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. As of April 18th, 2006, the total U.S. government debt was $8.4 trillion.

The World Factbook estimated the US's 2005 GDP at $12.41 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 debt was $242 billion with an estimated 2005 GDP of $8.182 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%.

A division of the United States Treasury Department known as the Bureau of the Public Debt calculates the amount of money owed by the national government on a daily basis.

Image:National debt as a % of gdp.jpg

Contents

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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 billion, 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 $1.2 trillion at the end of March 2005. 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.

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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.

There is a question among economists in the United States as to whether the debt held by the 50 individual states should be counted as part of the national debt. Some economists include sums related to bills the government must pay for goods and services it has contracted for in the current fiscal year.

The debt is usually viewed as an absolute number, but it can also be measured as a percentage of the gross domestic product (GDP). By this measure, the United States is merely an average nation. The economy of Japan could be more worrisome, as the country has a debt of about 165% of its GDP.

Another method is to measure by the amount payable in any given year. For example, much of the debt is payable in 10, 20, or 30 years — much like a mortgage. There is debate about how such debt should be represented. Sometimes, alternative measures are used by individuals to support their own political arguments.

Estimated debts for the united states in the future are expected to double, even triple.

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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% 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.

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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. While part of the Social Security Trust Fund comprises a significant portion of the national debt (about $1.7 trillion as of May 2005), it can never be totally paid off.

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 increasing revenue through increased taxes and other fees, such as import tariffs. Over 47% of the personal income tax (but not of total tax revenue) collected in 2003 was spent on paying interest on the debt. 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.

It is also possible to repay the debt by simply printing more money. While conventional wisdom maintains that this is destructive to an economy, and results in inflation, or hyperinflation, Roger Mitchell argues that there is little or no historical evidence that this occurs Soure: [Mitchell, Rodger Malcolm 2004: Free Money]. Others indicate that there are excellent examples from Economic history where this has occurred, for example: Germany in 1923, Argentina in the 1980's, and Zimbabwe in the 1980's.

The debt could also be paid by cutting spending on government programs and redirecting those dollars toward retiring significant portions of the National Debt.

Inflation during the Carter administration -- a period of relatively low debt increase -- rose from 5.75% in 1976 to 15.89% at the start of 1982. Inflation during the Reagan administration -- a period of massive debt increase -- fell to as low as 1.87% in 1989.

During the Carter and Reagan administrations debt as a % of GDP was fairly low. It is thought by some that debt becomes inflationary only when it is above about 45% of GDP. Because this ratio has happened only once in the past 10 years -- at the end of WWII -- and inflation has happened several times, it is difficult to substantiate this hypothesis.

The belief that debt should be reduced is responsible for intermittent periods of federal surplus. There are those who argue 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:

In 1817-21 the federal debt was reduced 29% A depression began in 1819

In 1823-36 the federal debt was reduced 99.7% A depression began in 1837

In 1852-56 the federal debt was reduced 59% A depression began in 1857

In 1867-73 the federal debt was reduced 27% A depression began in 1873

In 1880-93 the federal debt was reduced 57% A depression began in 1893

In 1920-30 the federal debt was reduced 36% The “Great Depression” began in 1929

In 1998-2000 federal debt growth slowed to 1.4% annually (President Clinton’s surplus). A recession began in 2001. Then, President Bush cut taxes and debt growth rose.

The fear of debt relates to the fear of inflation and hyper-inflation, which many believe result from excessive printing of money. Source: [1]

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Replies to arguments against paying down the debt

The main 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." This statement has some truth to it, but is more a consequence of the cause and effect relationship that level of US National Debt has on the money supply. As discussed in that section, fractional reserve banking adds to the money supply by lending "either the whole sum or some fraction of (the bank's reserves) can immediately be lent out. The borrower can buy an asset and the seller of that asset can place the proceeds in another money supply constituent deposit. The money supply has just increased, because both the original and secondary deposits count as part of the money supply. That money can therefore continue to increase many times over."

If the money supply multiplicatively expands when banks lend money, then it is only logical that the money supply would have greatly expanded each time the US borrowed money and contracted greatly each time the US paid its debt down. The expansions in money supply would have created boom times and the contractions would have created busts. Source: [2]

That a "boom and bust" cycle was strongly related to how the US managed its debt would only be expected and is not in and of itself an argument against paying down the national debt but merely do pay close attention to its effect on the money supply by making a gradual decrease because the money supply declines when the national debt declines, unless it is replaced by sufficient consumer debt, local government debt and/or business debt.

Alan Greenspan, a long time advocate of reducing the US National deficit, essentially argued against reducing the deficit too quickly in his remarks before the Bond Market Association on April 27th, 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. However, the evidence of the past year and a half gives little support to this notion: Foreign private investors, on net, have run off their holdings of U.S. Treasury securities, while they have built up their holdings of private dollar assets by an even larger amount, and the foreign exchange value of the dollar has appreciated. Source: [3]

Again, 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 section and would lower interest rates overall.

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Risks

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 has 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.

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.

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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. [4] 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. 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. [5] However, even if both banks cease to buy U.S. treasuries, the U.S. could find new buyers by raising the interest rates they pay.

Some who study geopolitics and creditary economics are greatly concerned by this.Template:Fact With strong financial ties, others believe that there is an incentive for the U.S. to be protective of the respective nations.

For instance, military strategist Thomas Barnett believes that the world's nations are essentially paying the United States to be the world's policeman. This is in the interest of world's nations as long as the world without stable U.S. political and military power is less desirable than one stabilized by the single superpower. There is a risk that military confrontations could occur between the U.S. and its debtors if the country cannot repay the debts, though most analysts believe that any confrontations would be entirely economic. The likelihood of any military confrontations directed against the U.S. is diminished by the fact that the U.S. military power is overwhelming.

A risk of even greater magnitude is the possibility that OPEC will begin to price petroleum in Euros, as Saddam Hussein began to do in 1998, until this decision was reversed by the 2003 invasion of Iraq. According to economist Henry C.K. Liu, the "float" achieved by the necessity of all industrial nations needing to keep a U.S. dollar reserve to hedge against rising prices of oil, is also numbered in trillions of dollars. A shift to a different reserve currency that would float as well, would send those saved dollars back to U.S. shores to be redeemed for goods. This would induce inflation, a rise in interest rates, and increases in bankruptcy as obligations and assets are called in, to increase flow of cash or goods to the offshore buyers redeeming dollars.

The impact of this would likely be that U.S. bonds have to raise rates to appeal to investors in a thinner market, which would trigger inflation around the industrialized world, given the central position the U.S. holds in it. This would introduce the possibility of a round of hyper-inflation that could break the capacity of states to react. This would be a larger scale repeat of the George Soros attack on the British Pound Sterling that forced Britain out of the European Union fixed-rate exchange system.

Every dollar of increased U.S. public debt, every rise in interest rates, and every shift in pricing of a major industrial commodity, decreases the cushion available, and increases the potential that the U.S. might default on its own bonds. This would likely mean that U.S. dollar savings would be worth drastically less. Far-fetched as this seems, it happened in Argentina when International Monetary Fund-required measures forced an economic austerity regime that was widely blamed by economists as leading to a meltdown in its currency.

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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 [6] [7].

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 [8].

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 [9] [10]:

Year to
30th
September		U.S. Govt Debt
US$ billions
19102.6
192025.9
193016.2
194043.0
1950257.4
1960290.2
1970389.2
1980930.2
19903,233.3
20005,674.2
20057,932.7

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 but began rising again after congress and the George W. Bush administration implemented several tax cuts. In 2004, the debt reached 63.7% of GDP and is projected to continue rising, reaching 70% of GDP in 2010. It should be noted that the debt of United States on par with what it is in many 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. [11]

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Modern presidential records

Statistics here are given in both raw numbers and in relation to the debt ratio, an expression of the federal debt as a percentage of GDP. Due to World War II, the national debt spiked to a historical peak of 121.2% of GDP in 1946.

National Debt Summary
President Party Years Increase in Debt Annual Increase Debt as a % of GDP
Jimmy Carter D 4 49.1% 10.5% 33.3%
Ronald Reagan R 8 188.2% 14.1% 52.6%
George H. W. Bush R 4 46.2% 9.9% 65.9%
Bill Clinton D 8 13.7% 1.6% 57.7%
George W. Bush to 2004 R 4 26.0% 5.9% 64.8%

Source for percentage debt growth: Congressional Budget Office

Formula used for percentage debt growth: (outgoing election year debt - incoming election year debt) / incoming election year debt

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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 obsolete (for lack of digits) when the debt reaches the $10 trillion mark, expected in the next two years. [12]

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

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Statistics and comparables

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See also

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External links

From the CIA World Factbook:

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References

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