Congress Just Lifted The Debt Ceiling Yet Again: What Even Is National Debt? Does It Matter?
Yes, It Does. But It’s More The Actual Interest Payments On The Debt, Equal To $360B, That Are Squeezing The Current Budget.
Congressional lawmakers recently agreed on a two-year budget that would raise spending by $320 billion over existing limits and therefore allow the government to keep borrowing.
If President Trump signs the deal, the U.S. would avoid defaulting on its debt and push the next budget deliberations until after the 2020 elections, according to the New York Times.
Essentially, we just keep kicking the can down the road.
While the news is certainly meaningful, it got me wondering: Does anyone actually care about the national debt? And are people justified in their decision not to care?
National debt is one of those terms that is thrown around all the time, but probably matters very little to people outside of politicians, investors and the media.
It’s hard to get too worked up about it, considering U.S. national debt is climbing toward $22 trillion.
I mean, is that even a real number? I don’t know honestly, but broken down that’s $66,776 per U.S. citizen.
As a person with a slightly-above-average financial HQ and having done some modest reading on the issue, the conclusion I have come to is that while U.S. national debt certainly does matter, the interest payments on the debt are far more important right now and might ultimately get people to start noticing the issue.
I think a big hurdle is how overwhelming the issue can be, which is why I have tried to break down and explain the national debt in as simple terms as possible, as well as actually look at whether any of this debt actually matters.
Here is what I have found in my research:
What Is U.S. National Debt?
This is simply debt the U.S Government has borrowed and in theory needs to pay back. There are two types of national debt:
— Debt held by the public, which can be defined by the amount of treasury securities held by those outside the federal government such as individuals, corporations, the Federal Reserve and other governments. As of Dec. 31 2018, public debt was nearly $15.6 trillion.
— Debt held by the government is associated with trust funds for government programs such as Social Security and Medicare. Other big funds that make up intra-governmental debt include funds such as those associated with the Military Retirement and Civil Service Retirement. Total debt held by the government, as of Dec. 31, 2018, was $5.87 trillion.
Who Holds National Debt?
The below pie chart is a pretty good break down of who holds U.S. debt: American investors hold the most, followed closely by foreign investors, rounded out by the U.S. government (intra-governmental debt) and the Federal Reserve.
I did not find the specific companies that own the most U.S. Treasury securities, but I did find a decent break down by sector, according to data from the Federal Reserve put into a chart by the Securities Industry and Financial Markets Association.
As you can see in the chart below (in billions), as of the third quarter of 2018, pension funds held about $2.58 trillion; individuals $2.28 trillion; mutual funds $1.95 trillion; banking institutions $664 billion; state and local governments $678 billion and insurance companies $356 billion:
Then, there are 30 countries, each of which owns at least $30 billion in treasury securities. Even countries like Iraq own U.S. debt.
The top 10 debt holders as of October 2018, according to the U.S. Treasury, are China, Japan, Brazil, Ireland, the United Kingdom, Luxembourg, Switzerland, the Cayman Islands, Hong Kong and Saudi Arabia.
How Did We Get Here?
In 1929, according to The Balance, debt was $17 billion, or 16 percent of gross domestic product. In 2000, total debt was roughly $5.8 trillion, or about 55 percent GDP. During George W. Bush’s two terms, debt essentially doubled, rising to about 83 percent GDP. President Barack Obama continued the trend, adding another $8.6 trillion. President Donald Trump has followed his two predecessors, adding about $2 trillion to the national debt since he took office. Here is a chart detailing the debt growth from 2000 (in billions).
Does Debt Matter Right Now?
Yes, it does.
The U.S. might not be aggressively paying off its debt, but it is making interest payments on outstanding debt, and those have started to take up a sizable portion of the annual budget.
In federal fiscal year 2019, the budget for Oct. 1, 2018 through Sept. 30, 2019, the U.S. will spend more than $360 billion, or more than 8 percent of the total FY19 budget (marked interest in chart below) on interest payments.
If the U.S. didn’t have to make these interest payments, they could allocate the $360 billion somewhere else — transportation and infrastructure spending could certainly use a boost.
However, things are only likely to get worse.
Payments are expected to rise to $900 billion within a decade, at which point the U.S. would be spending more annually on debt interest than on the military.
And remember, these payments are not really reducing national debt; they are just being paid to prevent the U.S. from defaulting on payments that are due. Total debt continues to grow.
Will The U.S. Ever Default On It’s Debt?
The U.S. could default on its debt if Congress does not continually raise the debt ceiling, which is the amount of money the government is allowed to borrow.
Or if it stopped making interest payments simply because they got too high. Both scenarios seem unlikely in the short term. Congress has already raised the debt ceiling three times under Obama, seven times under Bush and four times under Bill Clinton. And if the U.S. ever stopped making debt payments, it would likely have catastrophic effects on the U.S. and global economy.
But if the U.S. eventually defaults, I would guess — with my limited knowledge — that it would be because interest payments are too high. In FY19, they take up over 8 percent of the budget, but by 2023, they are expected to take up 12 percent of the annual budget.
Eventually, the debt payments will cut into the budget enough, where the government cannot cover a noticeable amount of services.
At what point people start calling on their congressional representatives to reduce the national debt is anyone’s guess.
Anecdotally, I don’t hear the average American stressing about debt like they do when it comes to healthcare or immigration. Could this change once the debt interest payments reach 12 percent? Or 20 percent? Who knows?
What Would Happen If The U.S. Defaulted?
It’s honestly tough to say. As Scotty Henderson in the Big Think points out:
While many countries have defaulted on their national debts before, no country so influential, so thoroughly integrated with the global economy has ever gone bust. This means that while we can look to the past for evidence, there are variables in this case with no analogs elsewhere.
That said, I think most agree that it would be an absolute disaster. All of those institutions that hold U.S. treasury bonds — individuals, financial institutions, foreign nations, oil exporters and many more — would take a huge hit.
The U.S. economy would struggle.
When Congress in the past has threatened not to raise the debt ceiling and ratings agencies have changed their outlook on U.S. debt, the Dow Jones Industrial Average has taken a beating. The struggles in the U.S. would undoubtedly overflow into the rest of the world.
Former U.S. Treasury Secretary Timothy Geithner wrote famously to Congress in 2011 that defaulting on debt would “impose a substantial tax on all Americans” because it would raise rates on U.S. treasury securities, which represent a benchmark borrowing rate for other sectors including home mortgages and auto loans.
Geithner also noted that payments on Social Security and Medicare benefits would be delayed, as well as those for individual tax refunds, unemployment benefits, U.S. military salaries and a host of other parties. There are a ton of other effects from defaulting on the debt, but I think you get the picture.
Can The Debt Be Reduced?
This is a tough proposition considering debt is rising sharply everyday, and the fact that the U.S. has been spending more than it makes in revenue every year since 2002.
You could cut spending or raise taxes, but these are very unpopular moves among different segments of voters and tend to lead toward politicians being voted out of office.
You could also do both, probably the most effective method for reducing the debt. Maybe the fact that a politician was willing to piss off everyone on both sides of the aisle would actually make people like that politician.
Some also believe that spending on things like infrastructure to produce more jobs and make the economy grow at a faster clip is the way to go, but there is widespread disagreement on that one.
If things get dire enough, maybe countries like China and Japan will forgive the debt, although without changing our habits, whose to say the U.S. wouldn’t just find itself in debt again.
The Congressional Budget Office recently outlined over 100 ways to cut the annual deficit between 2019 and 2028, which would help with cutting national debt.
The options range from reducing subsidies to cutting the Department of Defense’s budget to increasing individual income taxes or eliminating itemized deductions.
However, given the politically-charged environment these days, nothing is likely to happen until constituents begin to reward politicians for fiscal responsibility, also known as making hard decisions.