When I was much younger, I attended what was considered a very good public high school in the United States. Yet like many schools around the world, much of what I was taught had very little to do with practical knowledge.
In a humble attempt to shine a light on what my former teachers missed, I present to you a new series I call Basic Learning. Many of you who read these articles may be far more well-versed on these topics than I, and I apologize if my discourses offend you. Furthermore, I am as much a purveyor of knowledge as I am still a student seeking it, and therefore remain prone to the fallacies of the non-expert.
Today’s Basic Learning: the National Debt and the National Deficit (in the United States).
You’ve probably heard these terms a million times in news reports. But what exactly are they?
The Debt
The Debt is otherwise known as the U.S. public debt, the national debt or the gross federal debt. For the purposes of this article, I’ll refer to it simply as “the debt”.
Simply put, the debt is the money the federal government owes to other entities. The debt is currently around 8 trillion dollars, or the number 8 with 12 zeroes after it – 8,000,000,000,000. The exact total can be found here.
The debt is divided into two categories – public debt and intragovernmental holdings. I-G holdings refer to money owed or reserved in a separate government plan. An example of this is government trust or pension funds. It’s sort of like money the government owes another division of itself for later payout to someone or some fund. Right now I-G debt is approximately 3 trillion, or 38% of the total debt.
The other part of the debt, the remaining 62%, is owed to other people or institutions. Most of this debt is in the form of Treasury Securities, which are divided into bonds and T-bills and the like. Click on the link for an explanation of what treasury securities are.
If you yourself, as an individual, have ever purchased a treasury bill for $20, then the national debt was increased by $20. That’s because the U.S. government, which is the American people, now owes you $20 plus the interest. However most Treasury securities are purchased by banks or financial institutions. Your local bank A might find it has an extra million dollars to spare for a week. It might then buy $1 million of treasury securities, which “mature” (get paid off) in a week, with interest. Since Treasury securities are issued by the U.S. government itself, it’s considered a practically risk-free investment.
Some Treasury securities “mature” (pay out) in just one week. Others don’t pay off for 30 years. So some of the national debt is literally going to disappear in a week, while others will be carried on the books for 30 years.
For a variety of reasons, a large chunk of the public side of the debt (as opposed to I-G holdings) is actually owned by foreign entities, most often foreign banks. As of this writing, the public debt is $4,689,818,714,834.81 and at the end of September, foreigners owned 2,065,500,000,000 of that debt or 44%.
This means that the American people owe some 2 trillion dollars to foreigners, again mostly central banks of other nations (64% of the foreign holdings). Click on this link to see exactly who. You might notice that the #4 foreign holder of America’s debt is “Caribbean Banking Centers”, which mean banks located in those countries, not necessarily people OF those countries. They have protective banking laws and are used by corporations and individuals around the world for that purpose.
Central foreign banks often buy securities because they need dollars for the purposes of buying oil. In short, regardless of whether you live in China or Zimbabwe, the only currency you can use to buy oil on the open market is with dollars. Considering that the rest of the world consumes at least 57 billion barrels of oil per day, purchased only in dollars, this has a net effect of the world being obligated to float the U.S. debt. All of that would change drastically if oil was purchasable in another currency such as the Euro. This is a vast topic which deserves its own article and won’t be covered further here.
Since the inception of the United States there has always been a public debt, although it was reduced to nearly zero under the Presidency of Andrew Jackson in the 1830’s. For a complete list of historical debt, click here (1791-2000).
In the more modern era, the Congress has put into effect what is called the “debt ceiling”, which means the maximum amount allowed to be owed. You might remember in 1995 when President Clinton and Congress refused to raise the debt ceiling and, as a result, the government was shut down for a few days. Far more information on the debt can be found here.
If you look at this graph you can see the debt has skyrocketed in the past 100 years. Some of that occurred during the two World Wars but in recent “peacetime” decades, the debt has continued to steadily increase.
If you remember my article on the Federal Reserve, you will remember that the Fed controls the interest rate (and thus “manages” the economy) by buying or selling vast amounts of Treasury securities. This is part of an economic model which has been in place since the Great Depression that paying off the debt is not a priority, that instead “managing” it in various ways is healthier. I’ll refer you to an economist for further analysis of that but the net result is that whether in peacetime or wartime, the U.S. has not made paying off the debt a priority.
The Deficit
The deficit refers to when the government spends more money than it receives (the opposite is called a “surplus”). If you or I did this, we’d be in big trouble but governments have another option. In essence, the government decides to pay X number of dollars for various services and projects. Any revenue (income) is tabulated and whatever dollar amount the government is short becomes the deficit.
The way the government borrows that money is by issuing Treasury securities. These of course add to the public debt, as described above.
Calculating exactly how much money the government needs is quite complicated and subject to different interpretations, especially for commitments like paying for Social Security. Currently the U.S. deficit for the Fiscal Year 2005 is around 319 billion dollars, which means of course that the debt has risen by 319 billion (or about 4%).
The “budget” is the government’s decision on how much money to spend on its various departments. Overseeing this money, its allocation, and calculating the costs of these programs and services is the job of the Congressional Budget Office.
There are differing ways to interpret whether or not having a deficit is “bad” or “good”, or how much deficit is acceptable and/or a good thing. For instance, FDR in the early 1930’s had several years of large deficits but that government spending went to fund the “New Deal”.
What’s interesting to note is that Social Security is under a separate ledger entry and is not counted in the budget. It is considered technically an “off budget” item. Therefore talk of the deficit does not refer directly to Social Security, although the debt does.
Social Security is funded from deductions and payments made by workers and employees which goes into a separate fund that later disperses the money. That’s why it’s considered off-budget (since it is financed not by normal revenue) but part of the debt (since it’s an intra-governmental holdings debt).
The government has a number of “accounts” in which money has been received that is earmarked for later payout. Government employee pension funds and Social Security are two examples of these. The government often “borrows” the money from these funds and “adds” it to the budget, thereby manipulating the numbers in terms of what is calculated as the surplus/deficit. A lot of partisan information about this can be found here.
Calculating the actual deficit based on concrete revenue versus money borrowed from funds thus becomes more difficult to establish.
Conclusion
With a population of approximately 290 million and a debt of 8 trillion, this means that every single American citizen currently owes just about $28,000 dollars. A percentage of that is debt owed to fellow citizens but again, 44% of that total or approximately $7,000 is owed per person to foreign entities.
There is currently approximately 730 billion dollars worth of printed U.S. currency in circulation, more than half of this outside America’s borders. If you remember my article on the dollar, you will note that every last dollar bill of this is actually part of the U.S. debt since it must be repaid to the Federal Reserve. Ironically this means if you have a $20 bill in your wallet, you are personally transporting around $20 of the national debt.
Just like a credit card you may own, interest on the debt is a large chunk. Currently just the interest on the debt is 18 billion dollars. That’s for just the month of October 2005. In the year 2005, the government owes 352 billion dollars just on interest on the debt alone.
Depending on how the budget is analyzed, this means that interest payments alone are forming a huge chunk of the government’s expenses. Compare 352 billion with the money the government is spending on the Department of Defense (419 billion – includes the war in Iraq), education (56 billion) or on NASA (16.5 billion) or Veterans Affairs (33.4 bilion) or the EPA (7.6 billion) or even the National Endowment for the Arts (121 million) or Homeland Security (34.2 billion). Puts things into perspective, doesn’t it? By the way, FEMA is part of the Dept. of Homeland Security, which is the primary agency tasked on handling the aftermath of Hurricane Katrina.
Imagine if the government had an extra 352 billion dollars and all the things which could be funded with that. And that’s without a single cutback in any government program, from the military to schools to roads to healthcare to Social Security to grants for higher education.
You may wonder how much money the government collects in taxes. According to the IRS, in 2004 there was a gross receipt of 2,018,502,103,000 or approximately 2 trillion dollars. That includes both corporate as well as personal income tax collected. It also includes such revenue as employment taxes (non-Social Security) as well as excise taxes (customs duties). Information comes from here (Excel format).
Doing extremely simplified math – the government will pay 352 billion this year in interest payments and will collect approximately 2 trillion, making 17% of all direct revenue going immediately out the door to pay interest on the debt. So long as the debt continues to increase, one day the money received (revenue) will be less than the interest payments on the debt alone.
Besides the aforementioned need to possess dollars in order to purchase oil, the debt owned by foreign entities is predicated on trust that the United States will remain “solvent”. If that trust should be shaken, it would mean that less debt would be purchased and that means less money for the government to spend (whether on paying off old debt or on current projects).
In a very real sense, if confidence in the U.S. government fell beyond a certain point, it would trigger a collapse that would affect the entire globe. In essence, the United States is allowed to maintain such a huge debt partly because the world cannot afford to have it fail. Many other governments have become insolvent, from Argentina to Russia, just in the last 10 years. Yet the failure of the United States would be a catastrophe on a level never seen before.
There are many proposals to erase the deficit, to generate a budget surplus and to pay down the national debt (even to the point of paying it off). Whatever the possible solutions, it seems quite clear that something must be done before the situation becomes mathmatically untenable.
Again this is a simplified summary and is not meant to be a comprehensive study on the issue but rather a general introduction to the topic.
And now you know what my teachers never taught me…
Other parts of this series can be found on Flogging the Simian
Peace
