Professor Laurence Kotlikoff (working for the
Federal Reserve Bank of St Louis), argued the United States is heading for
bankruptcy. His paper's extraordinary claim contends that the ballooning annual budget deficits (in combination with expected annual inceases in
Social Security and
Medicare benefits) could send the U.S. Government into financial
insolvency. According to his analysis, "the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds." [
4] Kotlikoff's analysis assumes the U.S. would rather go into bankruptcy than raise taxes or cut government benefit programs to prevent bankruptcy.
U.S. Treasury statistics indicate that, at the end of 2004, foreigners held 44% of federal debt held by the public. [
5] About 64% of that 44% was held by the
central banks of other countries. A large portion was held by the central banks of
Japan and
China, although, most was held by members of the EU. This exposes the United States to potential financial or political
risk that either bank will stop buying Treasury securities or start selling them heavily. In fact, the debt held by Japan reached a maximum in August of 2004 and has fallen nearly 3% since then. [
6]
On the 3rd of August 2006, Italy's central bank announced that it would sell off a large portion of its dollar holdings (including US Treasury bonds) and instead shift to British Pound Sterling. The reason Italy gave for doing out of fear of an "expected slide in the dollar." Russia, Sweden, and the United Arab Emirates had announced similar shifts out of the dollar into other curriences and gold earlier and cited the United States's "twin deficits" (i.e. the US trade deficit as well as it's budget deficit) as the reason for the expected fall in the dollar's value.[
7]
The United States has had public debt since its inception. Debts incurred during the
American Revolutionary War and under the
Articles of Confederation led to the first yearly reported value of $75,463,476.52 on
January 1,
1791. Over the following 45 years, the debt grew and then contracted to nearly zero in late
1834. On January 1,
1835, the national debt was only $33,733.05, but it quickly grew into the millions again [
8] [
9].
The first dramatic growth spurt of the debt occurred because of the
Civil War. The debt was just $65 million dollars in
1860, but passed $1 billion in
1863 and had reached $2.7 billion following the war. The debt slowly fluctuated for the rest of the century, finally growing steadily in the
1910s and early
1920s to roughly $22 billion as the country paid for involvement in
World War I [
10].
The buildup and involvement in
World War II brought the debt up another order of magnitude from $43 billion in
1940 to $260 billion following the war. After this period, the debt's growth closely matched the rate of
inflation until the
1980s, when it again began to skyrocket [
11] [
12]:
Year to
30th
September¦¦U.S. Govt Debt
US$ billions |
|---|
| 1910 | 2.6 |
| 1920 | 25.9 |
| 1930 | 16.2 |
| 1940 | 43.0 |
| 1950 | 257.4 |
| 1960 | 290.2 |
|1970| 389.2 |
|1980| 930.2 |
|1990| 3,233.3 |
|2000| 5,674.2 |
|2005| 7,932.7 |
The public debt briefly started to go down in
2000 when the country had a substantial budget surplus, but began growing again after budget deficits grew large beginning in 2002.
At any given time (at least in recent decades), there is a
debt ceiling in effect. If the debt grows to this ceiling level, many branches of government are shut down or only provide extremely limited service. However, the ceiling is routinely raised by passage of new laws by the
United States Congress every year or so. The most recent example of this occurred in March of 2006, when the
U.S. Congress agreed to raise the National Debt Ceiling to just under
$9.000 trillion.
Viewed alternately as a percentage of the
GDP, the national debt rose sharply during
World War II, reaching about 122% of GDP in 1946. As soon as the conflict ended, the debt began declining, reaching a postwar low of 32.6% of GDP in 1981. The debt then started rising again and peaked at 67.3% of GDP in 1996. It then dropped to 57.4% of GDP by 2001. It should be noted that the debt of United States is on par with the debt of other developed countries, such as
Germany and
France. In any case, all of the above debt figures can be found in Historical Table 7.1 of the 2006 U.S. Budget. [
13]
See also
National debt by U.S. presidential termsIn several cities around the United States, but most famously at
Times Square in
New York City, there are national debt clocksâ€"electronic billboards which supposedly show the amount of money owed by the government. Some also attempt to show the money owed per capita or per family. There is a significant level of fluctuation day-to-day, both up and down, so any "clocks" must be continually re-set with proper values.
The most famous debt clock located in
Times Square in
New York City was created by eccentric estate mogul
Seymour Durst. The clock is now owned by his son
Douglas Durst. Durst's clock was deactivated in 2000 when the debt began to decrease. However, following large increases, the clock was reactivated a few years later, though had to be moved to make way for
One Bryant Park. (Interestingly, some "man on the street" interviews showed that some people felt that the sign's deactivation meant that the debt had been eliminated, though it remained at roughly $5 trillion.) According to Durst the National debt is now increasing at such a rate that his clock will be obsolete (for lack of digits) when the debt reaches the $10 trillion mark, expected in the next two years.
There is an online debt clock at:
brilligA free debt clock for web sites is available at:
zFacts* U.S. public debt on 30 December 2005 was $8,170 billion (or $8.1 trillion) [
14], which is nearly six times the amount of United States currency in circulation (M1 Money Supply), estimated to be $1,372 billion [
15].
* U.S.
official gold reserves are worth $160 billion,
foreign exchange reserves $63 billion and the
Strategic Petroleum Reserve $33 billion.
* The debt equates to $27,434 per head of the U.S.
population, or $58,390 per head of the U.S. working population [
16].
* In 2003 $318 billion was spent on
interest payments servicing the debt, out of a total
tax revenue of $1,952 billion [
17].
* Total U.S. household debt, including
mortgage and
consumer debt, was $11,400 billion in 2005. By comparison, total U.S. household assets, including
real estate, equipment, and financial instruments such as
mutual funds, was $62,500 billion in 2005. [
18]
* Total
third world debt was estimated to be $1,300 billion in 1990 [
19].
* The U.S.
balance of trade deficit in goods and services was $725.8 billion in 2005 [
20].
* The global
market capitalization for all
stock markets was $43,600 billion (or $43.6 trillion) in March 2006 [
21].
The figures are only including treasuries. There is also agency debt owned by foreign holders not covered in these figures. Encourage editors to research and add.
*
Balance of payments*
Budget deficit*
Deficit*
Inflation*
Economy of the United States - discusses U.S. national debt and economic context
*
Fiat currency*
Fractional-reserve banking*
Global debt - the "big picture"
*
Gold as an investment*
History of the U.S. public debt - a table containing historical debt data
*
List of countries and territories by current account balance*
List of public debt - list of the public debt for many nations, as a percentage of the GDP
*
Public debt - a general discussion of the topic
*
Bureau of the Public Debt**
The debt to the penny and who holds it**
Monthly statements on the debt**
Average Interest Rates on Treasury Securities (October 2004)**
Total dollar amount compared to past months and years*U.S. Gross
National Debt Graph with Presidential terms marked.
*
U.S. National Debt Clock*
US Debt News via HavenWorks.com News
*
Read Congressional Research Service (CRS) Reports regarding the US Federal Debt*
Definitions and History of U.S. Government Debt The United States Public Debt, 1861 to 1975
*
Just the dollar amount*
Federal Budget*
Congressional Research Service (CRS) Reports regarding the U.S. budget deficit*
Congress Raises National Debt Ceiling to Almost $9 Trillion*
The U.S. 'could be going bankrupt' according to U.S. Federal Reserve Bank of St. Louis officialFrom the CIA World Factbook:
*[https://www.cia.gov/cia/publications/factbook/rankorder/2079rank.html Rank Order of Countries Debt]
*[https://www.cia.gov/cia/publications/factbook/rankorder/2001rank.html Rank Order of Countries GDP (purchasing power parity)]
*[https://www.cia.gov/cia/publications/factbook/rankorder/2186rank.html Rank Order of Countries Public debt (% of GDP)]
* Frances X. Cavanaugh;
The Truth About the National Debt: Five Myths and One Reality (1996)
*Murray Rothbard.
The Case Against the Fed (1994)
* E. Hargreaves.
The National Debt (1966)
* James Macdonald,
A Free Nation Deep in Debt: The Financial Roots of Democracy, Princeton University Press, 2006. 564 pp. ISBN 0-691-12632-1. Argues that democracies eventually defeat autocracies because "countries with representative institutions are able to borrow more cheaply than those with autocratic governments" (p. 4). Bond markets also strengthen democracies internally by giving citizens some of the proverbial power of the purse and by aligning their interests with those of their governments.
* Taylor, George Rogers, Ed.
Hamilton and the National Debt. (1950)
