Let’s Talk About Debt

Debt, debt everywhere and not a cent to spare.

There’s been a lot of talk, particularly in the political narrative, about the national debt and its imminent threat to our prosperity as a nation. So what exactly is the big deal about all this debt?

First, a word about the debt vs. the deficit. The national debt is our total debt added up from the beginning of our nation to now. The deficit is how much debt we incur in a fiscal year. So if we say we have $800 billion this year in deficit spending, that means that we are spending $800 billion more than we budgeted for the year. That deficit is subsequently added to the national debt. Our national debt is growing because we are deficit spenders.

Second, what is the debt? Most of our debt is what we call “marketable securities”, which are essentially IOU’s by the US Treasury to pay back a certain amount with interest in a specified amount of time. In other words, they’re bonds. These securities are sold on the open market and bought by investors, and the Treasury then uses that revenue to finance governmental operations.

So getting down to it,  how much national debt is there? Well…there’s a lot. Almost $16 trillion. But that figure is repeated all the time, and especially for someone who works in politics (like yours truly), it gets fatigued very quickly. What is arguably more interesting is the follow up question…

Who owns the debt? That is a far more difficult question to answer. Foreign investors do own quite a bit, so that mantra you hear often about the US selling it’s soul to China, is actually somewhat true. China is the largest foreign holder of US debt, to the tune of $1.16 trillion. Interestingly enough, the runner up is Japan with $1.08 trillion. (Source)

But, adding up all that foreign investment only adds up to around $3 trillion. Who owns the rest?

We do.

The US government is the largest holder of marketable securities. To the tune of $6.2 trillion. That’s right. We owe ourselves trillions of dollars. And for all those Ron Paul-ites out there, the Federal Reserves owns $1.65 trillion as of January 2012. But that number is quickly increasing, if the current trend of the Fed purchasing 61% of US debt continues.

Why does the debt matter? Because if the US declares bankruptcy, our credit will instantly devalue and we will be plagued with hyperinflation. Yay. But that may not be likely to happen anytime soon. 

Conclusion: Is the debt a problem? Yes. Are we going to die because of it? Probably not. Our country has never been debt free for any long period of time (there was a brief stint in the 19th century when our debt was completely paid off). Our monetary system is based on debt, so it’s only natural that we have some debt. The question is how much? And I think most people would agree that debt that is 103% of GDP is a little too high. 

Ultimately, God is in control and He’ll take care of us if our economy crashes and burns, but more importantly, He’ll take care of us if it doesn’t.

SDG. Knowledge Ignites.

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3 thoughts on “Let’s Talk About Debt

  1. Great article! It answers many questions that I’m sure most of us have asked ourselves before.

    Like

  2. Thanks for the post and the details.

    The distinction between debt and deficit is an important one; otherwise, people can easily misunderstand statements like “Our budget will cut the federal deficit by 35%.” That sounds great, but it means we’re still going further into debt!

    Also, if my memory serves me, the entire federal debt was retired in 1835 under Jackson. He was even returning money to the states because he saw no need for the surplus they had in the national treasury. Anyway, you might want to double check the sentence “Our country has never been debt free for any period of time.”

    Re “Our monetary system is based on debt”: yes, but for a long time not at such an alarming amount (almost 2,000% inflation in less than 100 years under the Fed), and it was kept in check by nature of being backed by gold and silver.

    The scary thing about the debt owned by the Fed? For every $1 of U.S. Bond they receive, they print $1 of currency to “pay” for the bond, and they print an additional $9 to “loan” out to banks to fuel our fractional reserve inflationary system!

    Anyway, good article. Thanks!

    Like

    • Oh yeah, I remember Jackson retiring the debt. I thought I changed my post to reflect that. I’ll amend it now. Thanks for the feedback!

      Like

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