Where Do We Stand on the U. S. National Debt?

November 3, 2008


National Debt Clock

How big is the national debt?
    The best way to understand the size of the U. S. national debt is measure it against the Gross Domestic Product (just as the most meaningful way to understand how deep I am in debt is to measure it as a percentage of my income). The chart reproduced below

is taken from this excellent and fact-filled website. What it shows is, first, that Reagonomics was a failure (it was financed by running up the national debt), and that the Bush Administration pulled the same con again on the American people. ("Those who fail to learn the lessons of history are doomed to repeat its mistakes."
    The second take-home message from this is that, on September 22, the U. S. national debt punctured its 1994 high to stand at its highest level since 1955.

Why don't we pay off the national debt? Is it about to bankrupt us?
    Unlike private citizens, governments never pay off their national debts. Instead, they pay the interest on their national debts, and rely upon inflation and growth in their inflation-adjusted gross domestic products to reduce the relative magnitude of their debts.  Looking at the ratio of national debt to GDP, as plotted in the chart above, rather than trying to reduce the numerator in this ratio (the national debt), countries rely on increasing the denominator (their GDP). (Note that if a country's GDP falls as it does when the country is in a recession, this will increase rather than reduce the national-to-GDP ratio. Also, the country's tax revenues will fall, forcing the country to either cut back on services or to add even more to its national debt.) To give a concrete example, suppose that the GDP increases by 5% a year, with 3% of it reflecting inflation, and the other 2% real growth. In that case, it would take about 15 years of zero-deficit budgets for the national debt/GDP ratio to fall to one-half what it was at the outset. It would take another 15 years of balanced budgets  for this ratio to fall to one-fourth of its original value, and about 50 years for it to drop to one-tenth its initial value.
    To answer the second question: no, it won't bankrupt us. As the chart shows, the national debt has been higher in the past than it is even now.
    One concern is that, because of our current economic mal-de-mer, the national debt, expressed as a percentage of GDP, will go higher before it goes lower

From whom is the government borrowing this money?
    As of March 4, 2007, the national debt stood at $8.5 trillion. Of that money, 52% was owned by the U. S. government consisting mostly of Social Security and Medicare trust funds. Twenty-five percent, or about $2.1 trillion, was owned by foreign governments, with Japan holding $644 billion or about 31% of the $2.1 trillion, China owning about $350 billion, the UK accounting for $239 billion, and the oil-exporting countries (including Russia) possessing about $100 trillion. Other major holders of Treasury debt "include state and local governments ($467 billion); individual investors, including brokers ($423 billion); public and private pension funds (319 billion); mutual funds ($243 billion); holders of US savings bonds ($206 billion); insurance companies ($166 billion) and banks and credit unions ($117 billion.)".
    It's a reassuring fact that as of 20 months ago, three-quarters of our national debt was held by domestic investors. China owned only about 4% of our national debt.
    What isn't reassuring is that our national debt has grown from $8.5 trillion 20 months ago to $10.56 trillion today, rising by a $ trillion in the past month. (These bailouts are expensive.)

How is the borrowing actually done?
    The Treasury holds an auction every three months.

Why are investors willing to buy U. S. Treasury bonds when they pay an interest rate that's only about equal to the rate of inflation?
    Because U. S. Treasury bonds are considered one of the world's safest investments (if not the safest investment).