United States public debt
From Wikipedia, the free encyclopedia
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 September 21, 2006, the total U.S. government debt was $8.500 trillion.
In 2005 the public debt was 64.7% of GDP. According to the CIA's World Factbook, this meant that the U.S. public debt was the 35th largest in the world by percentage of GDP. In absolute value, it is easily the largest.
It is important to differentiate between public debt and external debt. The former is the amount owed by the government to its creditors, whether they are nationals or foreigners. The latter is the debt of all sectors of the economy (public and private), owed to foreigners. In the U.S., foreign ownership of the public debt is a significant part of the nation's external debt (see also below).
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.
[edit] 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. 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 $644.2 billion at the end of August 2006. In recent years the People's Republic of China has also become a holder of over $1 Trillion in total foreign reserves, of which about $339 billion are US Treasuries. Source: [1] [2]
[edit] Calculating and projecting 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.
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 re-estimates", 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 significant and 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.
[edit] The mechanics of US Government debt
When the total amount of revenue collected by the US Government is exceeded by the amount of money it spends, it issues new debt to cover the deficit. 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 monetized by which the US Government sells the debt to the Federal Reserve. Monetized debt expands the money supply because these government securities become bank reserves held by the Federal Reserve that, under the system of Fractional Reserve Banking, are treated as an asset that the bank can then lend against. The ultimate consequence of monitizing US debt is that it expands the money supply which, various schools of economics believe, results in inflation. In recent years, the debt has soared and inflation has stayed low, but, as China currently holds over $1 trillion in dollar denominated assets (of which $330 billion are US Treasury notes), that situation could change should China ever chose to divest itself of a portion of those reserves. Source: [3] [4]
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.
When the US Government has a surplus, it may 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.
[edit] Paying the debt and arguments against doing so
Since the money supply is reduced 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" the 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 — 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.
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: [5]
[edit] Replies to arguments against paying down the debt
Economists from the Austrian School point out that the United States experienced depreciation of 43% of CPI (from CPI of 51 to 29) from 1800-1912: a period of strong economic growth in US history. (Source: [7]) Furthermore, those who would argue that an expansion of the money supply is necessary to expand the economy need to explain the colossal 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. [8] This did nothing to cure Japan's recession and has instead left the nation with a national debt that is 158% of GDP. [9]
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.
[edit] Risks
[edit] The relationship between risk and interest
The U.S. issues government bonds. The bonds are then bought by investors. The interest rate offered is the one that clears the market. On December 13, the U.S. 30 year treasury note had a rate of 5.375%.
[edit] Risks to the currency system
International trade involves the exchange of goods and services across national borders. Historically the currencies of nations involved were backed by precious metals (typically using some form of Gold Standard), which would cause a nation operating under a trade imbalance to send precious metals (economic goods in and of themselves) to their largest exporters. In the current scheme of fiat money, the US Government is free to print all the money it wants. Consequentally, the government can not technically go bankrupt and any debtor nation can just issue more money. However, if there is a gross imbalance between the amount of money in circulation and the amount of economic goods that are represented by an economy, then you have an unstable situation that can lead to hyperinflation. This has been observed in smaller nations; the modern financial system overseen by International Monetary Fund and World Bank, tend to enforce measures that resemble the Chapter 11 bankruptcy proceedings of an ill-faring private company- with the nation in default makes periodic repayments.
Recently, Professor Laurence Kotlikoff argued the United States will eventually choose between "bankruptcy," raising taxes, or cutting payouts. He assumes there will be an ever-growing payment obligations from Medicare and Medicaid. [1] Others who have attempted to bring this issue to the fore of America's attention range from Ross Perot in his 1992 Presidential bid, to Investment guru Robert Kiyosaki, and, most recently, David Walker, head of the Government Accountability Office. Source: [10] [11]
[edit] 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. [12] 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 banks 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. [13]
On 3 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 currencies and gold earlier and cited the United States's "twin deficits" (i.e. the US trade deficit as well as its budget deficit) as the reason for the expected fall in the dollar's value.[14]
[edit] 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 [15] [16].
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 [17].
The buildup and involvement in World War II brought the debt up another order of magnitude from $51 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. Between 1980 and 1990, the debt more than tripled. By the end of 2005, the gross debt reached $7.9 trillion, about 8.7 times its 1980 level. [18]
| Year to 30 September |
U.S. Govt Debt US$ 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 |
| 2006 | 8,506.9 |
The debt held by the public briefly started to go down in 1999 when the country had small on-budget surplus ($1.9 million in 1999 and $86.4 million in 2000), but began growing again in 2001. However, the total government debt has increased every year since 1960.
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 then began rising again, reaching 64.3% of GDP by 2005. 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 2007 U.S. Budget. [19]
See also National debt by U.S. presidential terms
[edit] Debt clocks
In several cities around the United States, 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.
There is an online debt clock at: brillig A free debt clock for web sites is available at: zFacts
[edit] Statistics and comparables
- U.S. public debt on 30 December 2005 was $8,170 billion (or $8.1 trillion) [20], which is nearly six times the amount of United States currency in circulation (M1 Money Supply), estimated to be $1,372 billion [21].
- 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 $28,412 per head of the U.S. population, or $58,390 per head of the U.S. working population [22].
- In 2003 $318 billion was spent on interest payments servicing the debt, out of a total tax revenue of $1,952 billion [23].
- 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. [24]
- Total third world debt was estimated to be $1,300 billion in 1990 [25].
- The U.S. balance of trade deficit in goods and services was $725.8 billion in 2005 [26].
- The global market capitalization for all stock markets was $43,600 billion (or $43.6 trillion) in March 2006 [27].
The figures only include Treasuries. There is also agency debt owned by foreign holders not covered in these figures.
[edit] See also
- 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
[edit] External links
- Bureau of the Public Debt
- 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
- The United States Public Debt, 1861 to 1975
- Public Debt Issues, 1775-1976
- Just the dollar amount
- The Budget Graph: A graphical representation of the 2007 United States federal discretionary budget, including the public debt.
- 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 official
From the CIA World Factbook:
- Rank Order of Countries Debt
- Rank Order of Countries GDP (purchasing power parity)
- Rank Order of Countries Public debt (% of GDP)
[edit] References
- 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)
