United States public debt

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U.S. debt from 1940 to 2008. Red lines indicate the public debt and black lines indicate the gross debt, the difference being that the gross debt includes funds held by the government (e.g. the Social Security Trust Fund). The second chart shows debt as a percentage of U.S. GDP or dollar value of economic production per year. Data from U.S. Budget historical tables at whitehouse.gov/omb and other tables listed when you click on the figure.

The United States government debt, commonly called the "public debt" or the "national debt", is the amount of money owed by the federal government of the United States to holders of U.S. debt instruments. Debt held by the public is all federal debt held by states, corporations, individuals, and foreign governments, but does not include intragovernmental debt obligations or debt held in the Social Security Trust Fund. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds, and State and Local Government Series securities.^[1]

As of April 7, 2009, the total U.S. federal debt was $11,152,772,833,835.89,^[2] or about $36,676 per capita. Of this amount, debt held by the public was roughly $6.869 trillion.^[3] In 2007, the public debt was 36.8 percent of GDP,^[4] with a total debt of 65.5 percent of GDP.^[5] The CIA Factbook ranked the total percentage as 22nd in the world.^[6]

Public debt is the amount owed by the government to its creditors, whether they are nationals or foreigners. External debt is the debt of all sectors of the economy (public and private), owed to foreigners. In the U.S., foreign ownership of the public debt is a significant part of the nation's external debt. The Bureau of the Public Debt, a division of the Department of the Treasury, calculates the amount of money owed by the national government on a daily basis.^{[7][8][9][10]}

The total debt has increased over $500 billion each year since FY 2003, considering both budgeted and non-budgeted spending.^[11] The annual US budget deficit declined from $318 billion in 2005 to $162 billion in 2007,^[12] but increased to $455 billion in 2008.^[13] Since FY 2002, the deficit reported by the media has been significantly less than the annual change in the debt. The annual change in debt surpassed $1 trillion for the first time in FY 2008.^[14]

The Government Accountability Office (GAO), Office of Management and Budget (OMB) and the U.S. Treasury Department have warned that debt levels will increase dramatically relative to historical levels if entitlement programs are not reformed. For example, projected expenditures for Medicare and Social Security programs exceed tax revenues by over $40 trillion over the next 75 years. Mandatory expenditures are projected to exceed federal tax revenues sometime between 2030 and 2040 if reforms are not undertaken.^[15][16] The severity of the measures necessary to address this challenge increases the longer such changes are delayed. These organizations have stated that the government's current fiscal path is "unsustainable."^[17]

[edit] History

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, briefly contracted to zero on January 8, 1835 under President Andrew Jackson but then quickly grew into the millions again.^[18]

The first dramatic growth spurt of the debt occurred because of the Civil War. The debt was just $65 million in 1860, but passed $1 billion in 1863 and had reached $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.^[18]

The buildup and involvement in World War II brought the debt up another order of magnitude from $51 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, when it again began to increase rapidly. Between 1980 and 1990, the debt more than tripled. The public debt shrank from FY 1998 until FY 2002 on a nominal dollar basis, although the total debt has not declined since FY 1969.^[19] By the end of 2005, the gross debt had reached $7.9 trillion, about 8.7 times its 1980 level.^[20]

[edit] Debt ceiling

At any given time (at least in recent decades), there is a debt ceiling in effect. Whereas Congress once approved legislation for every debt issuance, the growth of government fiscal operations in the 20th century has made this impractical. For example, the Treasury now conducts more than 200 sales of debt by auction every year. The Treasury has been granted authority by Congress to issue such debt as was needed to fund government operations as long as the total debt (excepting some small special classes) does not exceed a stated ceiling.

The ceiling has been raised by passage of new laws by the United States Congress every year or so:

• September 2007: to $9.815 trillion.^[23][24]

• In mid-2008: to $10.6 trillion, to account for the potential bailout of the two mortgage giants Fannie Mae and Freddie Mac.^[25]

• On October 4, 2008, to $11.3 trillion, by the Emergency Economic Stabilization Act of 2008 (H.R.1424).^[26]

[edit] Components

[edit] Public and government accounts

The national debt is broken down into 2 main categories:^[27]

1. Securities held by the public

   • Marketable securities
   • Non-marketable securities

2. Securities held by government accounts

The values for fiscal years 1999-2008 are:^[27]

Below is a chart (using data published by the U.S. Treasury) showing the total of government and public portions of the debt as well as the components of each as of December 2008:

[edit] Estimated ownership

Because there is a large variety of people who own the notes, bills, and bonds in the "public" portion of the debt, the U.S. Treasury also publishes data which groups the types of holders by a few, general categories to get a good picture of 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 more 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. Below is a chart for the data as of June 2008:

The next chart does the same thing for each year since 1997:

[edit] Fannie Mae and Freddie Mac obligations excluded

Although not included in the figures reported by the government, the U.S. government has moved to more explicitly support the soundness of obligations of Freddie Mac and Fannie Mae, starting in July via the Housing and Economic Recovery Act of 2008, and the September 7, 2008 Federal Housing Finance Agency (FHFA) conservatorship of both government sponsored enterprises (GSEs). The on- or off-balance sheet obligations of those two independent GSEs is just over $5 trillion.^[28] The government accounts for these corporations as if they are unconnected to its balance sheet. The U.S. Treasury contracted at the inception of the conservatorship to receive US$1 billion in senior preferred shares, and a warrant for 79.9% of the common shares from each GSE, as a fee to fund, as needed, up to US$100 billion total for each GSE (in exchange for more senior preferred stock), in order to maintain solvency and adequate capital ratios at the GSEs, thereby supporting all senior (normal) liabilities, subordinated indebtedness, and guarantees of the two firms. Some observers see this as an effective nationalization of the companies that ultimately places taxpayers at risk for all their liabilities^[29] The net exposure to taxpayers is difficult to determine at the time of the takeover and depends on several factors, such as declines in housing prices and losses on mortgage assets in the future.^[30] The Congressional Budget Office has recommended incorporating the assets and liabilities of the two companies into the federal budget due to the degree of government control over the entities.^[31] The 5-year credit default swap spread for U.S. treasuries had risen to 18 basis points per annum as of 9 September 2008 as a result of market perception regarding the increased debt load of the government.^[31]

On January 8, 2009, Moody's said that only 4 of the 12 Federal Home Loan Banks (FHLB) may be able to maintain minimum required capital levels and the U.S. government may need to put some of them into conservatorship. [4] According to Bloomberg, the FHLB is the largest U.S. borrower after the federal government. [5]

[edit] Guaranteed obligations excluded

Starting in late 2008, the U.S. federal government is guaranteeing large amounts of obligations relating to mutual funds, banks, and corporations under several new programs designed to deal with the problems initiated by the Liquidity crisis of September 2008. Guarantees are off-balance sheet and therefore excluded in the calculation of federal debt. The funding of direct investments made in response to the crisis, such as those made under the Troubled Assets Relief Program, are captured by the debt totals.

[edit] Foreign ownership

Major foreign holders of United States Treasury Securities.^[7]

A traditional defense of the national debt is that Americans "owe the debt to themselves", but that is becoming increasingly less accurate. The US debt in the hands of foreign governments was 25% of the total in 2007^[32], virtually double the 1988 figure of 13%.^[33] Despite the declining willingness of foreign investors to continue investing in US dollar denominated instruments as the US dollar fell in 2007,^[34] the U.S. Treasury statistics indicate that, at the end of 2006, foreigners held 44% of federal debt held by the public.^[35] About 66% of that 44% was held by the central banks of other countries, in particular the central banks of Japan and China. In total, lenders from Japan and China held 47% of the foreign-owned debt.^[7] This exposure to potential financial or political risk should foreign banks stop buying Treasury securities or start selling them heavily was addressed in a recent 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." ^[36]

In 2006, the central banks of Italy, Russia, Sweden, and the United Arab Emirates announced they would reduce their dollar holdings slightly, with Sweden moving from a 90% dollar-based foreign reserve to 85%. ^[37] On May 20, 2007, Kuwait discontinued pegging its currency exclusively to the dollar, preferring to use the dollar in a basket of currencies.^[38] Syria made a similar announcement on June 4, 2007.^[39]

A list of the foreign owners of U.S. Treasury securities is listed by the U.S. Treasury:^[7]

[edit] Statistics and comparables

• U.S. official gold reserves are worth $261.5 billion^{[citation needed]} (as of March 2008), foreign exchange reserves $63 billion^{[citation needed]} and the Strategic Petroleum Reserve $67 billion (at a Market Price of $104/barrel with a $15/barrel discount for sour crude).^[40]

• The national debt equates to $30,400 per person U.S. population, or $60,100 per head of the U.S. working population,^[41] as of February 2008.
• In 2003 $318 billion was spent on interest payments servicing the debt, out of a total tax revenue of $1.95 trillion -- that is, 16.3% of total tax revenue.^[42]
• 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.^[43]
• Total U.S Consumer Credit Card revolving credit debt was $937.5 billion in November 2007.^[44]
• Total third world debt was estimated to be $1.3 trillion in 1990.^[45]
• The U.S. balance of trade deficit in goods and services was $725.8 billion in 2005.^[46]
• The global market capitalization for all stock markets was $40 trillion in September 2008.^[47]

[edit] Risks and obstacles

[edit] Risks to the U.S. dollar

By definition, international trade is the exchange of goods and services across national borders. Historically the currencies of nations involved were backed by precious metals (typically using some form of Gold Standard), which would cause a nation operating under a trade imbalance to send precious metals (economic goods in and of themselves) to correct any trade imbalances. In the current scheme of fiat money, the U.S. government is free to print all the money it wants. Consequently, the government cannot technically go bankrupt as any debtor nation can just issue more money through a practice known as seigniorage.^[48]

If there is a gross imbalance between the amount of new money being brought into circulation and the amount of economic goods that are represented by an economy, then there is an unstable situation that can lead to hyperinflation.^[49] This has been observed in smaller nations such as Argentina in 1989-90, and Zimbabwe in 2005-09; the International Monetary Fund and World Bank try to end such crises by working with the problem country to institute sound economic policies and restore faith in the international community that the country can again service its debt with a stable currency.^[50]

The interest rate offered on new bond issues is the one that clears the market. On December 13, 2006, the U.S. 30-year treasury note had a rate of 5.375%. Were investors to become concerned about the future value of the US dollar, they would demand a higher interest rate on US bonds to compensate them for the risk they are assuming.^[51]

[edit] Long-term risks to financial health of federal government

Risks due to increasing entitlement spending

Several government agencies provide budget and debt data and analysis. These include the Government Accountability Office (GAO), the Congressional Budget Office, the Office of Management and Budget (OMB), and the U.S. Treasury Department. These agencies have reported that the federal government is facing a series of critical long-term financing challenges. This is because expenditures related to entitlement programs such as Social Security, Medicare, and Medicaid are growing considerably faster than the economy overall, as the population grows older. These agencies have indicated that under current law, sometime between 2030 and 2040, mandatory spending (primarily Social Security, Medicare, Medicaid, and interest on the national debt) will exceed tax revenue. In other words, all discretionary spending (e.g., defense, homeland security, law enforcement, education, etc.) will require borrowing and related deficit spending. These agencies have used such language as "unsustainable" and "trainwreck" to describe such a future.^[52]

While there is significant debate about solutions,^[53] the significant long-term risk posed by the increase in entitlement spending is widely recognized^[54], with health care costs (Medicare and Medicaid) the primary risk category.^[55][56] If significant reforms are not undertaken, benefits under entitlement programs will exceed government income by over $40 trillion over the next 75 years.^[16] According to the GAO, this will cause debt ratios relative to GDP to double by 2040 and double again by 2060, reaching 600 percent by 2080.^[57]

In 2006, Professor Laurence Kotlikoff argued the United States must eventually choose between "bankruptcy", raising taxes, or cutting payouts. He assumes there will be ever-growing payment obligations from Medicare and Medicaid.^[58] Others who have attempted to bring this issue to the fore of America's attention range from Ross Perot in his 1992 Presidential bid, to investment guru Robert Kiyosaki, and David Walker, former head of the Government Accountability Office.^[59][60]

Thomas Friedman has argued that increasing dependence on foreign sources of funding will render the U.S. less able to act independently.^[61]

[edit] Unfunded obligations

The U.S. government is committed under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. The 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 payroll taxes fully cover payouts only until 2017. These deficits require funding from other tax sources or borrowing.^[52] The present value of these deficits or unfunded obligations is an estimated $41 trillion. This is the amount that would have to be set aside during 2008 such that the principal and interest would pay for the unfunded commitments through 2082. Approximately $7 trillion relates to Social Security, while $34 trillion relates to Medicare and Medicaid. In other words, healthcare programs are nearly five times as serious a funding challenge as Social Security. Adding this to the national debt during September 2008 of nearly $10 trillion and other federal commitments brings the total obligations to nearly $53 trillion.^[62]

The Congressional Budget Office (CBO) has indicated 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."^[63]

[edit] Recent additions to the public debt of the United States

Deficit and debt increases 2001-2008

There is a significant difference between the reported budget deficit and the change in debt. The key differences are: 1) The Social Security surplus, which reduces the "off-budget" deficit often reported in the media; and 2) Non-budgeted spending, such as for the Iraq and Afghanistan wars. The debt increased by approximately $550 billion on average each year during the 2003-2007 period, but then increased over $1 trillion during FY 2008.

The cumulative debt of the United States in the past 8 completed fiscal years was approximately $4.3 trillion, or about 43% of the total national debt of ~$10.0 trillion as of September 2008.^[64][65] President Barack Obama announced in February, 2009, his intention to ban federal accounting "gimmicks" previously employed to make the budget deficit appear smaller than it really is [6].

[edit] Debt clocks

In several cities around the United States, there are national debt clocks—electronic billboards which try to illustrate the amount of money owed by the government. Some also attempt to show the money owed per capita or per family. There is a significant level of fluctuation day-to-day, both up and down, so any "clocks" must be continually re-set with proper values.

The most famous debt clock, the National Debt Clock located in Times Square^[66] in New York City, was created by eccentric real estate mogul Seymour Durst. The clock is now owned by his son Douglas Durst. Although the total debt continued to increase, the Durst's clock was deactivated in 2000 when public debt began to decrease due to budget surpluses.^[67] However, following large increases in the debt (total and public) a few years later, the clock was reactivated in July 2002 ^[68], though it had to be moved to make way for One Bryant Park. Since September 30, 2008, when the debt surpassed $10 trillion, the clock's dollar sign has been replaced by the extra digit. A new clock, enabling the recording of a quadrillion dollars of debt, is expected early 2009.^[69][70]

[edit] Calculating and projecting the debt

2010 Budget: Projected deficits and debt increases in President Obama's 2010 Budget

Tracking current levels of debt is a cumbersome but rather straightforward process. Making future projections is much more difficult for a number of reasons. For example, before the September 11, 2001 attacks, the George W. Bush administration projected in the 2002 U.S. budget that there would be a $1.288 trillion surplus from 2001 through 2004.^[71] In the 2005 Mid-Session Review, however, this had changed to a projected deficit of $850 billion, a swing of $2.138 trillion.^[72] The latter document states that 49 percent of this swing was due to "economic and technical re-estimates", 29 percent was due to "tax relief", (mainly the 2001 and 2003 Bush tax cuts), and the remaining 22 percent was due to "war, homeland, and other enacted legislation" (mainly expenditures for the War on Terror, Iraq War, and homeland security).

Projections between different groups will sometimes differ because they make different assumptions. For example, in August 2003, a Congressional Budget Office report projected a $1.4 trillion deficit from 2004 through 2013.^[73]

However, a mid-term and long-term joint analysis a month later by the Center on Budget and Policy Priorities, the Committee for Economic Development, and the Concord Coalition stated that "In projecting deficits, CBO follows mechanical 'baseline' rules that do not allow it to account for the costs of any prospective tax or entitlement legislation, no matter how likely the enactment of such legislation may be." The analysis added in a proposed tax cut extension and Alternative Minimum Tax reform (enacted by a 2005 act), prescription drug plan (Medicare Part D, enacted in a 2003 act), and further increases in defense, homeland security, international, and domestic spending. According to the report, this "adjusts CBO's official ten-year projections for more realistic assumptions about the costs of budget policies", raising the projected deficit from $1.4 trillion to $5 trillion.^[74]

The 2010 Budget proposed by President Barack Obama projects significant debt increases, as shown in the diagram at right. ^[75][76]

[edit] See also

• Balance of payments
• Budget deficit
• Deficit
• Inflation
• Economy of the United States - discusses U.S. national debt and economic context
• Fiat currency
• Fractional-reserve banking
• FRED (Federal Reserve Economic Data)
• Global debt - the "big picture"
• Gold as an investment
• History of the U.S. public debt - a table containing historical debt data
• List of countries by current account balance
• List of public debt - list of the public debt for many nations, as a percentage of the GDP
• National debt by U.S. presidential terms
• Proposed bailout of U.S. financial system (2008)
• Public debt - a general discussion of the topic
• United States federal budget - analysis of federal budget spending and long-term risks
• Securities
• US total cumulative debt per person

[edit] References

[edit] External links

• US Debt Clock Running Out of Digits -retrieved Oct 9, 2008
• US National Debt Clock
• Bureau of the Public Debt
  • The gross and public debt to the penny
• The United States Public Debt, 1861 to 1975
• Public Debt Issues, 1775-1976