Updated Feb 06, 2022
What is The National Debt of The United States?
What is National debt?
The federal government's debt is known as the national debt. Sovereign debt is also known as country debt or government debt. The national debt of the United States is made up of two categories of debt: public debt and intragovernmental debt.
The public debt is the amount the government owes Treasury investors. People from the United States, international investors, and foreign governments are among the investors.
The federal government owes other government agencies intragovernmental debt. It pays for pensions and other government programs, such as Social Security in the United States.
When the federal government spends more than it receives in tax revenue, it contributes to the national debt. The debt is increased with each year's budget deficit, while the debt is decreased with each year's budget surplus.
What are the Causes of the National Debt?
Government spending is the source of the national debt. This results in a budget deficit, yet it is important to assist the economy is growing. Expansionary fiscal policy is the term for this. The government employs budgetary measures to either increase spending or lower taxes by increasing the money supply in the economy. Consumers and businesses will have more money to spend, which will improve economic development in the short run.
Defense equipment, health care, and construction are all funded by the federal government. It enters into contracts with private companies that then hire additional staff, or it hires employees directly. These workers then spend their pay on transportation, groceries, and new clothing. Consumer spending stimulates the economy.
However, to stimulate the economy, the government will have to spend money, which will increase the national debt.
What Is the National Debt Made Up Of?
As of December 2021, the national debt totaled to than $29 trillion. Daily, the national debt clock and the U.S. Department of the Treasury website track the exact number.
Both public and intragovernmental debt make to the public debt. The public holds the majority of the debt, which totals more than $22 trillion. Treasury bills, notes, and bonds owned by US investors, the Federal Reserve, and foreign governments fall into this category. The remaining $6 trillion is made up of Government Account Series assets held by federal institutions like the Social Security Trust Fund, federal public employee retirement funds, and military retirement funds.
The national debt is so massive that it's difficult to comprehend. For example, $29 trillion divided by a population of approximately 330 million equals $87,878, the national debt per person.
The national debt exceeds the country's annual output. Even if the United States produced everything is generated in a single year to pay off its debt, it would still be unable to do it. When measured against the gross domestic product (GDP), the US debt exceeds 100% of GDP, which is considered unhealthy. The government continues to spend on required programs like Social Security, Medicare, and Medicaid, even though it has been at this level for years. The federal government also pays out several billion dollars in interest to Treasury investors each year.
While the national debt is massive, investors generally maintain faith in the economy. Foreign investors, such as China and Japan, continue to buy Treasurys as a haven. As a result, interest rates are kept low. Interest rates would rise if it ever stopped because weak demand for Treasury notes drives up interest rates.
If Congress ever threatens to keep the debt ceiling—the ceiling on the national debt—from being raised or suspended, the United States could face default. The United States has never defaulted on its debt in modern history, but Congress has delayed rising or suspending it in the past, causing confidence in the economy to wane for periods.
The Economic Impact of the National Debt
When the national debt reaches the debt ceiling, it puts the country at risk of defaulting. To avoid this, Congress must raise or suspend the debt ceiling, but this simply means that the debt-to-GDP ratio will continue to rise to unsustainable levels.
When the debt-to-GDP ratio exceeds 77 percent, investors are concerned about default. According to a World Bank study, if the debt-to-GDP ratio exceeds 77 percent over an extended period, economic development slows. Every percentage point of debt above this level reduces the country's yearly economic growth by 0.017 percentage points.
Multiple studies have found that a high level of national debt slows long-term growth by influencing interest rates. According to the Congressional Budget Office, a 1% rise in debt as a proportion of GDP might result in a 2 to 3 basis point increase in interest rates.
Higher interest rates hinder the economy because businesses can't borrow as much and can't grow or hire more workers, reducing demand. Businesses may cut prices if individuals spend less money, implying that they will generate less money. There is a possibility of layoffs if this occurs. All of this could lead to a downturn.
When a country is unable to pay off or reduce its national debt by paying its obligations, it enters a sovereign debt crisis. The first symptom is when the country discovers that it no longer has access to low-interest loans from lenders. Banks are concerned that the country would be unable to pay its bonds and will default on its obligations. To compensate for their risk, they want larger dividends. Refinancing the country's debt will be more expensive as a result.
How does the National Debt Affect everyone?
When the national debt is below the tipping threshold, the government continues to spend and contributes to a rising economy, which means more financing for programs that you can benefit from.
Your standard of living, however, may be impacted if your debt crosses the tipping point. Interest rates may rise, causing the economy to slow. A loss of investor confidence could cause the stock market to react, resulting in decreased returns on your investments. A recession is also a possibility.
Because the value of a country's currency is linked to the value of the country's bonds, this also exerts downward pressure on the currency. Foreign bond holders' repayments are worthless as the value of their currency falls. This reduces demand even more and raises interest rates. As the value of the currency falls, goods and services may become more expensive, contributing to inflation.
What Are the Options for Reducing the National Debt?
The country could raise taxes or cut spending to lower the debt. These are two of the weapons of contractionary fiscal policy, and one of them has the potential to limit economic growth.
Cuts in spending, on the other hand, have their drawbacks. Government spending accounts for 31% of GDP or the total value of all goods and services generated in a given year. GDP will fall and economic growth would stagnate if the government cuts spending too much. As a result, there will be less revenue and a higher deficit.
Increases in taxes can also stifle economic progress. According to one study, a 1% rise in taxes reduces real GDP by around 3%. The real GDP is an inflation-adjusted metric that makes year-to-year comparisons easier.
Creditors have faith in the government to repay them as long as the debt is below the tipping point. The tipping point occurs when a country's potential to thrive economically is hampered by its public debt. Government interest rates can remain low when debt is moderate, allowing governments to maintain deficits for years.
Conclusion
One of the most critical public policy challenges is the national debt level. Debt can be utilized to promote a country's long-term growth and prosperity when used properly. The national debt, on the other hand, must be assessed properly, such as by comparing the amount of interest expense paid to other governmental expenses or by comparing debt levels per capita.
