If there is one thing you take from this article, one single fact worth pulling out, it's this: The national debt has no analogy to personal finances. There is absolutely no national credit card, no tab for some other nation to "call in," each American does not "owe" $42,998.12.
It is a borderline disservice to our readers even linking to that last source because none of this exists. It's fake, fantastical and make-believe. These ideas come from the fiscal version of Narnia, where economists do battle against rational hobgoblins wielding enchanted slide rules. If you ever find yourself comparing the national debt to a household checkbook, step back through the nearest wardrobe. Hard. Repeatedly.
Good. Now that's out of the way.
Note: All numbers are accurate and current at time of writing.
What Is the National Debt?
The national debt is the full measure of currently issued government securities. When the government's combined public and internal obligations exceed its total revenue, it issues securities such as bonds, notes and bills which add to the national debt.
The U.S. Gross National Debt is approximately $21.9 trillion. This debt comes in two forms: intra-governmental and public.
1. Intra-Governmental Debt
The amount of intra-government debt is $5.8 trillion. This is money owed by the Treasury to other government services and agencies.
When government agencies run a surplus, particularly those self-funded or guaranteed their annual budget, they often invest that money in government bonds. This is a way of lending unspent money back to the rest of the government rather than letting it sit uselessly in a bank account.
The biggest single source of intra-governmental debt is Social Security. Funded by a dedicated payroll tax, the program typically uses any excess revenue to buy Treasury securities. As a result, almost $3 trillion of the national debt is owed to the Social Security Trust.
The government owes $5.8 trillion to other government agencies combined.
2. Public Debt
The amount of public debt is $16.1 trillion. This is the measure of government securities issued to third parties (those outside of the U.S. government). Anyone can purchase public debt, including citizens, state and local governments, foreign citizens, companies, investment firms and foreign governments.
When you buy a Treasury bond, you are investing in public debt.
The government owes $16.1 trillion in publicly issued securities.
What Is the Structure of the National Debt
The national debt is made of Treasury securities. These are financial instruments issued chiefly by the U.S. Treasury. There are four types:
- Treasury bonds
- Treasury bills
- Treasury notes
- Treasury inflation protected securities
Most individual consumers who purchase government debt do so by investing in bonds. This is the standard way that the government advertises its debt to the general public.
All government securities have a fixed period of maturity with a set interest rate. Treasury bills mature one year from purchase. Treasury notes have a 5- to 10-year maturity rate, while treasury bonds do so in a window of 20 - 30 years.
Inflation protected securities mature within windows of five, 10 and 30 years. Unlike the other forms of government securities, the interest rate on this instrument is set by the rate of inflation rather than a fixed repayment guarantee.
While it is common for analysts to raise concerns about a foreign government "calling in" America's debt, this is not possible due to the nature of Treasury securities. Their fixed maturity and interest rates make them among the most predictable debt instruments in the world, which includes protection against any third party demanding early repayment.
The National Debt vs. the Federal Deficit
It's a common mistake to use the terms "national debt" and "federal deficit" interchangeably. They are not the same thing.
When the U.S. government issues a budget, any shortfall between that budget's spending and the Treasury's revenue for that period is the federal deficit. The securities issued by the Treasury to pay for this deficit creates the national debt.
So, for example, if Congress authorized a $4 trillion budget with $3.5 trillion in revenue it would generate a $500 billion deficit. Then the Treasury would issue $500 billion in new bonds and other debt instruments adding that amount to the national debt.
It's common for articles on this subject to list major government expenses as contributing to the national debt. They do not. Major government expenses add to each budget deficit. Obligations issued by the Treasury to pay those expenses create the national debt.
What Is the Debt Ceiling?
The debt ceiling is a statutory cap on borrowing imposed by Congress in 1917. It sets a maximum amount of money that the Treasury can borrow at any given time and was passed in order to allow the Executive branch to borrow without having to consult Congress on each new bond issuance.
Congress must raise the ceiling by statute when the national debt reaches its limit. Failure to do so, for any reason, would lead the U.S. to default on both new payments and existing securities. This would cause interest rates to skyrocket around the world, and would quite likely crash the value of the U.S. dollar as investors dumped Treasury bonds for fear of not receiving timely payment.
The debt ceiling reflects the key distinction between a budget deficit and the national debt. When Congress passes a budget it authorizes new spending. If that budget has a deficit, the Treasury must raise the money to cover that spending through debt.
However, having issued a budget authorizing the spending deficit, Congress must from time to time issue a second law authorizing the Treasury to raise the money for that spending.
Who Owns the National Debt?
The national debt breaks down among several major stakeholders. Readers should note that due to the government shutdown, details about individual holdings are out of date. In order to avoid confusion, we will show percentage values to maintain consistency with the total national debt figures reflected elsewhere in this article.
Approximately 26% of total national debt
This is the debt owned by U.S. agencies and departments. Most departments own at least some government securities, from the Department of Energy's $56 billion to NASA's $17 million investment. Based on the most recent data available, the biggest holders of intra-governmental debt are:
- Social Security Trust Fund - Approximately 13% of the total national debt.
- Retirement Funds (Civilian and Military) - Approximately 9.3% of the total national debt.
- Medicare Trust Fund - Approximately 3% of the total national debt.
- The FDIC Trust Fund - Approximately 1.6% of the total national debt.
Approximately 74% of the total national debt
This is the debt purchased on the open market. Holders can include anyone from private investors to state and foreign governments. Based on the most recent data available, the biggest holders of public debt are:
1. Foreign Governments
Approximately 29% of the total national debt
Of this, China holds $1.138 trillion in U.S. securities and Japan owns $1.018 trillion. These two countries hold more than a third of all U.S. debt owned by foreign governments. Brazil holds the third-largest amount, at $313 billion. (In a ledger line that simply begs for federal investigation, the government of the Cayman Islands owns $208 billion in government securities.)
Readers should have caution when they see analysts warning about Chinese dominance over U.S. debt. While there is no question that the government of China holds large reserves of Treasury securities, this investment amounts to less than 5% of the total U.S. national debt.
China has taken a significant position in Treasury securities, certainly enough to influence the strength of the U.S. dollar and the Chinese renminbi. It is, however, relatively minor compared to the full scope of U.S. stakeholders.
2. Mutual Funds, Insurance Companies, Pension Funds and Depository Banks
15% of the total national debt
This includes most forms of professional investment institutions.
3. Federal Reserve
Approximately 12% of the total national debt
Along with simply printing additional money, having the Federal Reserve buy Treasury securities is the chief way that the government expands the money supply during a recession. Much of the Federal Reserve's assets reflect this process of quantitative easing during the Great Recession.
4. Individual Investors, Businesses, and All "Other" Investors
11% of the total national debt
This includes all debt owned by personal investors, by banks managing personal trusts, by corporations and any other category of investor not broken out specifically. It does not include mutual funds, and most forms of investment or deposit banking.
5. State and Local Governments
4% of the total national debt
Like government agencies, when state and local governments have a budget surplus they often invest it in U.S. debt.
The National Debt vs. Family Finances
When analysts and pundits discuss the national debt they often do so in terms of family finances. A common phrase is the "national credit card." This is particularly true among commenters who compare budget reductions to an indebted family cutting back on personal spending.
Two Reasons Why National Debt Isn't Like Personal Finance
The national debt works nothing like personal finances. Most pundits who make this argument do so disingenuously. Two key reasons why this is wrong include:
1. The U.S. Owes Most of Its Debt to Itself
Between the debt held by federal entities, state and local governments, individual citizens, and domestic corporations, the U.S. owes most of its debt to itself. This means that most national debt payments enrich government services, individual citizens and U.S. corporations.
What's more, setting aside questions about lines of authority, the government could wipe out nearly $3 trillion worth of debt at a stroke by having the Social Security Administration surrender its public securities, and another $2.5 trillion by deciding that the Federal Reserve should walk away from its rights as well.
Those decisions would certainly have consequences, potentially enormous ones, which is why Congress doesn't do this. But the next time someone suggests that the national debt is a "credit card," consider that in this analogy the APR is set by the family dog and your kids are collecting.
2. The U.S. Can Print Its Own Money
The government also controls the currency with which it pays its bills.
All lending to the U.S. government is done in dollars, and the Treasury controls the supply of that currency. It is literally impossible for America to face a pure debt crisis because it can always print enough money to pay its bills.
Again, that creates its own problems. Doing so would risk significant inflation which would almost certainly harm the country's credit rating, making future borrowing more expensive. However, America structurally can't reach a point where it doesn't have the money to pay its debts; only a point where it prioritizes different concerns.
The Federal Reserve also sets the country's target rate of inflation, which erodes long term debt. The government can always manage its own debt down by targeting a higher rate of inflation.
National Debt-to-GDP Ratios
At time of writing the Federal Reserve has measured the national debt at 104.15% of America's Gross Domestic Product (GDP). This includes debt held by the government.
Most economists consider the debt-to-GDP ratio a more important measure than a nation's raw debt. In part this is because a wealthy nation can more reliably pay back larger sums. America's $21.9 trillion debt has remained manageable, for example, while the nation of Greece was plunged into a depression (in part) by $356 billion.
The different experiences of the U.S. and Greece point to the other important aspect of the debt-to-GDP ratio. A larger economy can better absorb debt payments without having to significantly cut spending or government services.
The more of its budget a government has to dedicate to debt and interest, as a proportion of tax receipts, the less money it will be able to directly spend. This eventually risks slowing down the economy as money is taken from employment and purchasing and sent to banks.
There is no ideal debt-to-GDP ratio. Larger economies can handle higher debt ratios than smaller ones can, as they have a greater ability to raise excess revenue.