The U.S. National Debt: Understanding Why and How the Government Borrows Money
In a world where financial literacy is more essential than ever, understanding how and why the government borrows money can illuminate the complexities of our economic landscape. The U.S. national debt, currently exceeding $36 trillion, is not just a number; it represents financial responsibilities that impact every citizen. Let’s dive into the nuances of borrowing, public debt, and how these elements intertwine with our economy.
What is Public Debt?
Understanding Debt Basics
Debt is essentially a promise to pay back borrowed money. When the U.S. government borrows, it issues securities—financial instruments like bonds—to lenders, which can range from individual investors to foreign governments. In exchange for their loan, lenders receive interest as compensation.
The Budget Deficit Phenomenon
Each year, the government often faces a budget deficit, which occurs when spending exceeds revenue. The federal government borrows to cover these deficits, which accumulate over time. In fact, the last time the U.S. had a balanced budget was in 2001.
“It’s like the running total on the nation’s tab,” says economist Karen Dynan from Harvard University.
How Does the Federal Government Borrow Money?
Types of Debt: Public vs. Intragovernmental
When we discuss national debt, we differentiate between two types:
- Public Debt: This encompasses debt owed to external entities, such as private investors and foreign governments, totaling around $28.9 trillion.
- Intragovernmental Debt: This is the money one federal agency owes another, primarily found in trust funds like Social Security, accounting for roughly $7.3 trillion.
The Role of Treasury Securities
The U.S. Department of the Treasury issues various securities to borrow money. The major types include:
- Bills: Short-term securities maturing in a year or less.
- Notes: Medium-term securities, maturing in two to ten years.
- Bonds: Long-term securities with maturities spanning 20 to 30 years.
Who Lends Money to the Government?
Diverse Investors
The largest holders of public debt are private investors, holding about $15.6 trillion. Notably, the Federal Reserve, the nation’s central bank, holds roughly $4.5 trillion in government securities. Foreign investors also play a significant role, holding nearly $9 trillion, with countries like Japan, the U.K., and China among the largest creditors.
Are Foreign Debt Holders a Threat to the U.S. Economy?
Debunking Fears
While concerns about foreign debt holders disrupting the economy arise occasionally, experts believe these fears are largely overstated. U.S. Treasury securities are considered safe investments, and selling them in large quantities would harm the investors’ interests as well.
Economist Judith Arnal argues that the real threats may come from poor fiscal governance rather than foreign creditors.
The Connection Between Budget Deficits and National Debt
An Interwoven Relationship
Federal spending reached $6.75 trillion in fiscal year 2024, with the budget deficit reaching $1.8 trillion. As federal spending, which includes mandatory programs like Social Security and discretionary spending on defense and infrastructure, rises, so do deficits.
To cover these deficits, the Treasury issues securities, leading to an increase in the national debt. Thus, annual budget deficits are the principal contributors to debt held by the public.
Treasury Securities Explained
What Are They and How Do They Work?
Treasury securities are sold in public auctions. Investors submit bids, including their desired yield or return. The highest accepted bid sets the yield for all successful bidders, impacting ultimately how much the government pays in interest over time.
Understanding how these rates are set is crucial, as they are influenced by factors like supply and demand, as well as Federal Reserve’s target interest rates.
Why Has the National Debt Risen?
Key Catalysts for Debt Growth
The growth of the national debt has been accelerated by several significant events:
Post 9/11 Military Engagements: The wars in Iraq and Afghanistan have cost trillions and will continue to impact budgets for generations to come.
The Great Recession: Increased spending to stimulate a struggling economy led to higher deficits.
- Tax Cuts and COVID-19: Recent tax legislation and pandemic relief efforts have further exacerbated the situation.
Conclusion: Navigating the Future of Public Debt
Understanding these dynamics is crucial as we consider future fiscal policies. Countries often struggle when they borrow extensively, particularly when deficits lead to an unsustainable public debt-to-GDP ratio, which some economists believe could reach 117% by 2034.
Monitoring the Situation
While the national debt stands as a daunting number, discussions surrounding it should focus not just on the figures but on the implications for fiscal policy, economic health, and the well-being of future generations.
In an era where financial awareness can significantly shape public policy and economic understanding, staying informed about these complex concepts is more vital than ever.
Let’s keep the dialogue going—because borrowing responsibly needs our collective attention.
For further reading, check out these resources:
