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National debt of the United States

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This article is part of a series on the
Budget and debt in the
United States of America
Major dimensions
Programs
Contemporary issues

2007–2008 financial crisis

2013 budget sequestration

Related events

Terminology
Cumulative deficit + Interest ≈ Debt
U.S. debt from 1940 to 2011. Red lines indicate the debt held by the public (net public debt) and black lines indicate the total public debt outstanding (gross public debt), the difference being that the gross debt includes that held by the federal government itself. The second panel shows the two debt figures as a percentage of U.S. GDP (dollar value of U.S. economic production for that year). The top panel is deflated so every year is in 2010 dollars.

The United States public debt is the money borrowed by the federal government of the United States through the issuing of securities by the Treasury and other federal government agencies. US public debt consists of two components:[1]

  • Debt held by the public includes Treasury securities held by investors outside the federal government, including that held by individuals, corporations, the Federal Reserve System and foreign, state and local governments.
  • Debt held by government accounts or intragovernmental debt includes non-marketable Treasury securities held in accounts administered by the federal government that are owed to program beneficiaries, such as the Social Security Trust Fund. Debt held by government accounts represents the cumulative surpluses, including interest earnings, of these accounts that have been invested in Treasury securities.

Public debt increases or decreases as a result of the annual unified budget deficit or surplus.[2] The federal government budget deficit or surplus is the difference between government receipts and spending, ignoring intra-governmental transfers. However, some spending that is excluded from the deficit (supplemental appropriations) also adds to the debt.

Historically, the US public debt as a share of GDP increased during wars and recessions, and subsequently declined. For example, debt held by the public as a share of GDP peaked just after World War II (113% of GDP in 1945), but then fell over the following 30 years. In recent decades, however, large budget deficits and the resulting increases in debt have led to concern about the long-term sustainability of the federal government's fiscal policies.[3]

On 13 February 2013, debt held by the public was approximately $11.668 trillion or about 74% of GDP. Intra-governmental holdings stood at $4.856 trillion, giving a combined total public debt of $16.524 trillion.[4][5][5][6] As of July 2012, $5.3 trillion or approximately 48% of the debt held by the public was owned by foreign investors, the largest of which were China and Japan at just over $1.1 trillion each.[7]

History

File:Publicly Held Federal Debt 1790-2012.png
U.S. federal debt held by the public as a percentage of GDP, from 1790 to 2012
Main article: History of the United States public debt

Except for about a year during 1835–1836, the United States has continuously held a public debt since the US Constitution legally went into effect on March 4, 1789. Debts incurred during the American Revolutionary War and under the Articles of Confederation amounted to $75,463,476.52 on January 1, 1791. From 1796 to 1811 there were 14 budget surpluses and 2 deficits. There was a sharp increase in the debt as a result of the War of 1812. In the 20 years following that war, there were 18 surpluses. The federal government actually paid off its debt entirely in January 1835, only to begin accruing debt anew by 1836 (the debt on January 1, 1836 was $37,000).[8][9]

Another sharp increase in the debt occurred as a result of the Civil War. The debt was $65 million in 1860, but passed $1 billion in 1863 and reached $2.7 billion by the end of the war. During the following 47 years, there were 36 surpluses and 11 deficits. During this period 55% of the national debt was paid off. Debt increased again during World War I (1914–1918), reaching $25.5 billion at its conclusion. This was followed by 11 consecutive surpluses that saw the debt reduced by 36%.[10]

The next period of major increase in the national debt took place between 1930 and 1945. In 1930, debt held by the public stood at $15.05 billion or 16.5% of GDP. Decreased tax revenues and social programs enacted during the Great Depression increased the debt, and by 1939, the debt held by the public had increased to $39.65 billion or 43% of GDP. The buildup and involvement in World War II during the Roosevelt and Truman presidencies caused an even larger increase; debt held by the public had reached $251.43 billion or 112% of GDP at its conclusion in 1945. Rapid economic growth after the war reduced debt as a percentage of GDP, and it reached a post-WWII low of 24.6% in 1974.[10][11]

Debt held by the public relative to GDP rose rapidly again in the 1980s. President Ronald Reagan's economic policies lowered tax rates and increased military spending, while congressional Democrats held fast against attempts to reverse spending on social programs.[12][13] As a result, debt as a share of GDP increased from 26.2% in 1980 to 40.9% in 1988, and continued to rise during the presidency of George H. W. Bush, reaching 48.3% of GDP in 1992.[10][14]

Debt held by the public reached 49.5% of GDP at the beginning of President Clinton's first term. However, it fell to 34.5% of GDP by the end of Clinton's presidency due in part to decreased military spending, increased taxes (in 1990, 1993 and 1997), and increased tax revenue resulting from the Dot-com bubble.[10][11][15][16][17] The budget controls instituted in the 1990s successfully restrained fiscal action by the Congress and the President and together with economic growth contributed to the budget surpluses at the end of the decade.[18]

In the early 21st century, debt relative to GDP rose again due in part to the Bush tax cuts and increased military spending caused by the wars in the Middle-East and a new entitlement Medicare D program. During the presidency of George W. Bush, debt held by the public increased from $3.339 trillion in September 2001 to $6.369 trillion by the end of 2008,[6][19] In the aftermath of the Global Financial Crisis and related significant revenue declines and spending increases, the debt held by the public increased to $11 trillion by the end of July 2012 under the presidency of Barack Obama.[6][20]

Change in debt position since 2001

Cause of change between CBO's 2001 projection of a $5.6 trillion surplus between 2002 and 2012 and the $6.1 trillion debt increase that actually occurred.

The CBO has summarized the cause of change between its January 2001 estimate of a $5.6 trillion cumulative surplus between 2002 and 2011 and the actual $6.1 trillion cumulative deficit that occurred, an unfavorable "turnaround" or debt increase of $11.7 trillion. Tax cuts and slower-than-expected growth reduced revenues by $6.1 trillion and spending was $5.6 trillion higher. Of this total, the CBO attributes 72% to legislated tax cuts and spending increases and 27% to economic and technical factors. Of the latter, 56% occurred from 2009 to 2011.[21][22]

The difference between the projected and actual debt in 2011 can be largely attributed to:

  • $3.5 trillion – Economic changes (including lower than expected tax revenues and higher safety net spending due to recession)
  • $1.6 trillion – Bush Tax Cuts (EGTRRA and JGTRRA), primarily tax cuts but also some smaller spending increases
  • $1.5 trillion – Increased defense baseline budget and non-defense discretionary spending under both the Bush and Obama administrations
  • $1.4 trillion – Wars in Afghanistan and Iraq
  • $1.4 trillion – Incremental interest due to higher debt balances
  • $0.9 trillion – Stimulus and tax cuts since 2008 (Economic Stimulus Act of 2008, ARRA and Tax Act of 2010)[22]

Several other sources have used CBO data to summarize the results in various ways.[23][24][25]

Valuation and measurement

Public and government accounts

Detailed breakdown of government holders of treasury debt and debt instruments used of the public portion.
U.S. national debt live panel, in New York, April 20, 2012

As of 30 November 2012, debt held by the public was approximately $11.553 trillion or about 72% of GDP. Intra-governmental holdings stood at $4.816 trillion, giving a combined total public debt of $16.369 trillion.[4][6]

The national debt can also be classified into marketable or non-marketable securities. As of March 2012, total marketable securities were $10.34 trillion while the non-marketable securities were $5.24 trillion.[4] Most of the marketable securities are Treasury notes, bills, and bonds held by investors and governments globally. The non-marketable securities are mainly the "government account series" owed to certain government trust funds such as the Social Security Trust Fund, which represented $2.7 trillion in 2011.[26] The non-marketable securities represent amounts owed to program beneficiaries. For example, in the case of the Social Security Trust Fund, the payroll taxes dedicated to Social Security were credited to the Trust Fund upon receipt, but spent for other purposes. If the government continues to run deficits in other parts of the budget, the government will have to issue debt held by the public to fund the Social Security Trust Fund, in effect exchanging one type of debt for the other.[27] Other large intragovernmental holders include the Federal Housing Administration, the Federal Savings and Loan Corporation's Resolution Fund and the Federal Hospital Insurance Trust Fund (Medicare).

Accounting treatment

Only debt held by the public is reported as a liability on the consolidated financial statements of the United States government. Debt held by government accounts is an asset to those accounts but a liability to the Treasury; they offset each other in the consolidated financial statements.[28]

The deficit is presented on a cash rather than an accruals basis, although the accrual basis may provide more information on the longer-term implications of the government's annual operations.[29]

Fannie Mae and Freddie Mac obligations excluded

See also: Federal takeover of Fannie Mae and Freddie Mac

Under normal accounting rules, fully owned companies would be consolidated into the books of the owner, but the large size of Fannie and Freddie has made the U.S. government reluctant to incorporate Freddie and Fannie into its own books. When the financial crisis required a bail-out, White House Budget Director Jim Nussle, on September 12, 2008, initially indicated their budget plans would not incorporate the GSE debt into the budget because of the temporary nature of the conservator intervention.[30] As the intervention has dragged out, pundits have started to further question this accounting treatment, noting that changes in August 2012 "makes them even more permanent wards of the state and turns the government's preferred stock into a permanent, perpetual kind of security".[31] The government controls the Public Company Accounting Oversight Board, which would normally criticize inconsistent accounting practices, but it does not oversee its own government's accounting practices or the standards set by the Federal Accounting Standards Advisory Board. The on- or off-balance sheet obligations of those two independent GSEs was just over $5 trillion at the time the conservatorship was put in place, consisting mainly of mortgage payment guarantees.[32] The extent to which the government will be required to pay these obligations depends on a variety of economic and housing market factors. The federal government provided over $110 billion to Fannie and Freddie by 2010.[33]

Guaranteed obligations excluded

See also: Temporary Liquidity Guarantee Program and Exchange Stabilization Fund

U.S. federal government guarantees are not included in the public debt total, until such time as there is a call on the guarantees. For example, the U.S. federal government in late-2008 guaranteed large amounts of obligations of mutual funds, banks, and corporations under several programs designed to deal with the problems arising from the late-2000s financial crisis. The funding of direct investments made in response to the crisis, such as those made under the Troubled Assets Relief Program, are included in the debt.

Unfunded obligations excluded

The U.S. government is obligated under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. The Government Accountability Office (GAO) projects that payouts for these programs will significantly exceed tax revenues over the next 75 years. The Medicare Part A (hospital insurance) payouts already exceed program tax revenues, and social security payouts exceeded payroll taxes in fiscal 2010. These deficits require funding from other tax sources or borrowing.[34] The present value of these deficits or unfunded obligations is an estimated $45.8 trillion. This is the amount that would have had to be set aside in 2009 in order to pay for the unfunded obligations which, under current law, will have to be raised by the government in the future. Approximately $7.7 trillion relates to Social Security, while $38.2 trillion relates to Medicare and Medicaid. In other words, health care programs will require nearly five times more funding than Social Security. Adding this to the national debt and other federal obligations would bring total obligations to nearly $62 trillion.[35] However, these unfunded obligations are not counted in the national debt.

Measuring debt relative to gross domestic product

2010 Budget: Total Debt $ and % to GDP 2000–2010

GDP is a measure of the total size and output of the economy. One measure of the debt burden is its size relative to GDP, called the "Debt to GDP ratio." Mathematically, this is the debt divided by the GDP amount. The Congressional Budget Office includes historical budget and debt tables along with its annual "Budget and Economic Outlook." Debt held by the public as a percentage of GDP rose from 34.7% GDP in 2000 to 40.5% in 2008 and 67.7% in 2011.[36]

Mathematically, the ratio can be lowered even while debt grows, if the increase in GDP is sufficient. Alternatively, the ratio can increase even while debt is being reduced, if the decline in GDP is sufficient.

According to the CIA World Factbook, during 2011, the U.S. debt to GDP ratio of 67.8% was the 38th highest in the world. This was measured using "debt held by the public."[37]

The ratio is higher if the total national debt is used, by adding the "intragovernmental debt" to the "debt held by the public." For example, on 10 January 2013, debt held by the public was approximately $11.577 trillion or about 73% of GDP. Intra-governmental holdings stood at $4.855 trillion, giving a combined total public debt of $16.432 trillion. U.S. GDP in 2012 was approximately $15.6 trillion, for a total debt to GDP ratio of approximately 105%.[4][5][5][6]

There are various economic risks associated with higher debt levels (see related section). For example, a high public debt to GDP ratio may slow economic growth. Economists Carmen Reinhart and Kenneth Rogoff calculated that countries with public debt above 90 percent of GDP grow by an average of 1.3 percentage points per year slower than less indebted countries. If growth slows, many of the economic challenges the United States faces will worsen.[38]

Calculating the annual change in debt

Comparison of deficits to change in debt in 2008

The annual change in debt is not equal to the "total deficit" typically reported in the media. Social Security payroll taxes and benefit payments, along with the net balance of the U.S. Postal Service, are considered "off-budget", while most other expenditure and receipt categories are considered "on-budget." The total federal deficit is the sum of the on-budget deficit (or surplus) and the off-budget deficit (or surplus). Since FY1960, the federal government has run on-budget deficits except for FY1999 and FY2000, and total federal deficits except in FY1969 and FY1998–FY2001.[39]

In large part because of Social Security surpluses, the total deficit is smaller than the on-budget deficit. The surplus of Social Security payroll taxes over benefit payments is spent by the government for other purposes. However, the government credits the Social Security Trust fund for the surplus amount, adding to the "intragovernmental debt." The total federal debt is divided into "intragovernmental debt" and "debt held by the public." In other words, spending the "off budget" Social Security surplus adds to the total national debt (by increasing the intragovernmental debt) while the surplus reduces the "total" deficit reported in the media.

Certain spending called "supplemental appropriations" is outside the budget process entirely but adds to the national debt. Funding for the Iraq and Afghanistan wars was accounted for this way prior to the Obama administration. Certain stimulus measures and earmarks are also outside the budget process.

For example, in FY2008 an off-budget surplus of $183 billion reduced the on-budget deficit of $642 billion, resulting in a total federal deficit of $459 billion. Media often reported the latter figure. The national debt increased by $1,017 billion between the end of FY2007 and the end of FY2008.[40] The federal government publishes the total debt owed (public and intragovernmental holdings) at the end of each fiscal year[41] and since FY1957 the amount of debt held by the federal government has increased each year.

Reduction

Contrary to popular belief, debt reduction is almost always accomplished without running budget surpluses.

Negative real interest rates

Since 2010, the U.S. Treasury has been obtaining negative real interest rates on government debt.[42] Such low rates, outpaced by the inflation rate, occur when the market believes that there are no alternatives with sufficiently low risk, or when popular institutional investments such as insurance companies, pensions, or bond, money market, and balanced mutual funds are required or choose to invest sufficiently large sums in Treasury securities to hedge against risk.[43][44] Lawrence Summers, Matthew Yglesias and other economists state that at such low rates, government debt borrowing saves taxpayer money, and improves creditworthiness.[45][46]

In the late 1940s through the early 1970s, the US and UK both reduced their debt burden by about 30% to 40% of GDP per decade by taking advantage of negative real interest rates, but there is no guarantee that government debt rates will continue to stay so low.[43][47] Between 1946 and 1974, the US debt-to-GDP ration fell from 121% to 32% even though there were surpluses in only eight of those years which were much smaller than the deficits.[48]

Converting fractional reserve to full reserve banking

The International Monetary Fund published a working paper suggesting that the debt could be eliminated by raising bank reserve requirements, converting from fractional reserve banking to full reserve banking.[49][50] Economists at the Paris School of Economics have commented on the plan, stating that it is already the status quo for coinage currency,[51] and a Norges Bank economist has examined the proposal in the context of considering the finance industry as part of the real economy.[52] A Centre for Economic Policy Research paper agrees with the conclusion that, "no real liability is created by new fiat money creation, and therefore public debt does not rise as a result."[53]

Debt ceiling

Main article: United States debt ceiling
US debt ceiling at the end of each year from 1981 to 2010.

Definition

Under Article I Section 8 of the United States Constitution, Congress has the sole power to borrow money on the credit of the United States. From the founding of the United States until 1917, Congress directly authorized each individual debt issuance separately. In order to provide more flexibility to finance the United States' involvement in World War I, Congress modified the method by which it authorizes debt in the Second Liberty Bond Act of 1917.[54] Under this act Congress established an aggregate limit, or "ceiling," on the total amount of bonds that could be issued. Denmark is the only other country with a comparable debt ceiling, although Denmark sets the level very high.[55]

Relationship to appropriation process

The modern debt ceiling, in which an aggregate limit is applied to nearly all federal debt, was substantially established by Public Debt Acts[56][57] passed in 1939 and 1941. The process of setting the debt ceiling is separate and distinct from the Federal budget process, and raising the debt ceiling does not have any direct impact on the budget deficit. The U.S. President proposes a federal budget every year. This budget details projected tax collections and outlays and, if there is a budget deficit, the amount of borrowing the President is proposing in that fiscal year. Congress creates specific appropriation bills which authorize spending, which are signed into law by the President.

A vote to increase the debt ceiling is, therefore, usually treated as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office (GAO) explains: "The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred."[58] The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.[59][60]

Since 1979, the House of Representatives passed a rule to automatically raise the debt ceiling when passing a budget, without the need for a separate vote on the debt ceiling, except when the House votes to waive or repeal this rule. The exception to the rule was invoked in 1995, which resulted in two government shutdowns.[61]

Treasury measures when debt ceiling is reached

The Treasury is authorized to issue debt needed to fund government operations (as authorized by each federal budget) up to a stated debt ceiling, with some small exceptions. When the debt ceiling is reached, Treasury can declare a debt issuance suspension period and utilize "extraordinary measures" to acquire funds to meet federal obligations but which do not require the issue of new debt. One example is to suspend contributions to certain government pension funds. However, these amounts are not sufficient to cover government operations.[62] Treasury first used these measures on December 16, 2009, to remain within the debt ceiling, and avoid a government shutdown,[63] and also used it during the debt-ceiling crisis of 2011. However, there are limits to how much can be raised by these measures.

History

Between 1940 and January 2013, the debt ceiling was raised 54 times during Republican presidential administrations and 40 times during Democratic administrations. The ceiling was raised the most times (18) during President Reagan's administration, with no other President exceeding 10 times. During President Obama's first term, the ceiling was raised six times.[64]

The debt ceiling was increased on February 12, 2010, to $14.294 trillion.[65][66][67] On April 15, 2011, Congress finally passed the 2011 United States federal budget, authorizing federal government spending for the remainder of the 2011 fiscal year, which ends on September 30, 2011, with a deficit of $1.48 trillion, [citation needed] without voting to increase the debt ceiling. The two Houses of Congress were unable to agree on a revision of the debt ceiling in mid-2011, resulting in the United States debt-ceiling crisis. The impasse was resolved with the passing on August 2, 2011, the deadline for a default by the U.S. government on its debt, of the Budget Control Act of 2011, which immediately increased the debt ceiling to $14.694 trillion, required a vote on a Balanced Budget Amendment, and established several complex mechanisms to further increase the debt ceiling and reduce federal spending.

On September 8, 2011, one of the complex mechanisms to further increase the debt ceiling took place as the Senate defeated a resolution to block a $500 billion automatic increase. The Senate's action allowed the debt ceiling to increase to $15.194 trillion, as agreed upon in the Budget Control Act.[68] This was the third increase in the debt ceiling in 19 months, the fifth increase since President Obama took office, and the twelfth increase in 10 years. The August 2 Act also created the United States Congress Joint Select Committee on Deficit Reduction for the purpose of developing a set of proposals by November 23, 2011, to reduce federal spending by $1.2 trillion. The Act required both houses of Congress to convene an "up-or-down" vote on the proposals as a whole by December 23, 2011. The Joint Select Committee met for the first time on September 8, 2011. The debt ceiling was raised once more on January 30, 2012, to a new high of $16.394 trillion.

At midnight on Dec. 31, 2012, a major provision of the Budget Control Act of 2011 (BCA) was scheduled to go into effect. The crucial part of the Act provided for a Joint Select Committee of Congressional Democrats and Republicans — the so-called 'Supercommittee '— to produce bipartisan legislation by late November 2012 that would decrease the U.S. deficit by $1.2 trillion over the next 10 years. To do so, the committee agreed to implement by law — if no other deal was reached before Dec. 31 — massive government spending cuts as well as tax increases or a return to tax levels from previous years. These are the elements that make up the 'United States fiscal cliff.'[69]

Debt holdings

Estimated ownership each year.

Because a large variety of people own the notes, bills, and bonds in the "public" portion of the debt, Treasury also publishes information that groups the types of holders by general categories to portray who owns United States debt. In this data set, some of the public portion is moved and combined with the total government portion, because this amount is owned by the Federal Reserve as part of United States monetary policy. (See Federal Reserve System.)

As is apparent from the chart, a little less than half of the total national debt is owed to the "Federal Reserve and intragovernmental holdings". The foreign and international holders of the debt are also put together from the notes, bills, and bonds sections. To the right is a chart for the data as of June 2008:

Foreign holdings

Composition of US Long-Term Treasury Debt held by foreign states, Nov. 2005–Nov. 2010. June figures are results of comprehensive Treasury Department surveys.

As of January 2011, foreigners owned $4.45 trillion of U.S. debt, or approximately 47% of the debt held by the public of $9.49 trillion and 32% of the total debt of $14.1 trillion.[70] The largest holders were the central banks of China, Japan, Brazil, Taiwan, United Kingdom, Switzerland and Russia.[72] The share held by foreign governments has grown over time, rising from 13% of the public debt in 1988[73] to 25% in 2007.[74]

As of May 2011 the largest single holder of U.S. government debt was China, with 26 percent of all foreign-held U.S. Treasury securities (8% of total U.S. public debt).[75] China's holdings of government debt, as a percentage of all foreign-held government debt, have decreased a bit between 2010 and 2011, but are up significantly since 2000 (when China held just 6 percent of all foreign-held U.S. Treasury securities).[76]

Major Foreign Holders of U.S. Treasury Securities, 2000–2010 Source: http://FutureofUSChinaTrade.com
Major foreign holders of U.S. Treasury securities, June 2010-May 2011[77]

This exposure to potential financial or political risk should foreign banks stop buying Treasury securities or start selling them heavily was addressed in a June 2008 report issued by the Bank of International Settlements, which stated, "Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely."[78]

On May 20, 2007, Kuwait discontinued pegging its currency exclusively to the dollar, preferring to use the dollar in a basket of currencies.[79] Syria made a similar announcement on June 4, 2007.[80] In September 2009 China, India and Russia said they were interested in buying International Monetary Fund gold to diversify their dollar-denominated securities.[81] However, in July 2010 China's State Administration of Foreign Exchange "ruled out the option of dumping its vast holdings of US Treasury securities" and said gold "cannot become a main channel for investing our foreign exchange reserves" because the market for gold is too small and prices are too volatile.[82]

According to Paul Krugman, "It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction."[83]

Forecasting

Further information: United States federal budget

Short-term forecasts

The Congressional Budget Office releases its "Budget and Economic Outlook" annually in January or February, with an update in August. This report covers a ten-year window. CBO projected in August 2012 that the fiscal year 2012 debt held by the public would be $11,318 billion, or 72.8% GDP. CBO projected that if 2012 tax and spending policies were extended (i.e., the "alternate fiscal scenario"), these amounts would rise to $12,460 billion (78.1% GDP) in 2013 and $22,181 billion (89.7% GDP) in 2022. If the U.S. were to experience significant tax increases and spending cuts (i.e., the "baseline scenario") related to the United States fiscal cliff, these amounts would be considerably less in 2013 ($12,064 billion or 76.1% GDP) and 2022 ($14,464 or 58.5% GDP).[84]

The Congressional Budget Office (CBO) wrote in 2008 that: "Future growth in spending per beneficiary for Medicare and Medicaid – the federal government’s major health care programs – will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs – which will be difficult, in part because of the complexity of health policy choices – is ultimately the nation’s central long-term challenge in setting federal fiscal policy."[85]

Demographic shifts and per-capita spending are causing Social Security and Medicare/Medicaid expenditures to grow significantly faster than GDP. If this trend continues, government simulations under various assumptions project mandatory spending for these programs will exceed taxes dedicated to these programs by more than $40 trillion over the next 75 years on a present value basis.[86]

According to the GAO, this will double debt-to-GDP ratios by 2040 and double them again by 2060, reaching 600% by 2080.[87] A GAO simulation indicates that Social Security, Medicare, and Medicaid expenditures alone will exceed 20% of GDP by 2080, which is approximately the historical ratio of taxes collected by the federal government. In other words, these mandatory programs alone will take up all government revenues under this simulation.[86]

CBO long-term scenarios

CBO-Public Debt Under "Extended" and "Alternate" Scenarios

The Congressional Budget Office projects the debt as part of its "Long-term Budget Outlook" which is released annually. The 2012 Outlook included projections for debt through 2037. CBO outlined two scenarios, the "Extended Baseline" scenario and "Extended Alternative Fiscal" scenario. The Baseline scenario assumes significant fiscal austerity, with lower debt and deficits via higher tax revenues and lower spending. The Alternative scenario assumes higher debt and deficits via lower tax revenues and higher spending. CBO projected that debt held by the public would be 53% GDP in 2037 under the Baseline Scenario but 199% under the Alternate Scenario, versus 73% in 2012. CBO has warned that the debt levels under the Alternative scenario would pose significant risks, including much higher interest expenses crowding out government benefits.[88]

CBO estimated in August 2011 that if laws currently "on the books" were enforced without changes, meaning the "extended baseline scenario" described above is implemented along with deficit reductions from the Budget Control Act of 2011, the deficit would decline from 8.5% GDP in 2011 to around 1% GDP by 2021.[89]

The CBO reported in August 2011: "Many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation’s underlying fiscal policies than the extended-baseline scenario does. The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and rapid policy changes to put the nation on a sustainable fiscal course."[89]

Risks and obstacles

Risks due to increasing entitlement spending, according to GAO's projections of future trends
Components of interest on the debt.
Main article: Deficit reduction in the United States

CBO risk factors

The CBO reported several types of risk factors related to rising debt levels in a July 2010 publication:

  • A growing portion of savings would go towards purchases of government debt, rather than investments in productive capital goods such as factories and computers, leading to lower output and incomes than would otherwise occur;
  • If higher marginal tax rates were used to pay rising interest costs, savings would be reduced and work would be discouraged;
  • Rising interest costs would force reductions in government programs;
  • Restrictions to the ability of policymakers to use fiscal policy to respond to economic challenges; and
  • An increased risk of a sudden fiscal crisis, in which investors demand higher interest rates.[90]

Sustainability

The Government Accountability Office (GAO), the federal government's auditor, argues that the United States is on a fiscally "unsustainable" path and that politicians and the electorate have been unwilling to change this path.[34] Further, the subprime mortgage crisis has significantly increased the financial burden on the U.S. government, with over $10 trillion in commitments or guarantees and $2.6 trillion in investments or expenditures as of May 2009, only some of which are included in the public debt computation.[91]

Risks to economic growth

Debt levels may also affect economic growth rates. Economists Kenneth Rogoff and Carmen Reinhart reported in 2010 that among the 20 advanced countries studied, average annual GDP growth was 3–4% when debt was relatively moderate or low (i.e. under 60% of GDP), but it dips to just 1.6% when debt was high (i.e., above 90% of GDP).[92] Economist Paul Krugman has argued, however, that it is low growth which causes national debt to increase, rather than the other way around.[93]

Risk of inflation

A high debt level may result in inflation if currency devaluation is viewed as a solution to debt reduction. If wages are rising due to inflation, fixed amounts of debt can be paid off more easily using cheaper dollars. This helps the debtor but hurts the debtholder, who receives less value in return for their loan. A variety of factors are placing increasing pressure on the value of the U.S. dollar, increasing the risk of devaluation or inflation and encouraging challenges to dollar's role as the world's reserve currency.

The U.S. Federal Reserve has significantly expanded the money supply in the wake of the subprime mortgage crisis. This increases the risk of inflation once economic growth resumes at historical rates. Ben Bernanke stated in January 2013: "We have increased the monetary base, which is the amount of reserves that banks hold with the Fed. There are some people who think that is going to inflationary. Personally, I don't see much evidence of that. Inflation as I mentioned has been quite low. Inflation expectations remain quite well anchored....We have, I believe, we have all the tools we need to undo our monetary policy stimulus and to take that away before inflation becomes a problem."[94]

Mandatory programs

While there is significant debate about solutions,[95] the significant long-term risk posed by the increase in mandatory program spending is widely recognized,[96] with health care costs (Medicare and Medicaid) the primary risk category.[97][98] In a June 2010 opinion piece in the Wall Street Journal, former chairman of the Federal Reserve, Alan Greenspan noted that "Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit."[99] If significant reforms are not undertaken, benefits under entitlement programs will exceed government income by over $40 trillion over the next 75 years.[98]

Interest costs

Despite rising debt levels, interest costs have remained at approximately 2008 levels (around $450 billion in total) due to lower interest rates paid to Treasury debt holders.[100] However, should interest rates return to historical averages, the interest cost would increase dramatically. Historian Niall Ferguson described the risk that foreign investors would demand higher interest rates as the U.S. debt levels increase over time in a November 2009 interview.[101]

Debates

Main article: Political debates about the United States federal budget § Debates about the public debt

What is an excessive debt to GDP ratio?

Economists continue to debate about the level of debt relative to GDP that signals a "red line" or dangerous level, or if any such level exists. In January 2010, Economists Kenneth Rogoff and Carmen Reinhart stated that gross debt (i.e., debt held by the public plus intragovernmental debt) exceeding 90% of GDP might be an indicative danger level.[102] Fed Chair Ben Bernanke stated in April 2010 that "Neither experience nor economic theory clearly indicates the threshold at which government debt begins to endanger prosperity and economic stability. But given the significant costs and risks associated with a rapidly rising federal debt, our nation should soon put in place a credible plan for reducing deficits to sustainable levels over time."[103]

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.[93] The Center on Budget and Policy Priorities (CBPP) 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.[104]

There is debate regarding the economic nature of the intragovernmental debt, which was approximately $4.6 trillion in February 2011.[105] For example, the CBPP argues: that "large increases in [debt held by the public] 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 (the other component of the gross debt) has no such effects because it is simply money the federal government owes (and pays interest on) to itself."[104] 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 (i.e., debt held by the public) to pay for the projected shortfall in the Social Security program. This will result in "debt held by the public" replacing "intragovernmental debt".[106][107]

Appendix

National debt for selected years

End
of
Fiscal
Year 		Gross
debt in
$billions
undeflated
Treas.[108] 		Gross
debt in
$billions
undeflated
OMB[109][110] 		as %
of GDP
Low-High est.
or a – Treas.
audit 		Debt
held by
public
($billions) 		as %
of GDP
(Treas/MW,
OMB or
Treas/BEA) 		GDP
$billions
OMB/BEA[111]
est.=MW.com
1910 2.65 8.0 2.65 8.0 est. 32.8
1920 25.95 29.2 25.95 29.2 est. 88.6
1927 [112] 18.51 19.2 18.51 19.2 est. 96.5
1930 16.19 16.6 16.19 16.6 est. 97.4
1940 42.97 50.70 44.4–52.4 42.97 42.1 96.8
1950 257.3 256.9 91.2–94.2 219.0 80.2 273.1/281.7
1960 286.3 290.5 54.6–56.0 236.8 45.6 518.9/523.9
1970 370.9 380.9 36.2–37.6 283.2 28.0 1,013/1,026
1980 907.7 909.0 33.4 711.9 26.1 2,724
1990 3,233 3,206 56.0–56.4 2,412 42.1 5,735
2000 (a1) 5,674 5,629 a 57.6 3,410 34.7 9,821
2001 (a2) 5,807 5,770 a 56.6 3,320 32.5 10,225
2002 (a3) 6,228 6,198 a 59.0 3,540 33.6 10,544
2003 (a) 6,783 6,760 a 61.8 3,913 35.6 10,980
2004 (a) 7,379 7,355 a 63.2 4,296 36.8 11,686
2005 (a4) 7,933 7,905 a 63.6 4,592 36.9 12,446
2006 (a5) 8,507 8,451 a 64.0 4,829 36.5 13,255
2007 (a6) 9,008 8,951 a 64.8 5,035 36.2 13,896
2008 (a7) 10,025 9,986 a 69.6 5,803 40.2 14,394
2009 (a8) 11,910 11,876 a ~84.4 7,552 53.6 ~14,098
2010 (a9) 13,562 13,529 a ~93.4 9,023 62.2 ~14,508/14,512

Fiscal years 1940–2009 GDP figures are derived from February 2011 Office of Management and Budget figures which contained revisions of prior year figures due to significant changes from prior GDP measurements. Fiscal years 1950–2010 GDP measurements are derived from December 2010 Bureau of Economic Analysis figures which also tend to be subject to revision, especially more recent years. The two measures in Fiscal Years 1980, 1990 and 2000–2009 diverge only slightly.

Absolute differences from advance (one month after) BEA reports of GDP percent change to current findings (as of January 2011) found in revisions are stated to be 1.2% ± 1.8% or a 95% probability of being within the range of 0.0–3.0%, assuming the differences to occur according to standard deviations from the average absolute difference of 1.2%. E.g. with an advance report of a $500 billion increase of a $15 trillion GDP, for example, one could be 95% confident that the range would be 0.0 to 3.0% different than 3.3% (500 ÷ 15,000) or $0 to $450 billion different than the hypothetical $500 billion.

Fiscal years 1940–1970 begin July 1 of the previous year (for example, Fiscal Year 1940 begins July 1, 1939 and ends June 30, 1940); fiscal years 1980–2010 begin October 1 of the previous year.

Intergovernmental debts before the Social Security Act are presumed to equal zero.

1909–1930 calendar year GDP estimates are from MeasuringWorth.com[113] Fiscal Year estimates are derived from simple linear interpolation.

(a1) Audited figure was "about $5,659 billion."[114]

(a2) Audited figure was "about $5,792 billion."[115]

(a3) Audited figure was "about $6,213 billion."[115]

(a) Audited figure was said to be "about" the stated figure.[116]

(a4) Audited figure was "about $7,918 billion."[117]

(a5) Audited figure was "about $8,493 billion."[117]

(a6) Audited figure was "about $8,993 billion."[118]

(a7)Audited figure was "about $10,011 billion."[118]

(a8) Audited figure was "about $11,898 billion."[119]

(a9) Audited figure was "about $13,551 billion."[120]

Foreign holders of US Treasury securities

Foreign holders account for approximately one-third of all holders.[121] The following is a list of the top foreign holders (over $75 billion) of US Treasury securities as listed by the US Treasury (revised by December 2012 survey):[122]

Leading foreign holders of US Treasury securities as of December 2012
Economic area Billions of dollars (est.) Ratio of owned US debt to GDP (est.)[123] Percent change since December 2011
Mainland China 1,202.8 9.7%[124] +4.4%
Japan 1,120.2 18.7% +5.8%
Oil exporters1 262.5 n/a +0.5%
Brazil 251.5 10.4% +10.8%
Caribbean Banking Centers2 250.0 n/a +10.0%
Taiwan 198.8 42.7% +12.1%
Switzerland 193.9 31.1% +36.2%
Russia 157.6 8.1% +5.4%
Luxembourg 150.5 272.2% +2.0%
United Kingdom 142.0 5.8% +24.2%
Hong Kong SAR 141.8 55.0% +16.5%
Belgium 140.0 29.4% +3.6%
Ireland 105.4 51.5% +7.9%
Singapore 99.5 37.1% +32.5%
Others 1,138.7 n/a +23.6%
Grand total 5,555.4 n/a +10.9%

1Saudi Arabia, Venezuela, Libya, Iran, Iraq, the United Arab Emirates, Bahrain, Kuwait, Oman, Qatar, Ecuador, Indonesia, Algeria, Gabon, and Nigeria

2Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, British Virgin Islands and Panama

Statistics

U.S. Public debt by party affiliation of the White House from 1950 to 2009. Upper graph shows public debt in trillions, lower graph shows public debt as a percentage of GDP.
  • The Strategic Petroleum Reserve had a value of approximately $65 billion as of January 2011, at a Market Price of $98/barrel with a $15/barrel discount for sour crude.[128]
  • The national debt equates to $44,900 per person U.S. population, or $91,500 per member of the U.S. working population,[129] as of December 2010.
  • In 2008, $242 billion was spent on interest payments servicing the debt, out of a total tax revenue of $2.5 trillion, or 9.6%. Including non-cash interest accrued primarily for Social Security, interest was $454 billion or 18% of tax revenue.[118]
  • Total U.S. household debt, including mortgage loan and consumer debt, was $11.4 trillion in 2005. By comparison, total U.S. household assets, including real estate, equipment, and financial instruments such as mutual funds, was $62.5 trillion in 2005.[130]
  • Total U.S Consumer Credit Card revolving credit was $931.0 billion in April 2009.[131]
  • Total third world debt was estimated to be $1.3 trillion in 1990.[132]
  • The U.S. balance of trade deficit in goods and services was $725.8 billion in 2005.[133]
  • According to a retrospective Brookings Institute study published in 1998 by the Nuclear Weapons Cost Study Committee (formed in 1993 by the W. Alton Jones Foundation), the total expenditures for U.S. nuclear weapons from 1940 to 1998 was $5.5 trillion in 1996 Dollars.[134] The total public debt at the end of fiscal year 1998 was $5,478,189,000,000 in 1998 Dollars[135] or $5.3 trillion in 1996 Dollars. The entire public debt in 1998 was therefore attributable to the research, development, and deployment of U.S. nuclear weapons and nuclear weapons-related programs during the Cold War.[134][136][137]
  • The global market capitalization for all stock markets that are members of the World Federation of Exchanges was $32.5 trillion by the end of 2008.[138]

International debt comparisons

Gross debt as percentage of GDP
Nation 2007 2010 2011
European Union 59% 80% 83%
United States 62% 92% 102%
Austria 62% 78% 72%
France 64% 82% 86%
Germany 65% 82% 81%
Sweden 40% 39% 38%
Finland 35% 48% 49%
Greece 104% 123% 165%
Romania 13% 31% 33%
Bulgaria 17% 16% 16%
Czech Republic 28% 38% 41%
Italy 112% 119% 120%
Netherlands 52% 77% 65%
Poland 51% 55% 56%
Spain 42% 68% 68%
United Kingdom 47% 80% 86%
Japan 167% 197% 204%
Russia 9% 12% 10%
Asia 1 37% 40% 41%
Latin America 2 41% 37% 35%

Sources: Eurostat,[139] International Monetary Fund, World Economic Outlook (emerging market economies); Organisation for Economic Co-operation and Development, Economic Outlook (advanced economies)[140]

1China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand

2Argentina, Brazil, Chile and Mexico

Recent additions to the public debt of the United States

Deficit and debt increases 2001–2009.
Recent additions to U.S. public debt[6][108][109][111]
Fiscal year (begins
10/01 of prev. year) 		Value of
increase
$Billions 		% of GDP Total debt
$Billions 		% of GDP
1994 $282–292 4.0–4.2% ~$4,650 66.6–67.2%
1995 278–281 3.8% ~4,950 67.0–67.8%
1996 251–260 3.3–3.4% ~5,200 67.2–67.6%
1997 188 2.3% ~5,400 65.4–66.0%
1998 109–113 1.3% ~5,500 63.2–63.8%
1999 128–130 1.4% 5,641 61.2%
2000 18 0.2% 5,629 57.6%
2001 133 1.3% 5,792 56.6%
2002 421 4.0% 6,213 59.0%
2003 570 5.2% 6,783 61.8%
2004 596 5.1% 7,379 63.2%
2005 539 4.3% 7,918 63.6%
2006 575 4.3% 8,493 64.0%
2007 500 3.6% 8,993 64.8%
2008 1,018 7.1% 10,011 69.6%
2009 1,887 ~13.4% 11,898 ~84.4%
2010 1,653 ~11.4% 12,311 ~93.4%
2011[141] ~633 ~14,200 ~101.5%

The more precise FY 1999–2010 debt figures are derived from Treasury audit results.

The variations in the FY 2009–2010 figures are due to double-sourced or relatively preliminary GDP figures.

Historical debt ceiling levels

See also

References

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Further reading

  • Bonner, William (2006). Empire of Debt: the Rise of an Epic Financial Crisis. Wiley. ISBN 0-471-78253-X. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  • Johnson, Simon (2012). White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You. Pantheon. ISBN 9780307906960. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  • Macdonald, James (2006). A Free Nation Deep in Debt: The Financial Roots of Democracy. Princeton University Press. ISBN 0-691-12632-1.
  • Wright, Robert (2008). One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe. Mc-Graw Hill. ISBN 0-07-154393-7.
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