The US National Debt Explained

The United States National Debt can be considered the sum of total debt owed by the U.S Federal Government. The US National Debt surpassed the $17 trillion mark on 17th October, 2013. According to statistics, the United States debt is currently the largest deficit for a single country in the world. In fact, it runs quite close to the debt which is owed by the European Union. The latter is a union of 28 different countries.

It is worth mentioning that even before getting hit by recession in 2008, the United States debt had raised over 50% from the period between 2000 and 2007. It substantially increased from $6 to $9 trillion. Reaching December 2008, the $700 billion bailout allowed the US debt to rise above $10 trillion. The US National Debt is tracked by the NDC or National Debt Clock.

It is important to understand that about two-thirds of the United States National Debt is owed to the public (owed to the people), business organizations, and foreign country Governments who bought treasury notes, bonds and bills. The other part of the debt is simply owed by the Federal Government to itself. It is held in the form of Government Account Securities.

Most of this amount has come from Social Security, and many other trust funds running surpluses. The Government Account Securities are considered to be a promise to completely repay the funds when valid Baby Boomers retire in the next 20 years.

How did the United States Debt become Large?

The Federal debt is considered to be an accumulation of Government budget deficits. Thus, while analysing how the debt became large, it is better to make a comparison between the budget deficits and the different Presidents. The largest contributor to the debt has been current President Obama. The deficits can be attributed to the tax cuts, economic stimulus package and about $800 billion per year military spending.

The next major contributor is the last President Bush. His deficits were caused by the EGTRRA, the JGTRRA, War on Terror and Bank Bailout. The next in line is President Reagan. He expanded medicare, increased rapid defense spending and even cut taxes. All these Presidents suffered from a common problem – lower tax receipts because of recession.

However, the United States Government couldn’t keep running these deficits with high interest rates. Thus, there’s a simple reason why interest rates have remained low. Foreign Governments who purchased the treasury bills still expect that the United States will pay back the amount. For many foreign investors like Japan and China, the United States is a large customer. These countries have allowed to run credits to make sure the US keeps buying their exports.

In addition to this, countries like Japan and China maintain very large holdings of U.S treasuries to keep the currencies lower than the dollar. Although China warns the United States to lower the debt, it still keeps buying a lot more treasuries. Moreover, during the recession, many foreign countries increase holdings of U.S treasury bonds. This kept the United States interest rates low.

How the US National Debt can Affect the Economy?

The voters and economy benefit from huge deficit spending in the short term. However, in the future, an increasing Federal debt can make the growth process slower. It can substantially slow down the United States economy.

The primary reason is that debt holders always want large interest payments. This is meant to compensate the increasing risk of non-payment. This additional interest expense can force the United States Government to keep its debt within some limits.

Fortunately, the United States hasn’t yet faced any higher interest rates. Moreover, the Congress also realizes that the United States is facing a major debt crisis. It is worth mentioning that over the next few years, the SSTF or Social-Security Trust Fund won’t have sufficient amounts to cover various retirement benefits which have been promised to numerous Baby Boomers.

In simple terms, this would lead higher taxes. The high United States debt will rule out any further loans from foreign countries. It is very likely that such benefits will not be given, either to retirees who have a higher income or who’re younger than 70. It is worth mentioning that the United States has been receiving benefits from some unusual factors.

Resources

http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm

http://www.huffingtonpost.com/news/us-national-debt/

http://www.pewresearch.org/fact-tank/2013/10/09/5-facts-about-the-national-debt-what-you-should-know/

Conclusion

The Social-Security Trust Fund received more revenue through various payroll taxes levied on numerous Baby Boomers than it actually needed. According to economists, this amount should have been properly invested in funds for the time when these Baby Boomers retire. However, this amount was once again loaned to the Federal Government to finance even more deficit spending.

With this interest-free loan, the interest rates regarding Treasury Bonds could be kept low. In order to decrease the US National Debt, the Federal Government needs to take some serious steps to control deficit spending, and provide a safe future for the citizens.