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United States public debt

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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 April 18th, 2006, the total U.S. government debt was $8.395724 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. 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.

Contents

Structure of the debt

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.

Calculating the debt

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.

Projecting the future debt

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.

Paying the debt and arguments against doing so

The publicly held debt of the U.S. government is simply repaid whenever securities are returned for payment. The debt cannot be paid right away, partially because many securities are issued for decades-long periods.

The most common method used today to "reduce" the debt is by growing the nation's GDP. The hope is that the deficit spending that increases the debt will increase GDP by a greater amount, and thus — in relative terms, at least — 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.

The debt could also be paid down by either reducing spending and/or by increasing revenue through increased taxes and other fees, such as tariffs. Additionally, if it were possible to avoid incurring new debt, current revenues could be used to pay off the bonds sold and the loans taken. By U.S. law, a budget surplus must be used to pay down what the government owes, though the nation continues to issue securities. The debt could also be paid by cutting spending on government programs and redirecting those dollars toward retiring significant portions of the National Debt.

There are dangers in paying off the debt in a radically short period of time, mainly the effect on the money supply. In our current system of fiat money and fractional reserve banking, a great deal of the money in circulation started as government debt. Rodger Malcolm Mitchell[link] says that a significant minority of all money in circulation came about because of government debt, with the majority attributed to personal, business and state and local government debts. Murray Rothbard argues that the vast majority of money came about because of government debt ($7.8 Trillion in April 2006).

In either case, one could argue that the ratio of government debt to money supply (M3 is at $10.012 Trillion as of April 2006) [link] 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.

According to Warren Mosler, Rodger Malcolm Mitchell and Randall Wray, reducing the federal debt not only is unnecessary, but would be harmful, whether the debt were reduced slowly or quickly, as that act would reduce the supply of money in United States economy.

Replies to arguments against paying down the debt

One argument given above for not paying down the debt is that "every major depression in American history began with a major reduction in the national debt, and that every major recovery coincided with a resumption of government spending and a general increase in the debt." There are counter-arguments to this view. For example, in an article titled [Balanced Budgets and Depressions], libertarian economist Lawrence W. Reed states:

Those who argue that balanced budgets caused the Great Depression (or in any way contributed to it) have two major problems to contend with: theory and empirical evidence.

For evidence, Reed points to the serious economic slowdown that the U.S. suffered at the start of the 1920s after several years of deficit spending due chiefly to the high costs of World War I. Many other factors were involved because of the readjustment of the national and world economies to a peacetime bases. Reed only looks at the balanced budget claiming it played a major role as the downturn "completely turned around and by the spring of 1923 we had a labor shortage". For more information about the possible relationship of wars and economic downturns (See the section "Replies to arguments against paying down the debt" on the [discussion page]).

Others contend that there is some truth to the "surpluses lead to depressions" argument but that it is more a consequence of the cause and effect relationship that level of U.S. National Debt has on the money supply. They say the money supply multiplicatively expands when banks loan money and contracts when the loan is paid off. Both sides are in agreement that expansions in money supply create boom times and that money supply contractions cause busts. Source: [link] Source: Murray Rothbard, "The Case Against the Fed".

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 investors--especially official ones--may 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: [link]

This is not an argument against reducing the national debt in the long run, but merely a warning against shocking the system by doing it too quickly. In that very same speech, Greenspan said 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 is 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, but a large national debt figure makes it difficult to do so because it raises the interest paid in servicing that debt.

Risks

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." [link] Kotlikoff's analysis assumes the U.S. would rather go into bankruptcy than raise taxes or cut government benefit programs to prevent bankruptcy.

Consequences of foreign ownership of U.S. debt

U.S. Treasury statistics indicate that, at the end of 2004, foreigners held 44% of federal debt held by the public. [link] 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. [link]

A brief history of the debt

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 [link] [link].

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 [link].

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 [link] [link]:

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. [link]

See also National debt by U.S. presidential terms

Debt clocks

In several cities around the United States, but most famously at Times Square in New York City, there are national debt clocks—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. [link]

There is an online debt clock at: [brillig] A free debt clock for web sites is available at: [zFacts]

Statistics and comparables

See also

External links

From the CIA World Factbook:

References

 

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