Concerns Over Chinese Holdings Of Us Debt
According to a 2013 Forbes article, many American and other economic analysts have expressed concerns on account of the People’s Republic of China’s “extensive” holdings of United States government debt as part of their reserves. The National Defense Authorization Act of FY2012 included a provision requiring the Secretary of Defense to conduct a “national security risk assessment of U.S. federal debt held by China.” The department issued its report in July 2012, stating that “attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States. An August 19, 2013 Congressional Research Service report said that the threat is not credible and the effect would be limited even if carried out. The report said that the threat would not offer “China deterrence options, whether in the diplomatic, military, or economic realms, and this would remain true both in peacetime and in scenarios of crisis or war.”
How Is The National Debt Measured
Measuring the national debt can bebroken into three parts: debt held by the public, gross federal debt, and debt subject to limit.
Debt held by the public is the amount of money that the U.S. treasury borrows from external lenders through financial markets. The money gathered funds the governments activities and programs. Many financial analysts and economists think of this portion of the debt as the most meaningful because it focuses on the money that is raised through financial markets. This portion of the debt is made up of two-thirds domestic creditors and one-third foreign creditors. By the end of fiscal year 2021, the debt held by the public was $22.3 trillion.
Gross federal debt includes the public debt and federal trust funds and other government accounts. This is the amount that the government owes other governments and itself. By the end of fiscal year 2021, the gross federal debt was $28.4 trillion .
Debt subject to limit is similar to gross federal debt but does not include debt issued by agencies other than the Treasury and Federal Financing Bank. At the end of fiscal year 2021, this number was $28.4 trillion.
National Debt Vs Budget Deficits
Before addressing how the national debt impacts people, it is important to understand the difference between the federal governmentâs annual budget deficit, and the countryâs national debt. Simply explained, the federal government generates a budget deficit whenever it spends more money than it brings in through income-generating activities, such as taxes.
To operate in this manner, the Treasury Department has to issue treasury bills, treasury notes, and treasury bonds to make up the difference. By issuing these types of securities, the federal government can acquire the cash it needs to provide governmental services. The national debt is simply the net accumulation of the federal governmentâs annual budget deficits.
What The National Debt Means To You
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President Andrew Jackson Cuts Debt To Zero
The War of 1812 more than doubled the nations debt. It increased from $45.2 million to $119.2 million by September 1815. The Treasury Department issued bonds to pay a portion of the debt, but it was not until Andrew Jackson became president and determined to master the debt that this national curse, as he deemed it, was addressed.
The time of prosperity was short-lived, as state banks began printing money and offering easy credit, and land value dropped.
Can The United States Pay Off Its National Debt
The current US debt, at around $30 trillion, is unlikely to be paid off with any speed. In fact, as the worlds principal reserve currency, there are some ways in which the American national debt is good for other countries: Foreign investors can purchase US Treasury bonds to help fund their own countries.
The most likely way that the United States can pay off its debt is through budget surpluses, which boost a countrys GDP. However, the last time the US had a budget surplus was 2001.
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Definition Of Public Debt
Economists also debate the definition of public debt. Krugman argued in May 2010 that the debt held by the public is the right measure to use, while Reinhart has testified to the President’s Fiscal Reform Commission that gross debt is the appropriate measure. The Center on Budget and Policy Priorities cited research by several economists supporting the use of the lower debt held by the public figure as a more accurate measure of the debt burden, disagreeing with these Commission members.
There is debate regarding the economic nature of the intragovernmental debt, which was approximately $4.6 trillion in February 2011. For example, the CBPP argues: that “large increases in can also push up interest rates and increase the amount of future interest payments the federal government must make to lenders outside of the United States, which reduces Americans’ income. By contrast, intragovernmental debt has no such effects because it is simply money the federal government owes to itself.” However, if the U.S. government continues to run “on budget” deficits as projected by the CBO and OMB for the foreseeable future, it will have to issue marketable Treasury bills and bonds to pay for the projected shortfall in the Social Security program. This will result in “debt held by the public” replacing “intragovernmental debt”.
What Are The Primary Drivers Of Future Debt
The main drivers are still mandatory spending programs, namely Social Securitythe largest U.S. government programMedicare, and Medicaid. Their costs, which currently account for nearly half of all federal spending, are expected to surge as a percentage of GDP because of the aging U.S. population and resultant rising health expenses. Yet, corresponding tax revenues are projected to remain stagnant.
Meanwhile, interest payments on the debt, which now account for nearly 10 percent of the budget, are expected to rise, while discretionary spending, including programs such as defense and transportation, is expected to shrink as a proportion of the budget.
President Trump signed off on several pieces of legislation with implications for the debt. The most significant of these is the Tax Cuts and Jobs Act. Signed into law in December 2017, it is the most comprehensive tax reform legislation in three decades. Trump and some Republican lawmakers said the bills tax cuts would boost economic growth enough to increase government revenues and balance the budget, but many economists were skeptical of this claim.
The CBO says the law will boost annual GDP by close to 1 percent over the next ten years, but also increase annual budget shortfalls and add another roughly $1.8 trillion to the debt over the same period. In addition, many of the provisions are set to expire by 2025, but if they are renewed, the debt would increase further.
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Intergovernmental Vs Public Debt
The intragovernmental debt is what the government owes the Social Security Trust Fund and other federal agencies. It’s not part of the public debt and it doesn’t impact the interest on that debt. It’s money the government owes itself.
The debt held by the public$22.3 trillion as of January 2022is held in the form of Treasury bills, notes, and bonds, as well as Treasury Inflation-Protected Securities , savings bonds, and other securities. The majority of the public debt is owned by the American people, either through individual investors, the Federal Reserve, or state and local governments.
The total national debt was over $28 trillion for most of 2021. Congress raised the debt limit to $28.4 trillion on Aug. 1, 2021 to accommodate this, then it raised it again by another $2.5 trillion on Dec. 16, 2021. The interest on the public debt for fiscal year 2021 is estimated to be $413 billion, according to the Congressional Budget Office .
How Is It Calculated
When the federal government uses Treasury bills as loans, the interest rate associated with these bills varies. The amount of the bill and when it was issued are factors that contribute to the interest rate associated with the debt. Interest rates are set based on demand in the market, so these rates may differ from one bill to the next, depending on when the government took on this debt.
When theres a big demand for Treasury bills, the interest rate is generally low. However, when the demand is low, the interest rate increases and the federal government owes more interest on these bills. To calculate the federal governments current interest rate, you would need to separate all these debts and their respective interest rates, then add up these calculations.
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What Is Interest On The National Debt
National debt is the public debt the government carries, which is the money it owes to other lenders besides its own government. As a consumer, when you take out a loan with a lender, you agree to loan terms, which includes an interest rate you must pay in addition to the loan balance. The government agrees to these same terms with a lender when it borrows money from outside entities.
The federal government has debt with foreign central banks, individuals, and businesses. Most of this debt is carried in notes, bonds, Treasury bills, and other types of securities. This public debt is all grouped together and referred to as the national debt.
The national debt is different from its deficit because the government deficit refers to the amount of debt the federal government carries when compared to the money it brings in. However, the debt itself refers to the money the government has borrowed over the years to cover this deficit.
While the federal government also owes money to federal agencies and the Social Security Trust fund, this debt isnt part of the public debt. Its considered intragovernmental debt because the government needs to eventually pay it back to itself and not to an outside lender. Theres no additional interest on intragovernmental debt since its internal debt, so it doesnt count toward the interest on the national debt.
Debt By Year Compared To Nominal Gdp And Events
In the table below, the national debt is compared to GDP and influential events since 1929. The debt and GDP are given as of the end of the fourth quarter in each year to coincide with the end of the fiscal year. That’s the best way to accurately determine how spending in each fiscal year contributes to the debt and compare it to economic growth.
From 1947-1976, debt and GDP are given at the end of the second quarter since, during that time, the fiscal year ended on June 30. For years 1929 through 1946, debt is reported at the end of the second quarter, while GDP is reported annually, since quarterly figures are not available.
At the end of the fourth quarter in 2021, the national debt was about $29.6 trillion. Based on the fourth-quarter GDP of $23.9 trillion, the debt-to-GDP ratio was about 124%.
|End of Fiscal Year|
|COVID-19 and American Rescue Plan Act|
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What Is The Us Debt Ceiling
The United States Congress oversees all American government departments including the Treasury. Until 1917, the Treasury had to seek the approval of Congress for every bond auction. Since then, the debt-raising capability of the Treasury has been limited by a debt ceiling that is set by Congress.
The debt ceiling covers all US government debt, including intragovernmental holdings.
The debt ceiling is stated as an amount rather than a percentage of GDP.
Why Is The Us In Debt
Countries around the world currently hold a national debt in order to grow the economy and the country, debt is oftentimes needed to fund expansions and programming. The United States debt levels are extremely high, and can be attributed, in part, to income inequalities and trade deficit. These two factors indicate that some level of debt must be taken on in order to keep the economy moving. The U.S.s national debt increased 840% during the period from 1989 to 2020.
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Tracking The Federal Deficit: November 2021
The Congressional Budget Office estimates that the federal government ran a deficit of $193 billion in November, the second month of fiscal year 2022. This deficit was the difference between $474 billion of spending and $281 billion of revenue. Novembers deficit was 33% larger than the deficit recorded in November 2020. However, spending last November was artificially lowered by the fact that November 1 fell on a weekend, shifting $63 billion worth of payments into late October. If not for the timing shift, this Novembers deficit would have been 7% less than that of November last year.
Analysis of notable trends: Through the first two months of FY2022, the federal government has run a deficit of $358 billion$71 billion less than at this point last yearas spending rose 4% and revenues surged 24% this year, reflective of the nations ongoing economic recovery.
The Federal Budget Deficit Is Projected To Reach A New Record
Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.
The U.S. federal budget deficit reached $2.8 trillion for the fiscal year 2021. It was the second-highest deficit since 1945 the 2020 deficit of $3.1 trillion as a result of the COVID-19 pandemic takes the top spot.
Learn more about the factors impacting the federal budget deficit, how itÃ¢s calculated, and whether you should be concerned.
Interest And Debt Service Costs
Despite rising debt levels, interest costs have remained at approximately 2008 levels because of lower than long-term interest rates paid on government debt in recent years. The federal debt at the end of the 2018/19 fiscal year was $22.7 trillion. The portion that is held by the public was $16.8 trillion. Neither figure includes approximately $2.5 trillion owed to the government. Interest on the debt was $404 billion.
The cost of servicing the U.S. national debt can be measured in various ways. The CBO analyzes net interest as a percentage of GDP, with a higher percentage indicating a higher interest payment burden. During 2015, this was 1.3% GDP, close to the record low 1.2% of the 19661968 era. The average from 1966 to 2015 was 2.0% of GDP. However, the CBO estimated in 2016 that the interest amounts and % GDP will increase significantly over the following decade as both interest rates and debt levels rise: “Interest payments on that debt represent a large and rapidly growing expense of the federal government. CBO’s baseline shows net interest payments more than tripling under current law, climbing from $231 billion in 2014, or 1.3% of GDP, to $799 billion in 2024, or 3.0% of GDPthe highest ratio since 1996.”
According to a study by the Committee for a Responsible Federal Budget , the U.S. government will spend more on servicing their debts than they do for their national defense budget by 2024.
Servicing The National Debt
This is the first post in a two-part series about the national debt.
Most people consider the national debt in the same way they would the debt of a household, in which high levels of debt and deficit spending are not sustainable and must be paid back or renegotiated at some point.
But are these two items similar? At the national level, U.S. federal debt reached $20.5 trillion by the second quarter of 2020. What does increasing debt mean to the U.S., whose income has only grown by 30% in the past 12 years, while the debt has ballooned by 400% in the same period?
Senior Vice President and Economist David Andolfatto examined this issue in a recent Regional Economist article titled Does the National Debt Matter? To begin to answer that question, Andolfatto first looked at the topic from the perspective of debt issuance, debt as currency and debt service.
How Much Of The Federal Budget Goes To Interest On The National Debt
When the federal budget is created, the interest on national debt is taken into consideration. This interest must be addressed in the budget to ensure the federal government is still considered a credible and trustworthy borrower with outside entities.
The amount of the federal budget that goes to interest on the national debt depends on the current interest rates on Treasury bills. Since this interest rate varies, so does the percentage of the budget thats applied to interest on the national debt. For example, by the end of 2010, public debt was over $9 trillion and 10-year Treasury bill interest rates averaged 3.21%. The government set aside 5.7% of the federal budget to pay for the interest on the national debt.
By the close of 2020, the interest rate on a 10-year Treasury bill is expected to be at 0.6%. In April 2020, the U.S. public debt was $24.97 trillion. The government plans to set aside 8.7% of federal spending in 2020 to cover the interest on the national debt. As the years go by, the interest on public debt continues to increase, so the percentage of the federal budget thats used to cover this interest also increases.