U.S. federal government debt may be the most poorly discussed topic in today’s political debate.
In an election filled to the brim with half-truths, misperceptions, and manipulation, it may seem silly to pick out one topic as the worst. But I am confident that debt takes the cake. I am confident in this choice because the federal debt is actually not that complicated of a subject, but is at least as full of misleading information as other topics. Healthcare, taxes, and foreign policy constantly get mucked up in the details, but with debt, the fundamental concepts of the issue are constantly misunderstood. I hope to remedy some of that here.
The first issue is the difference between deficit and debt. The deficit (or, rarely, surplus) refers to the balance of the yearly budget. The debt is the total amount we owe through the accumulation of those deficits. The federal budget deficit for fiscal year (FY) 2012 was $1.1 trillion. This means that $1.1 trillion was added to our total debt, which now totals around $16 trillion. That debt is then sold through U.S. Treasury Bonds to investors. (I’ll be using “bonds” and “debt” interchangeably to refer to the U.S. federal debt, as bonds are basically the tool used move debt.)
It breaks my liberal heart to say it, but Jon Stewart totally screwed up the difference between these two in his debate with Bill O’Reily on October 6th. Stewart said that Bill Clinton created a total debt surplus by the end of his term. He did not. He created a budget surplus, meaning that he was shrinking the total size of the debt on a yearly basis, but the total debt wasn’t gone by the time he left office.
The second issue is why the size of our debt matters. If the debt gets so big that creditors lose faith in the U.S. government’s ability to pay the money back, then borrowing costs will rise, and the U.S. would be unable to run deficits. The government would then be in a Greece-type situation where they have to hike taxes and cut spending, which slows the economy, which cuts government revenue, and a nasty feedback loop is created. This would happen to the U.S. eventually if the debt keeps growing quickly.
The key word being eventually. We are nowhere near this point. Interest rates for the U.S. are so low that borrowing costs are actually negative when you factor in inflation. In other words, investors are paying the U.S. government to take their money. In case this seems weird to anyone, remember that the U.S. is the center of the entire goddamn world economy.
U.S. Treasury Bonds are pretty much as good as gold. Major investors generally treat them one of the most secure things there is. The rest of the world has actually taken the idea of them being as good as gold quite literally, as the U.S. dollar has long replaced gold as the global reserve currency. When two countries trade, they usually do it in U.S. dollars. (U.S. dollars are not the same as Treasury Bonds, but faith in one reflects some faith in the other.) Not to mention that if they want a large export market, they’re going to shoot for the Americans. If you scroll through the major export partners for most countries around the world, the U.S. is generally in the top three, if not number one.
The third issue is who we owe the debt to. Surprise, it’s mostly ourselves. Certain parts of the government, namely the Federal Reserve, Social Security Trust Fund, and Medicare Trust Fund own $6.3 trillion of U.S. debt as of this spring. Basically this means that parts of the government that run a surplus, such as Social Security, buy the debt of the other parts of the government, such as the Department of Defense. The Federal Reserve also buys this debt, but mainly through their wizarding financial powers which would require many other articles to make sense of.
Other people in the U.S. own debt as well. In fact, just about everyone is probably invested in it somehow. Pension funds, mutual funds, insurance companies, banks, state and local governments, and other investors hold roughly $3.7 trillion of the debt.
The other major owners of U.S. debt are foreign countries. Yes, China is the largest at $1.1 trillion, closely followed by Japan at $1 trillion. But for the love of god, we need to understand exactly what this means. China—or any other country—is not a loan shark. Government bonds cannot be called in at any time, they pay out at a specified point in the future. China buys our government bonds, and is then repaid at a later fixed date with some interest payments. China cannot call in the loans any time they want and break our kneecaps if we don’t pay up. We pay them when we said we would pay them.
What China can do is achieve some level of interest rate manipulation, given their decent share of the pot (about 7% or so). If they decided to sell off their entire share, it would likely mean we would have to pay more to borrow, excluding other variables. Therefore it is also important to understand why China—along with most other foreign countries holding our debt, but especially China—would never ever do this.
Exports to the U.S. constitute roughly 8% of China’s GDP, so jeopardizing the U.S. economy means jeopardizing the Chinese economy. And jeopardizing the Chinese economy means jeopardizing the Communist Party’s rule. Another article would be required to elaborate this point, but basically the biggest thing keeping people from toppling the authoritarian government at this point is huge economic growth. China knows this, so they buy U.S. debt to ensure that the U.S. economy does not go bad.
While most countries other than China don’t have to worry as much about their government being overthrown, many are just as dependent on the U.S. for an export market, as mentioned above. So don’t count on foreign governments trying to screw around with our debt anytime soon.
To summarize, there are three key points to understanding the debate over U.S. federal debt. First, the debt is total amount of money owed, and the deficit is what gets added to that total each year. Second, debts become a major issue when investors lose faith in the ability of the borrower to repay them, and the U.S. is nowhere near that point. Third, most of the debt is owned by other entities in the U.S., and the debt that is owned by foreign countries does not put us under their thumb. Debt is undoubtedly an important political issue, and it helps to have the basic facts under your belt before discussing it (or running for president).