What the U.S. National Debt Is:
(Updated June 3, 2010) The U.S. debt is over $13 trillion, and is the sum of all outstanding debt owed by the Federal Government. Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought
Treasury Bills, Notes and Bonds.
The rest is owed by the government to itself, and is held as Government Account securities. Most of this is owed to
Social Security and other trust funds, which were running surpluses. These securities are a promise to repay these funds when Baby Boomers retire over the next 20 years. (Source: U.S. Treasury,
Debt to the Penny;
Debt FAQ)
The Size of the U.S. Debt:
The U.S. debt is the largest in the world. How did it get so large? Purchasers of Treasury Bonds still reasonably expect the U.S. economy to recover enough to pay them back. For foreign investors like
China and
Japan, the U.S. is such a large customer it is allowed to run a huge tab so it will keep buying exports. (Source:
CIA World Factbook)Even before the economic crisis, the U.S. debt ballooned 50% between 2000 - 2007, growing from $6 - $9 trillion. The
$700 billion bailout helped the debt grow to $10.5 trillion by December 2008.
The U.S. Debt Level:
The debt level is the debt as a percent of the total country's production, or
GDP. Total economic output, or GDP, is $14.6 trillion (Q1 2010). The debt is now 89% of GDP, up from 51% in 1988. (Source: U.S. Treasury,
Debt to the Penny;
Bureau of Economic Analysis) Interest on the debt was $383 billion in Fiscal Year 2009, down from its peak of $451 billion in Fiscal Year 2008, thanks to lower interest rates. (Source: U.S. Treasury,
Interest)
How Did the Debt Get So Large?:
Government debt is an accumulation of budget deficits. Year after year, the government cut taxes and increased spending. In the short run, the economy and voters benefited from deficit spending. Usually, however, holders of the debt want larger interest payments to compensate for what they perceive as an increasing risk that they won't be repaid. This added interest payment expense usually forces a government to keep debt within reasonable limits.
The U.S., however, was the beneficiary of two unusual factors. First, the Social Security Trust Fund took in more revenue through payroll taxes leveraged on Baby Boomers than it needed. Ideally, this money should have be invested to be available when the Boomers retire. In reality, the Fund was "loaned" to the government to finance increased deficit spending. This interest-free loan helped keep Treasury Bond interest rates low, allowing more debt financing.However, it is not a real "loan" since it can only be repaid by increased taxes when the Boomers do retire.
Secondly, foreign countries increased their holdings of Treasury Bonds as a safe haven, also keeping interest rates low. These holdings went from 13% in 1988 to 28% in 2009. (Source: U.S. Treasury report
”Petrodollars and Global Imbalances”, February 2006)
Even during the recession, countries like China and Japan increased their holdings of Treasuries to keep their currencies low relative to the dollar. For more, see
How China Affects the U.S. Economy.
Of the total foreign holdings ($3.9 trillion), China owns $895 billion and Japan owns $785 billion. The U.K., Brazil and the oil exporting countries own about $100 - $280 billion each. The Bureau of International Settlements suspects that much of the holdings by Belgium, Caribbean Banking Centers and Luxembourg are fronts for various oil-exporting countries or hedge funds that do not wish to be identified. (Source:
Foreign Holding of U.S. Treasury Securities)
How The U.S. Debt Affects the Economy:
Over the next 20 years, the Social Security funds must be paid back as the Baby Boomers retire. Since this money has been spent, resources need to be identified to repay this loan. That would mean higher taxes, since the high U.S. debt means further loans from other countries have been maxed out. Unfortunately, it is most likely that these benefits will be curtailed, either to retirees younger than 70, or to those who are high income and therefore theoretically don't need Social Security.
Secondly, many of the foreign holders of U.S. debt are investing more in their own economies. Over time, diminished demand for U.S. Treasuries will increase interest rates, thus slowing the economy. Furthermore, this lessening of demand is putting downward pressure on the dollar. That's because dollars, and dollar denominated Treasury Securities, are becoming less desirable, so their value declines. As the dollar declines, foreign holders get paid back in currency that is worth less, which further decreases demand.
The bottom line is that the large Federal debt will ultimately slow the U.S. economy.
From:
http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm
