Did you know that the United States has a debt clock and a dedicated Bureau of Public Debt? Or that at the beginning of 2012, the U.S. federal debt burden equaled the economic value of the nation for the second time in U.S. history? There is a lot of information that passes by the public, unnoticed, when it comes to discussions about national debt.
If you are going to talk about America’s debt, you should know how that debt works and what it is made of. An informed opinion is a more accurate opinion – and when it comes to federal debt, few of us take advantage of the breadth of information available to the public. So read on to explore how the country’s debt really functions, how economists view it, and what can be down to effectively lower debt in coming years.
Basic Numbers: The Debt Clock and More
As of September 2012, the total public debt outstanding stood at a bit more than $16 trillion. Public debt is defined as all the public debt securities issued by the U.S. Treasury (like notes and bonds). Debt held by specific government accounts is not included, in part because it involves too many departments with budgets that do not necessarily qualify.
The term “gross federal debt” refers to all securities, including a few securities issued by agencies beyond the Treasury. As you can begin to see, national debt is composed of a myriad of different parts, many under the control of varying government organizations and regulation.
Owners of this public debt also vary. Usually, debt is divided between marketable notes that can be exchanged with others, and one-on-one nonmarketable notes. Some is held by the public, and some is held by other government organizations that have lent money to each other or have federal trust funds such as Social Security. States, corporations, individuals, and foreign governments all own pieces of the national debt.
The U.S. Debt clock gives approximations of how much debt is being gathered and where it comes from. Once you get used to watching the maze of ticking numbers, you will also notice approximations for currency data, employment reports, and national assets, handy for comparisons.
Untangling Debt Issues
There are several issues concerning national debt that people are often mistaken about or struggle to understand. These issues include:
Debt to creditors: Economists are somewhat divided on this issue. Some would prefer to look only at debt owed directly to creditors (such as foreign governments) rather than total debt including intragovernmental debts like Social Security. Because social program debts are a vast portion of the national debt, this brings current debt down to around $10 trillion. Others argue looking at debt through creditor-only eyes is a dangerous or mistaken perspective.
Country comparison: Advanced market nations have a habit of borrowing debt. The Eurozone Crisis was caused by country debts rising higher than the value of their economies. Portugal, Italy, Greece, and Ireland are some of the worst offenders, and are also at the center of European debt problems. Japan also has national debt larger than its economy. However, European countries can receive bailouts from EU bank organizations. The U.S. does not have such fallbacks.
Debt vs. deficit: The deficit is the (negative) difference between the money that the U.S. government takes in and its outlays or money spent. This does not mean that the Treasury will immediately borrow money to pay for the entire deficit. Certain budgets receive priority, while some expenses are adjusted before they are finalized or altered in other ways.
Historical trends: Many people assume that national debt has always risen. This is not true – debt has risen and fallen based on spending policies and overall economic situations. In World War II, national expenditures reached more than 30 percent of the U.S. GDP, before falling back down to 15 percent. Since debt is directly correlated with spending, it often followed this jagged spending history. When more securities are redeemed than are issued, national debt falls.
Currently, China is the largest foreign holder of U.S. debts, due to frequent Chinese imports (Japan is our other major creditor). Economists worry that Chinese policies are encouraging the purchase of U.S. debts so the country can influence future U.S. policies. However, most of the U.S. budget is used for domestic entitlement spending such as Social Security and Medicare. Combined, these international and political issues have made U.S. debt a key topic in debates, elections, and party platforms.
With the recession entering a recovery phase, policies are leaning toward cutting debt and lowering the debt/economy ratio once again. However, the future of U.S. debt is still largely undetermined, waiting on future federal decisions and further economic recovery.