Sign In with Google
Sign In with Facebook
National debt, often a topic of fierce debate and policy discussion, is an intricate part of a nation's economic fabric, and the United States, the world's leading economy, is no different. To dissect the structure of US national debt, one must comprehend that it is far from being a uniform, standalone concept. The national debt comprises two key components - intragovernmental debt and public debt. Let's delve deeper into each of these categories, their implications, and the significant role they play in shaping the US and global economy.
A Closer Look at Intragovernmental Debt
Intragovernmental debt, which clocked at an imposing figure of over $6.89 trillion in January 2023, pertains to the funds that the US Treasury owes to an array of federal agencies. It's a somewhat counterintuitive idea; the government, indeed, owes money to itself.
This seemingly paradoxical arrangement functions as follows: Certain federal agencies, like the Social Security Trust Fund, accumulate surplus revenue, predominantly through taxation. Instead of leaving these funds idle, these agencies redirect them into US Treasury securities. This act allows the agencies' excess revenue to be funneled into the general fund, thus contributing to the country's overall expenditure.
A natural question follows - which federal entities stand as the largest holders of Treasury securities? Without a shadow of a doubt, the Social Security Trust Fund tops the list, boasting a staggering $2.71 trillion in Treasury securities, as recorded in December 2022. Other significant entities are the Military Retirement Fund, which holds $1.36 trillion, along with the likes of Office of Personnel Management Retirement, Medicare, and operational funds for the federal government.
Delving into the Realm of Public Debt
The US public debt, accumulating to an enormous $24.53 trillion as of January 2023, is essentially the money that the US government owes to public creditors. These creditors are a diverse group encompassing individual investors, institutional entities, foreign governments, mutual funds, pension funds, insurance companies, and savings bonds holders.
A substantial slice of the US public debt pie is held by foreign governments, as clearly indicated by the December 2022 Treasury bulletin. The international investors accounted for a hefty sum of over $7.4 trillion. At the same time, state and local governments claimed ownership of $1.55 trillion, and mutual funds possessed $2.84 trillion.
Several other institutions and entities contribute to holding the public debt, including insurance companies, private pension funds, and individual investors. It's crucial to note that the public debt isn't merely confined to Treasury bills, notes, and bonds. It also extends to other financial instruments like Treasury Inflation-Protected Securities and special state and local government series securities.
One striking observation is that the aggregation of debt held by Social Security, combined with all retirement and pension funds, indicates that nearly half of US Treasury debt is held in trust for retirement purposes. The implication is that in the unlikely event of a debt default, retirees would bear the brunt of the impact.
The Indispensable Role of the Federal Reserve in US Debt
As the country's central bank, the Federal Reserve - or the Fed, as it is colloquially known - is the backbone of the US credit system. Though the Fed lacks a fiscal motivation to own Treasury notes, it does, which raises the question - why?
In an effort to cushion the blow of the 2008 financial crisis, the Fed embarked on a strategy called quantitative easing (QE). This strategy saw a notable spike in its holdings between 2007 and 2014, mainly via the purchase of mortgage-backed securities from banks, supplemented by the addition of US Treasurys in 2009. This increase peaked at a whopping $2.5 trillion in 2014.
The primary objective of the QE strategy was to stimulate the economy by maintaining low interest rates and infusing liquidity into the capital markets. In essence, this move ensured businesses continued to have access to low-cost borrowing, thereby facilitating ongoing operations and potential expansion.
Although the Fed concluded its QE strategy in October 2014, it has since continued to play a pivotal role in bolstering the economy, particularly during crises like the COVID-19 pandemic in 2020. During this tumultuous period, it announced the purchase of $500 billion in US Treasurys and $200 billion in mortgage-backed securities.
Foreign Stakeholders in US Debt
An often overlooked dimension of the US national debt is the proportion owned by foreign countries. As of November 2022, Japan emerged as the leading foreign holder of US debt with $1.08 trillion in US Treasurys, closely followed by China with $870 billion.
The strategic reasoning behind these nations holding US debt lies in their desire to keep the value of the dollar higher than their currencies. This policy helps ensure the affordability of their exports to the US, thereby fueling their economic growth. Other noteworthy foreign debt holders include the U.K., owning $645.8 billion, and Luxembourg, with a stake of $332.9 billion.
The Grand Picture of US National Debt
When one steps back to view the complete panorama, it becomes clear that the US national debt is a multifaceted enigma, encompassing public debt held by foreign countries, the Federal Reserve, mutual funds, diverse entities, individuals, and intragovernmental holdings by federal agencies like Social Security, the Military Retirement Fund, Medicare, and others.
A common misconception is that most of the US national debt is owed to foreign countries, with the likes of China and Japan often being the focus. However, the reality is that a large part of the national debt is owed to US citizens themselves, primarily via mechanisms like Social Security and pension funds.
Is national debt a problem? The debate regarding the acceptability of national debt levels is a contentious one among economists and policymakers. While there is a general consensus that a certain level of debt is necessary to spur economic growth, there is less agreement about the threshold at which it becomes a burden. Excessive debt can potentially trigger cuts in government programs, increase taxes, and create economic instability.
What's the link between the deficit and national debt? The relationship between the deficit and the national debt is direct. A budget deficit occurs when government expenditures outpace tax revenues, which necessitates further borrowing, thereby augmenting the debt.
Which U.S. president paid off the national debt? The unique distinction of being the only US president to fully pay off the nation's interest-bearing debt goes to Andrew Jackson, who achieved this feat in 1835.
