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U.S. public debt

From Academic Kids

The U.S. public debt, commonly called the national debt or the gross federal debt, is the amount of money owed by the the United States federal government. This does not include the money owed by states, corporations, or individuals. As of May 2005, the total government debt is approximately $7.8 trillion, i.e. $7,800,000,000,000 ($7.8 × 1012). This is more than ten times the amount of United States currency in circulation as of 2005, estimated to be $730 billion ($7.3 × 1011). The debt can also be measured as a fraction of the nation's gross domestic product (GDP); at present, U.S. public debt is about 65% of the GDP, a rather average level when compared to other nations.

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. 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. 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.

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 Treasury securities. Nearly half ($2.2 trillion) is composed of Treasury notes (aka T-notes), while T-bills and T-bonds (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 percent of the total debt held by the public. Foreign central banks owned 64 percent 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 [1] (http://a255.g.akamaitech.net/7/255/2422/07feb20051415/www.gpoaccess.gov/usbudget/fy06/pdf/spec.pdf)). The country holding by far the most debt is Japan which held $679 billion 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 $223.5 billion at that time. [2] (http://www.treas.gov/tic/mfh.txt)

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 125% 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 to support their own political arguments.

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 billion surplus from 2001 through 2004 in the 2002 U.S. Budget (http://www.gpoaccess.gov/usbudget/fy02/pdf/budget.pdf). In the 2005 Mid-Session Review (http://a255.g.akamaitech.net/7/255/2422/30jul20041200/www.gpoaccess.gov/usbudget/fy05/pdf/05msr.pdf), however, this had changed to a projected deficit of $850 billion, a swing of $2,137 billion. Table 7 in this latter document states that 49 percent of this swing was due to "economic and technical reestimates", 29 percent was due to "tax relief", and the remaining 22 percent 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 (http://www.cbo.gov/ftpdocs/44xx/doc4493/08-26-Report.pdf) projected a $1.4 trillion deficit from 2004 through 2013. However, a joint analysis (http://www.cbpp.org/9-29-03bud.pdf) 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 (http://a255.g.akamaitech.net/7/255/2422/07feb20051415/www.gpoaccess.gov/usbudget/fy06/pdf/spec.pdf) 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. Needless to say, this projection is very troubling. However, 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

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. When social security is considered part of the national debt, 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. However, this is destructive to an economy, as it results in inflation, reducing the actual worth of the national currency. If the country attempted to repay a huge amount of debt at once with this method, hyper-inflation would result, leading to a drastic reduction in the value of cash. The United States government can't actually use this method as the sole right to print money is given by the law to the Federal Reserve, the country's central bank. M3 broad money growth shows that this is indeed happening, and USA is often accused of exporting inflation.

Risks

National debt can be held by the citizens of the country, or by institutions outside of the country. Unlike the debt of a corporation though, a holder of the debts owed by governments can't force the government into bankruptcy to pay the debt. There is still considerable risk involved, however.

U.S. Treasury statistics indicate that, at the end of 2004, foreigners held 44 percent of federal debt held by the public. [3] (http://a255.g.akamaitech.net/7/255/2422/07feb20051415/www.gpoaccess.gov/usbudget/fy06/pdf/spec.pdf) 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 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 percent since then. [4] (http://www.treas.gov/tic/mfh.txt) This may change, of course, but it does underscore the risk.

Some who study geopolitics and creditary economics are greatly concerned by this. 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. 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.

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 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 to make U.S. bonds have to rise in rates to appeal to investors in a thinner market—which would trigger inflation all over 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 Bretton Woods system 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, and 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.

Far more serious than either of these questions, which involve "only money", is the question of the triple bottom line which is the financial, social and natural debt created by exploiting systems with an internal integrity, drawing on them as if they were free. Financial capital is not, in general, a good guide to social or natural capital flows, and many economists claim it is a contrary—even inherently contrary—process. See uneconomic growth for this discussion in detail.

A serious failure in accountability for instance causes loss of social capital which decreases trust essential to commerce and polity, while loss of natural capital causes a reduction in nature's services (such as irrigation or flood control) that must then be made up for by human effort, stressing the human economy. There are no economists who claim that the financial debt or deficit is actually independent of these factors, and very few who claim that economic growth indicators or measures of national income work well enough to rely on them utterly.

Thus, the ultimate political risk: collapse of an entire polity, which happened for instance in the collapse of the Soviet Union, or rise of a wholly different political economy, as happened after hyper-inflation in Weimar Germany, with the rise of Nazism.

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 (almost?) to zero in late 1834. On January 1, 1835, the national debt was only $33,733.05, but it quickly grew into the millions again.

The first dramatic growth spurt of the debt occurred because of the Civil War—it was just $65 million dollars in 1860, but passed $1 billion in 1863 and ended up at $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.

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:

The public debt briefly started to go down in 2000 when the country had a budget surplus, but quickly started growing again.

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. Still, Congress has failed to act in time at least once. In 1995, the federal government closed down for six days from November 14 to November 20 due to partisanship between the congress and then-President Bill Clinton.

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 (though the economy also hit a recession at the time). 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. [5] (http://www.gpoaccess.gov/usbudget/fy06/hist.html)

The famous national debt clock in New York City's Times Square was actually deactivated in 2000 when the debt began to go down. However, following large increases, the clock was reactivated a few years later. (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.)

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