The US Debt: Largest In The World

The U.S. debt is over $14.5 trillion, and is the sum of all outstanding debt owed by the Federal Government. Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds. The rest is owed by the government to itself, and is held as Government Account securities. Most of this is owed to Social Security and other trust funds, which were running surpluses. These securities are a promise to repay these funds when Baby Boomers retire over the next 20 years. The U.S. debt is the largest in the world. How did it get so large? Purchasers of Treasury bills still reasonably expect the U.S. economy to recover enough to pay them back. For foreign investors like China
and Japan, the U.S. is such a large customer it is allowed to run a huge tab so it will keep buying exports.
Even before the economic crisis, the U.S.
debt grew 50% between 2000-2007, ballooning from $6-$9 trillion. The $700 billion bailout helped the debt grow to $10.5 trillion by December 2008.
Interest on the debt was $414 billion in Fiscal Year 2010, higher than the $383 billion in FY 2009, but lower than its peak of $451 billion in FY 2008. That's because of lower interest rates. The interest on the debt is the fifth largest Federal budget item, after Defense and Security spending ($890 billion), Social Security ($730 billion) and Medicare ($490 billion).
Government debt is an accumulation of budget deficits. Year after year, the government cut taxes and increased spending. In the short run, the economy and voters benefited from deficit spending. Usually, however, holders of the debt want larger interest payments to compensate for what they perceive as an increasing risk that they won't be repaid. This added interest payment expense usually forces a government to keep debt within reasonable limits.
The U.S. also has a debt ceiling, which attempts to limit the debt. However, Congress usually raises the ceiling to prevent the negative consequences of a debt default.
Causes of the national
debt:
The most recent budget forecast from the Office of Management and Budget (OMB) showed the FY 2011 budget deficit at $1.3 trillion, more than the $1.17 trillion deficit for FY 2010, but down from the $1.7 trillion deficit for FY 2009. This was a result of the economic stimulus package, the 2008 government bailout measures and the roughly $800 billion a year defense/security spending. The deficit is also caused by reduced income from the recession, as well as the EGTRRA and JGTRRA tax cuts and the Alternative Minimum Tax patch.
-The U.S., however, has been the beneficiary of two unusual factors.
First, the Social Security Trust Fund took in more revenue through payroll taxes leveraged on Baby Boomers than it needed. Ideally, this money should have been invested to be available when the Boomers retire. In reality, the Fund was "loaned" to the government to finance increased deficit spending. This interest-free loan helped keep Treasury Bond interest rates low, allowing more debt financing. However, it's not really a loan, since it can only be repaid by increased taxes when the Boomers do retire. Second, foreign countries increased their holdings of Treasury Bonds as a safe haven, also keeping interest rates low. These holdings went from 13% in 1988 to 31% in 2011. During the recession, countries like China and Japan increased their holdings of Treasuries to keep their currencies low relative to the dollar. Even though China warns the U.S. to lower its debt, it keeps buying more
Treasuries.
-Over the next 20 years, the Social Security funds must be paid back as the Baby Boomers retire. Since this money has been spent, resources need to be identified to repay this loan. That would mean higher taxes, since the high U.S. debt rules out further loans from other countries. Unfortunately, it's most likely that these benefits will be curtailed, either to retirees younger than 70, or to those who are high income and therefore theoretically don't need Social Security.