The US Debt and How It Got So Big
The U.S. debt is the sum of all outstanding debt owed by the federal government. On Oct. 1, 2020, it surpassed $27 trillion. The U.S. Treasury Department tracks the current total public debt outstanding and this figure changes daily. The debt clock in New York also tracks it.
About two-thirds is debt held by the public. The government owes this to buyers of U.S. Treasury notes including individuals, companies, and foreign governments.
The remaining third is intragovernmental debt. The Treasury owes this debt to its various departments who hold government account securities. The biggest owner is Social Security.
These government account securities have been running surpluses for years and the federal government uses these surpluses to pay for other departments. They will come due as baby boomers retire over the next two decades. Since Social Security and trust funds are the largest owners, the answer as to who owns the U.S. debt is basically everyone’s retirement money.
The national debt is greater than what America produces in a whole year. This high ratio of the debt to gross domestic product (GDP) tells investors that the country might have problems repaying the loans. That's a new and worrying occurrence for the U.S. In 1988, the debt was only half of America's economic output.
- The U.S. debt is the total federal financial obligation owed to the public and intragovernmental departments.
- Social Security is one of the United States’ largest debt holders.
- U.S. debt is so big because Congress continues both deficit spending and tax cuts.
- If steps are not taken, the ability for the U.S. to pay back its debt will come into question, affecting the global economy.
How the U.S. Debt Got So Large
The chart below tracks U.S. debt milestones from 1989 to 2020. It has increased by more than 800% during that time. In October 2020, the national debt exceeded $27 trillion. This figure includes both debt held by the public as well as intragovernmental debt.
There are a few significant causes of the size of the national debt.
Federal Budget Deficits
The largest deficit goes to President Obama. He added $8.3 trillion to the debt, a 70% increase. That's due to the American Recovery and Reinvestment Act (ARRA) stimulus package, which halted the 2008 financial crisis. He also included both tax cuts and increased military spending.
Although the national debt under Obama grew the most dollar-wise, it wasn't the biggest percentage increase. That honor goes to Franklin D. Roosevelt. He only added about $236.1 billion between 1933 and 1945, but that was about a 1,048% increase. He did this to fight the Great Depression and prepare the U.S. to enter World War II at the start of the 1940s.
President Trump is the second-largest contributor to the debt. As of Sept. 30, 2020, he added $6.7 trillion to the debt since Obama's last budget. This was only a 33% increase.
More than $2 trillion of the debt that President Trump added to the total was from stimulus spending to help families and businesses recover from the COVID-19 pandemic. Trump's fiscal year budgets also added to the debt before the pandemic hit.
Social Security Trust Fund
Every president borrows from the Social Security Trust Fund. The Fund took in more revenue than it needed through payroll taxes leveraged on baby boomers.
Ideally, this money should have been invested to be available when the boomers retire. Instead, the Fund was "loaned" to the government to finance increased spending. This interest-free loan helped keep Treasury bond interest rates low, allowing more debt financing. But, it must be repaid by increased taxes as more boomers retire.
Foreign countries like China and Japan buy Treasurys to invest their export proceeds that are denominated in U.S dollars. They are happy to lend to America—their largest customer—so that it will keep buying their exports.
Low Interest Rates
The U.S. government has benefited from low interest rates. It couldn't keep running budget deficits if interest rates skyrocketed as they did in Greece. Why have interest rates remained low? Purchasers of Treasury bills are confident that America has the economic power to pay them back. During recessions, foreign countries increase their holdings of Treasury bonds as a safe-haven investment.
The Debt Ceiling
Congress sets a ceiling on the debt but raises it frequently. Since 1960, Congress has modified the U.S. debt limit 78 times, with more sure to come. President Donald Trump signed the Bipartisan Budget Act of 2019 that suspended the public debt limit through July 31, 2021. As a result, the debt limit will be whatever level the debt is on that day.
How the Large U.S. Debt Affects the Economy
In the short run, the economy and voters benefit from deficit spending because it drives economic growth and stability. The federal government pays for defense equipment, health care, and building construction, and contracts with private firms who then hire new employees. These new employees then spend their government-subsidized wages on gasoline, groceries, new clothes, and more, and that boosts the economy. The same effect occurs with employees the federal government hires directly. As part of the components of GDP, federal government spending contributes around 7%.
Over the long term, debt holders could demand larger interest payments. This is because the debt-to-GDP ratio increases and they’d want compensation for an increased risk they won't be repaid.
Diminished demand for U.S. Treasurys could increase interest rates and that would slow the economy.
Lower demand for Treasurys also puts downward pressure on the dollar. The dollar's value is tied to the value of Treasury Securities. As the dollar declines, foreign holders get paid back in a currency that is worth less. That further decreases demand. Many of these foreign holders would become more likely to invest in their own countries. At that point, the U.S. would have to pay higher interest payments.
Congress knows a debt crisis isn’t far away. In less than 20 years, the Social Security Trust Fund won't have enough to cover the retirement benefits promised to baby boomers. That could mean higher taxes once the high U.S. debt rules out further loans from other countries.