|WACO, October 24 - Federal debt has been a hot topic recently, with the partial shutdown and debt ceiling debate.
As I have traveled around the country over the past few weeks, I have been asked hundreds of questions about the situation. Here is a quick look at a few of the most common.
What is this debt and why do we have it? Essentially, the U.S. Department of the Treasury sells US Government securities to raise cash to pay for the day-to-day operations of the federal government (everything from Social Security payments to bills for construction to employee wages—you name it) and to pay off maturing liabilities. While there are receipts coming in (taxes and other payments), they aren’t enough to cover the obligations. Selling securities to make up this difference puts the federal government in debt to whomever buys them. The Treasury is making no decisions about whether or how to spend money, that’s handled by the President and the Congress through the budget process (or not, as noted in last week’s column).
How big is the national debt and how fast has it grown? Basically, the total debt is the accumulation of decades of deficits (the difference between what the government takes in and what it spends in a given year). As of September 30, the total national debt outstanding was just over $16.7 trillion (to be a little more precise and not round off to the hundreds of billions: $16,738,134,000,000; as soon as we got passed the debt ceiling crisis, it quickly moved over $17.0 trillion). Of that amount, almost $4.8 trillion is in the form of intragovernmental holdings, which are balances of special Treasury securities held by 239 federal government accounts which invest excess receipts. The largest of these is Social Security (with 57 percent of the total), followed by the Civil Service Retirement and Disability (17 percent), Military Retirement and Health Care (12 percent), and Medicare (six percent) trust funds. The remaining nearly $12.0 trillion is “debt held by the public,” which is all federal debt held by individuals, corporations, state or local governments, Federal Reserve Banks, foreign governments, and other entities outside the US government.
Total debt outstanding was relatively stable from 1992 to 2001, trending generally upward from about $4 trillion to less than $6 trillion. The total outstanding at the end of the fiscal year (September 30) in 2002 was $6.2 trillion, and by September 30, 2008, it was up to $10.0 trillion (largely because of war expenses and tax cuts during the Bush administration). The total reached more than $16.0 trillion just four years later. (Clearly, that was a rough four years, with the recession and the need for liquidity to help solve the financial crisis contributing to the problem; large spending packages during a time when tax receipts were falling added rapidly to debt levels.) We knew at the time that spending to help get the economy going would result in higher debt down the road, but the alternative was equally (or more) unattractive.
Whom do we owe? If you start with the total of $16.7 trillion and take off the $4.8 trillion in intragovernmental holdings (money one branch of the federal government owes another), you are left with about $12.0 trillion. The Federal Reserve System also holds some balances in securities under repurchase agreements, leaving about $10.0 trillion in U.S. Treasury securities which are “privately” held (meaning here that someone other than a branch of the federal government owns them).
There are good reasons to invest in Treasury securities, namely that they’re back by the full resources of the US government and have historically been a very safe place to store cash and the world’s definition of a (politically) risk-free asset. Banks, pension funds, insurance companies, and state and local governments all take advantage of this option, holding hundreds of billions this way (about $2.9 trillion all together). Private investors also hold another $1.5 trillion. Then there’s the category that causes alarm for some folks: securities held by foreign governments and international investors.
About $5.6 trillion in U.S. government securities is held by foreign/international entities, whether government entities, private concerns, or individuals residing in other countries. (Note that this information is collected from US-based custodians and broker-dealers and is subject to some limitations.) Of that amount, $1.3 trillion is held in China. Another $1.1 trillion is held in Japan. It drops quickly from there, with $300.5 billion held in Caribbean Banking Centers (Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, Panama, and the US Virgin Islands). Some $252.9 billion is held in Brazil, $246.4 billion by oil exporters (in the Middle East and elsewhere), and $183.6 billion in Taiwan. This phenomenon is just a fact of our global economy, and Americans also hold large volumes of the securities of foreign governments. (While some pundits claim there is reason to fear the magnitude of foreign holdings or our reliance on them, I think much of the worry is overblown, particularly if we get to a sustainable fiscal path sooner rather than later.)
People are (rightly) concerned with the growing national debt and the potential fallout for future generations. I’ll leave a more detailed discussion of the macroeconomic effects for another day, but suffice it to say that the longer it takes for meaningful reform and a workable budget, the larger the risk will be to future prosperity.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.