Our National Debt, What Does It Mean And Who Is Carrying It?

photorandy2023

1 year ago

I have written several postings related to Various topics including the military, Voting, the economy, religion and etc in America. A list of links have been provided at bottom of this article for your convenience. This article will, however address additional issues in these topics.

What is the national debt?

Key Takeaways

-The national debt is composed of distinct types of debt, similar to an individual whose debt may consist of a mortgage, car loan, and credit cards. The different types of debt include non-marketable or marketable securities and whether it is debt held by the public or debt held by the government itself (known as intragovernmental).

-The U.S. has carried debt since its inception. Debts incurred during the American Revolutionary War amounted to $75 million, primarily borrowed from domestic investors and the French Government for war materials.

-The national debt enables the federal government to pay for important programs and services for the American public.

The National Debt Explained

The national debt is the amount of money the federal government has borrowed to cover the outstanding balance of expenses incurred over time. In a given fiscal year (FY), when spending (ex. money for roadways) exceeds revenue (ex. money from federal income tax), a budget deficit results. To pay for this deficit, the federal government borrows money by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities (TIPS). The national debt is the accumulation of this borrowing along with associated interest owed to the investors who purchased these securities. As the federal government experiences reoccurring deficits, which is common, the national debt grows.

Simply put, the national debt is similar to a person using a credit card for purchases and not paying off the full balance each month. The cost of purchases exceeding the amount paid off represents a deficit, while accumulated deficits over time represents a person’s overall debt.

Funding Programs & Services

The federal government needs to borrow money to pay its bills when its ongoing spending activities and investments cannot be funded by federal revenues alone. Decreases in federal revenue are largely due to either a decrease in tax rates or individuals or corporations making less money. The national debt enables the federal government to pay for important programs and services even if it does not have funds immediately available, often due to a decrease in revenue. Decreases in federal revenue coupled with increased government spending further increases the deficit.

Consistent with the purpose of the federal government established by the U.S. Constitution, money is spent on programs and services to ensure the well-being of U.S. residents. The Constitution’s preamble states that the purpose of the federal government is “…to establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.” Uninterrupted funding of programs and services is critical to residents’ health, welfare, and security.

The Growing National Debt

The U.S. has carried debt since its inception. Debts incurred during the American Revolutionary War amounted to over $75 million by January 1, 1791. Over the next 45 years, the debt continued to grow until 1835 when it notably shrank due to the sale of federally-owned lands and cuts to the federal budget. Shortly thereafter, an economic depression caused the debt to again grow into the millions. The debt grew over 4,000% through the course of the American Civil War, increasing from $65 million in 1860 to $1 billion in 1863 and almost $3 billion shortly after the conclusion of the war in 1865. The debt grew steadily into the 20th century and was roughly $22 billion after the country financed its involvement in World War I.

Notable recent events triggering large spikes in the debt include the Afghanistan and Iraq Wars, the 2008 Great Recession, and the COVID-19 pandemic. From FY 2019 to FY 2021, spending increased by about 50%, largely due to the COVID-19 pandemic. Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt.

Comparing a country’s debt to its gross domestic product (GDP) reveals the country’s ability to pay down its debt. This ratio is considered a better indicator of a country’s fiscal situation than just the national debt number because it shows the burden of debt relative to the country’s total economic output and therefore its ability to repay it. The U.S. debt to GDP ratio surpassed 100% in 2013 when both debt and GDP were approximately 16.7 trillion.

Breaking Down the Debt

The national debt is composed of distinct types of debt, similar to an individual whose debt consists of a mortgage, car loan, and credit cards. The national debt can be broken down by whether it is non-marketable or marketable and whether it is debt held by the public or debt held by the government itself (known as intragovernmental). The national debt does not include debts carried by state and local governments, such as debt used to pay state-funded programs; nor does it include debts carried by individuals, such as personal credit card debt or mortgages.

The visual below comparing calendar year 2014 and 2024 displays the difference in growth between debt held by the public and intragovernmental debt. While both types of debt combine to make up the national debt, they have increased by different amounts in the past several years. One of the main causes of the jump in public debt can be attributed to increased funding of programs and services during the COVID-19 pandemic. Intragovernmental debt has not increased by quite as much since it is primarily composed of debt owed on agencies’ excess revenue invested with the Treasury. The revenue of the largest investor in Treasury securities, the Social Security Administration, has not increased significantly in recent years, resulting in this slower intragovernmental holding increase.

Maintaining the National Debt

The federal government is charged interest for the use of lenders’ money, in the same way that lenders charge an individual interest for a car loan or mortgage. How much the government pays in interest depends on the total national debt and the various securities’ interest rates.

The national debt has increased every year over the past ten years. Interest expenses during this period have remained fairly stable due to low interest rates and investors’ judgement that the U.S. Government has a very low risk of default. However, recent increases in interest rates and inflation are now resulting in an increase in interest expense.

The Debt Ceiling

The debt ceiling, or debt limit, is a restriction imposed by Congress on the amount of outstanding national debt that the federal government can have. The debt ceiling is the amount that the Treasury can borrow to pay the bills that have become due and pay for future investments. Once the debt ceiling is reached, the federal government cannot increase the amount of outstanding debt, losing the ability to pay bills and fund programs and services. However, the Treasury can use extraordinary measures authorized by Congress to temporarily suspend certain intragovernmental debt allowing it to borrow to fund programs or services for a limited amount of time after it has reached the ceiling.

Since the United States has never defaulted on its obligations, the scope of the negative repercussions related to a default are unknown but would likely have catastrophic repercussions in the United States and in markets across the globe.

Tracking the Debt

Created in 2012 and operating under the Department of the Treasury, the Bureau of the Fiscal Service manages all federal payments and collections and provides government-wide accounting and reporting services. A primary function of the Fiscal Service is to account for and report the national debt, as dictated by the U.S. Constitution, which states that “regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”

Dive Deeper into the Debt

For more information about the national debt, please explore more of Fiscal Data and check out the extensive resources listed below.

The most recent U.S. Government Financial Report
https://fiscaldata.treasury.gov/static-data/published-reports/frusg/FRUSG_2022.pdf

America’s Fiscal Future: Federal Debt
https://www.gao.gov/americas-fiscal-future/federal-debt

The Debt Ceiling: An Explainer
https://www.whitehouse.gov/cea/written-materials/2021/10/06/the-debt-ceiling-an-explainer/

Federal Borrowing and Debt
https://www.whitehouse.gov/wp-content/uploads/2021/05/ap_4_borrowing_fy22.pdf

Federal Net Interest Costs: A Primer
https://www.cbo.gov/publication/56910

Is the Federal Reserve Printing Money in Order to Buy Treasury Securities?
https://www.federalreserve.gov/faqs/money_12853.htm

Options for Reducing Deficit
https://www.cbo.gov/publication/56783

Treasury Bulletin
https://fiscal.treasury.gov/reports-statements/treasury-bulletin/

USAspending
https://www.usaspending.gov

Programs that millions of Americans depend on and care about may be feeling a squeeze from interest costs on our high and rising national debt.

The Congressional Budget Office (CBO) projects that interest payments will total $892 billion in fiscal year 2024 and rise rapidly throughout the next decade — climbing from $1 trillion in 2025 to $1.7 trillion in 2034. In total, net interest payments will total $12.9 trillion over the next decade. Relative to the size of the economy, interest will rise from 3.4 percent of gross domestic product (GDP) in fiscal year 2025 to 4.1 percent in 2034. The previous high for interest relative to GDP in the post-World War II era was 3.2 percent in 1991 — that ratio would now be exceeded in 2025.

The federal government already spends more on interest than on budget areas such as:

Medicaid
Federal spending on children
Income security programs, which include programs targeted to lower-income Americans such as the Supplemental Nutrition Assistance Program; earned income, child, and other tax credits
Veterans’ benefits

What is more, spending on interest will surpass federal outlays on major budget categories over the next few years:

In fiscal year 2024, the federal government will spend more on interest than on defense as well as non-defense discretionary, which includes funding for transportation, veterans, education, health, international affairs, natural resources and environment, general science and technology, general government, and more.
In fiscal years 2024 through 2027, interest payments will exceed the amount that the federal government spends on Medicare (net of offsetting receipts). However, that relationship will generally reverse for the rest of the 10-year period.

Furthermore, interest will continue to outstrip other budget categories. According to its latest long-term projections, CBO projects that interest will become the largest category in the federal budget in 2051 — exceeding the amount spent on Social Security that year.

Looking ahead, lawmakers should chart a more stable, sustainable path for the federal budget that would alleviate the growing interest burden and help ensure that there is room in the budget for national priorities.

The Federal Government Has Borrowed Trillions, But Who Owns All that Debt?

At the end of 2023, the nation’s gross debt had reached nearly $34 trillion. Of that amount, about $27 trillion, or 79 percent, was debt held by the public — representing cash borrowed from domestic and foreign investors. The remaining $7.0 trillion (21 percent), was intragovernmental debt, which simply records transactions between one part of the federal government and another.

Debt Held by the Public

Economists generally view held by the public (DHBP) is as the most meaningful measure of debt, because it reflects the amount that the Treasury has borrowed from outside lenders through financial markets to support government activities. At high levels, DHBP can crowd out private investments in the economy, make it more difficult to respond to economic crises, and increase volatility within the economy.

As of the end of December 2023, DHBP was $27 trillion, or 97 percent of GDP. That borrowing came from both domestic and foreign creditors, with the former holding about two-thirds of it.

Domestic Holders of Federal Debt

Domestic holdings of federal debt have increased notably over the past decade, rising from $6.0 trillion in December 2011 to $19.4 trillion at the end of December 2023. The Federal Reserve, which purchases and sells Treasury securities as a means to influence federal interest rates and the nation’s money supply, is the largest holder of such debt.

In fact, the central bank doubled its borrowing during the COVID-19 pandemic as part of its effort to mitigate the economic impact of the pandemic. However, the Fed has been reducing the size of its balance sheet over the past couple of years to combat high inflation.

Other domestic holders of public debt include investment funds (mutual and pension funds), commercial banks (depository institutions), state & local governments, insurance companies, and other corporations and individuals.

Foreign Holders of Federal Debt

Foreign ownership of U.S. debt, which includes both governments and private investors, is much higher now than it was about 50 years ago. In 1970, total foreign holdings accounted for $14.0 billion, or just 5 percent, of DHBP. As of December 2023, such holdings made up $7.9 trillion, or 29 percent, of DHBP. Of that amount, 52 percent was held by private foreign investors while foreign governments held the remaining 48 percent. Because Treasury securities are backed by the full faith and credit of the U.S. government, creditors including foreign investors often view lending to the United States as a safe investment.

In recent years, however, the foreign share of DHBP has declined due to the rapid growth in purchases by the Federal Reserve in response to the economic effects of the COVID-19 pandemic. Foreign holdings peaked at 49 percent of DHBP in 2011, but dropped to 29 percent by the end of 2023.

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of December 2023, they accounted for nearly $2 trillion, or about 7 percent of DHBP. While China’s holdings of U.S. debt have declined over the past decade, Japan’s purchases of U.S. Treasury securities remain comparable. Investors in many other countries — including the United Kingdom, Switzerland, and Ireland — have increased their holdings of U.S. debt as well.

Foreign ownership of U.S. debt can have implications for the nation’s economy and financial markets. When foreign investors purchase Treasury securities, the federal government must send income abroad in the form of interest payments. On the one hand, that foreign investment may help increase U.S. economic activity if the money borrowed from such investors is used for productive purposes, such as stimulating recovery from a recession or funding investments in the nation’s economy. On the other hand, some analysts note that more foreign-owned debt reduces the control of financial markets in the U.S. and more income sent abroad means less is available for domestic investors.

Intragovernmental Debt

Intragovernmental debt records a transfer from one part of the government to another, and therefore has no net effect on the government’s overall finances. As of December 2023, intragovernmental debt totaled $7.0 trillion, a $2.0 trillion increase from a decade ago. In almost all cases, such debt is held in government trust funds — accounting mechanisms to track money designated for a specific purpose or program.

The largest holder of intragovernmental debt is the Social Security Old-Age and Survivors Insurance Trust Fund, which holds about $2.6 trillion, or 38 percent of intragovernmental debt. Other accounts holding such debt include retirement funds for federal employees, Medicare’s Hospital Insurance Trust Fund, and the Highway Trust Fund.

What Does All This Debt Mean For the Federal Budget and the Economy?

The amount of federal debt issued to the public can affect the country’s fiscal and economic health in a number of ways. The nation’s high and rising levels of such debt can affect economic growth and poses a number of risks; it could:

Reduce private investment and slow the growth of the economy
Increase interest payments to foreign holders, thereby potentially reducing national income
Elevate the risk of a fiscal crisis
Lead to higher interest rates
Constrain lawmakers from implementing policies to respond to crises or invest in the future
Impede intergenerational equity, preventing future generations from accessing public goods and services

Until lawmakers in Washington agree on a fiscally sustainable approach to the federal budget, public debt will continue to rise — threatening important safety net programs as well as domestic and foreign confidence in U.S. markets that can eventually chip away at economic opportunities for Americans.

How the Federal Government Borrows Money

The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are:

Backed by the full faith and credit of the United States government
Offered in a wide range of maturities
Exempt from state and local taxes
Mostly marketable, meaning they can be resold in the financial market (a small portion are nonmarketable and can’t be resold, like U.S. Savings Bonds).

Investors can easily trade Treasury securities because there are many people interested in buying and selling them at any given time. Investors are willing to pay more for this safety and liquidity—leading to lower borrowing costs (interest on the debt) for the government.

You can see a breakdown of these investors and holders of intragovernmental debt (debt held by government accounts) in the graphic below

Managing the Debt

Treasury’s overarching debt management goal is to ensure the federal government’s financing needs are met at the lowest cost to taxpayers over time. To achieve this goal, Treasury issues a variety of marketable securities in sufficient amounts to ensure the liquidity of each, and maintains a regular and predictable auction schedule. This schedule provides investors with greater certainty and better information with which to plan their investments.

Why Debt Management Is Challenging

Constantly changing financial markets — Treasury must consider the volume of securities to be issued at a given maturity in relation to changing market demands for Treasury securities. If the Treasury offers too much of any given security, it may have to pay a higher yield to attract investors. If the Treasury offers too little of a given security, it may reduce the security’s liquidity in the secondary market, which, in the long run, may also increase the yield Treasury has to pay.

Uncertain future borrowing needs — Policy changes and national economic performance are difficult to project and can quickly and substantially affect federal cash flow. For example, policy responses to external events like recessions, war, and emergencies (e.g., natural disasters such as hurricanes) can dramatically affect borrowing needs.

Uncertainty about the debt limit — The debt limit (the statutory ceiling on the amount of total federal debt) is suspended through July 2021, at which time it will need to be either suspended again or raised. Delays in suspending or raising the debt limit can create debt and cash management challenges for the Treasury. Treasury has often used extraordinary actions, such as suspending investments or temporarily disinvesting securities held in federal employee retirement funds, to remain under the limit. For more information about the debt limit, read our WatchBlog post, “Debt Limit 101.”

Refinancing the debt — As of September 30, 2020, 64 percent of the outstanding amount of marketable Treasury securities held by the public (about $13.1 trillion) was scheduled to mature in the next 4 years. A significant share of that maturing debt will need to be refinanced at prevailing interest rates. Treasury’s debt management goal is to borrow at the lowest cost over time, while also managing its debt portfolio to mitigate “rollover risk”—the risk that it may have to refinance its debt at higher interest rates. To do this, Treasury needs to consider the mix of longer-term and shorter-term securities that it offers. Longer-term securities typically have higher interest rates but provide more certainty, while shorter-term securities have lower interest rates but need to be refinanced more frequently.

Resources

pgpf.org, “What Is the National Debt Costing Us?” By Peter G. Peterson; pgpf.org, “The Federal Government Has Borrowed Trillions, But Who Owns All that Debt?” By Peter G. Peterson; fiscaldata.treasury.gov, “What is the national debt?”; gao.gov, “America’s Fiscal Future – Federal Debt.”;