U.S. public debt

   

The U.S. public debt is the amount of money that the United States federal government (not the states or banks or corporations or individuals) owes.

The calculation of the debt is subject to political manipulation and creative accounting, but the accounting assumptions behind any specific set of numbers can be made clear. As these are often also political assumptions, they form an important role in debates on U.S. fiscal policy, the most important of which is the U.S. budget deficit. Any budget deficit must be made up for by deficit spending, which increases the debt. A budget surplus, by U.S. law, must be used to pay down the debt. So these cannot be discussed separately.

In several cities around the United States, but most famously at the corner of West 43rd Street and Sixth Ave (Avenue of the Americas) in New York City, there are national debt clocks -- electronic billboards which supposedly show the amount of money owed by the government. These show different numbers because being politically motivated they count the debt in different ways.

Over 47% of the personal income taxes (but not of total tax revenue) collected in 2003 will be spent on paying interest on the debt.

What the debt includes

Government bonds are part of the national debt, as are loans from banks, and Treasury securities. The debt also includes unfunded liabilities like pension plan payments and, by some measures, Social Security. Bonds sold for infrastructure projects are also part of the national debt. Some economists, but not all, 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 owed to a number of sources. Individual Americans and businesses buy savings bonds and T-bills. Much of the debt is held overseas, however. This is especially true of Japan which buys large amounts of the debt to cover its trade surplus. In recent years the People's Republic of China has also become a major holder of American debt.

There is a question among economists in the United States as to whether the debt held by the 50 individual states is really part of the "national debt."

Calculating the debt

One way to calculate the U.S. national debt is the absolute number -- for instance in 2003 the United States Congress, as it does virtually every year, increased the dollar amount of debt allowable by law to just shy of $7.4 trillion. Facing the government falling into default, after much partisan debate, the Senate voted to raise the debt ceiling on November 17, 2004. In an even more partisan vote (save 10 Republicans voting nay), the House passed the bill the next day, enrolling it. President Bush is expected to sign it into law. This is done to take into account current government borrowing to pay for deficit spending. However, some of this money isn't payable for 10, 20 or 30 years, so we aren't actually paying this money out at one time.

Another way is by the percentage of debt in relation to the gross domestic product. By this measure, the national debt taken during the World War II (about 125% of GDP) started first decreasing sharply, then by mid 1950s the rate was slowing down and by 1964 the ratio had reached its pre-war figure (32% of GDP). In the beginning of 1980 the debt started rising again and in 2002 the debt was about 60% of the GDP. The debt of United States is much lower than what it is in many other developed countries, such as Japan and many parts of the western Europe, where the debt is generally over 100% of GDP.

Yet another way is by the amount payable in any given year. As a down-home example, if you owe $50,000 on a mortgage that is payable over 30 years -- is your debt $50,000? Is it the $50,000 plus the interest? Or is it the actual amount you pay this year and not the whole amount? Your answer determines as whether you can 'pay' the debt. And debts you can pay can't be all that bad.

With the definition shifting of what exactly do you mean by the national debt it them becomes easy to argue in political debate the way that suits your purpose.

Reliability of reporting

There is no reliability to budget and debt reporting, in part because political leaders can announce official numbers that are almost meaningless, while careful analysis of implications by experts go all but unreported.

For instance, in 2003 the George W. Bush administration announced a projected $1.4 trillion deficit over the next 10 years (to 2013) amidst disclaimers from the White House about how the numbers are unreliable and how these deficits aren't very big relative to the size of the U.S. economy. These are examples of the types of disclaimers that are often used to 'fuzz' bad news.

By law, the budget office that prepares these numbers must assume that existing laws expire as planned, and that no new programs are added or subtracted. This permits politicians to extend laws, add programs, etc., in the period after budget announcement, for instance, to make temporary tax cuts permanent, or pass a Medicare prescription-drug package. Then they may hope that something changes in the interim that will improve the news before they (or their successors) must announce the budget numbers the next year, or simply hope for some reaction to taxes that they can exploit. For instance, if federal alternative minimum tax as projected hits 30 million taxpayers due to bracket creep, the pressure to remove it rises, and debt, being paid in the future, seems like less of an issue.

According to Economist Alan Sloan, writing in Newsweek in September 2003, if one assumes that the tax will be eliminated, the prior cuts made permanent, and the drug package passed, these changes alone add $3.6 trillion to the deficit over the same ten-year period.

Another issue is that the numbers do not count other shortfalls and leakage. For instance, in the 2003 projection, the U.S. Department of the Treasury used a $2.4 trillion Social Security surplus to offset its cash shortfall. This means that in 2013, "the government will owe Social Security about $4 trillion, just as baby boomers begin retiring en masse. I don't see how that debt can be honored without huge borrowings from outside investors that would send rates to the moon, or huge cuts in other programs," claimed Sloan.

He thus calculates the total projected deficit using only the published numbers and limited assumptions above at more than five times the $1.4 trillion, or about $7.4 trillion. These numbers further assume spending nothing in Iraq starting Oct. 1, 2005, which seems optimistic, as there are no budgetary nor troop commitments from nations that did not invade as of his publication date.

Business confidence is a major reason to mislead about debt and deficit numbers. Wall Street in general responds poorly to growing debt. The U.S. Office of Management and Budget announcements (such as that in July 2003 that they expected a $455 billion deficit (after subtracting Social Security's surplus) for fiscal 2004) cause interest rates to move up.

Political risks

Treasury statistics indicate that foreigners bought 58 percent of the securities that Treasury sold to investors. Some 60 percent of that 58 percent was bought by central banks. A large percentage of that went to the central banks of Japan and China. This exposes the United States to financial or political risk that either bank will stop buying Treasuries - or selling them heavily.

This is seen as a very substantial risk by some who study geopolitics and creditary economics.

Another risk of possibly even greater magnitude is the possibility that OPEC will begin to price oil 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 shifts that float as well, and sends those saved dollars back to U.S. shores to be redeemed for goods. This causes inflation, rises in interest rate, 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 of the U.S. in it. A round of hyper-inflation is possible that would potentially break Bretton Woods institutions capacity to react. This would be a larger scale repeat of the George Soros attack on the British Pound Sterling that broke the EU fixed rate exchange system and forced creation of the Euro.

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.

Repaying the debt

There are different ways to lower, or pay off, the national debt. Though, if you consider social security as part of the national debt of the United States then the debt can never be totally paid off.

One is through increased tax revenues. Another is to not incur new debt, and use current revenues to pay off the bonds sold and the loans taken. The most insidious and destructive way to handle debt is through inflation -- which is nothing more than the government printing money. 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 (Central Bank).

The most common method used today 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 the debt would decrease.

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.

A brief history of the debt

The numbers in this section come from the United States Treasury's Bureau of the Public 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:

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 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.

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