It is quite possible that you believe that the US public debt is quite large. You may even think that it is dangerously large, as in ‘unsettling financial markets’. If you harbour these beliefs it may come as a surprise that the public debt is not very large, and by any rational calculation the ‘burden’ it imposes is tiny.
Demonstrating the validity of these apparent heresies requires a branch of advanced maths, known as arithmetic. To make the proof even more difficult, I shall begin by invoking a bit of commonsense. The common sense consists of three general rules. The first is that a debt is a potential problem if it is owed to someone else. Indeed, it could be said that a debt you owe yourself is not a debt.
Second, there is a difference between a debt that was contracted for an asset and one contracted for immediate consumption. For example, when one borrows to purchase a home, the debt (mortgage) has an asset whose value compensates in part or whole for the debt. Thus, the net debt of a person or household equals what is owed to others minus the assets of the household or person.
Third, the cost or burden of a debt is what a person or household must pay to others in interest and to reduce the original value of the debt. To keep to the mortgage example, its running cost is not the amount of it, but the periodic interest and repayment of principle (‘debt service’).
This same common sense can be applied to the US government, and this is done in the table below. At the end of 2010, the federal public debt of the United States was just over fourteen trillion dollars, equivalent to about 96 percent of gross national product for that year. Forty percent of this debt was owed by the federal government to itself or to institutions under its control. That is, forty percent of the debt was owed by the federal government to the federal government, and the interest payments involved a shift of funds from one pocket to another. Even more, much of this shift had the positive purpose of funding the social security system. All of the US debt in the social security trust fund is an asset for the beneficiaries of system, generating their retirement income.
Next, the liquid assets of the US government, gold reserves, holdings of foreign currencies, bonds, etc., should be subtracted out to obtain the net debt. By the international standard methodology of the Organization of Economic Cooperation and Development (OECD), the net debt of the United States was just over six trillion dollars at the end of 2010, well less than half of the nominal total of 14 trillion. In other words, take out what the government owes itself, take out government liquid assets, and the debt was just over forty percent of GDP, not close to 100 percent.
But that’s not the end of the story. The major reason that the press and politicians carry on about the debt is the terror of the merciless ‘financial markets’. So, how much of the debt, gross or net, is held by these gnomes of finance? This is difficult to estimate precisely, but there are obvious candidates for exclusion, beginning with state and local governments. This portion of the federal debt, which includes public employee pension funds, was five percent of the total in 2010. This brings the maximum possible ‘financial market debt’ down to about 7.5 trillion gross and barely six trillion net.
Then, there is all that debt owed to China, $1.1 trillion at the end of 2010. Whatever nefarious plans the Chinese government may or may not have for its debt holdings, they do not include financial speculation. Nor is there any safer liquid form in which the Chinese government could hold its massive foreign exchange reserves. When we make the reasonable subtraction of the Chinese debt from the total, the maximum gross debt potentially vulnerable to speculation falls to $6.5 trillion, considerably less than half of GDP. The net equivalent drops to less than a third of GDP.
To summarize, when we take out what the federal government owes itself, the US public debt is a smaller proportion of GDP than the same debt measure for any other major developed country. Indeed, it is so low that it is no problem. When other obvious calculations are made, net instead of gross, public bonds held by local and state governments, you have to think, where is the problem?
US Public Debt, End of 2010
| Ownership categories |
US$ bns |
% of total |
% of GDP |
| Total federal public debt |
14,206 |
100.0 |
95.7 |
| owed to itself |
5,656 |
40.3 |
38.6 |
| owed to others |
8,370 |
59.7 |
57.1 |
| Net debt to others |
6,017 |
42.9 |
41.1 |
| Non-financial owners | |||
| State & local gov’ts |
706 |
5.0 |
4.8 |
| China |
1,160 |
8.2 |
7.9 |
| Everyone else*, gross |
6,504 |
46.4 |
44.4 |
| Everyone else*, net |
4,677 |
33.3 |
31.9 |
*Maximum possible value for debt entering ‘financial markets’.
Sources:
US debt: gross, Economic Report of the President 2011; net, OECD (OECD Economic Outlook 89 database).
Ah, but the problem is not the size of the debt, say the neo-Scroogians. The problem is servicing it, paying the interest. Not much a problem for the United States, I fear, as the table below shows clearly. Of the five largest developed countries, payments on the gross debt as a percentage of GDP was higher only for Japan. By contrast, putatively frugal German government paid out considerably more than the United States Treasury, and France and the United Kingdom were far above. Even more, the interest on the net debt was just one percent of US GDP in 2010.
Not-so-fast, argue the ‘deficit hawks’ (vultures, more like it), now down to their last argument: if ‘financial markets’ take fright, they will drive up interest rates and that little one or 1.6 percent will go through the roof and be unsustainable. But, how can ‘financial markets’ drive up interest rates when at most they have access to less than half of gross debt? Even, more, how would they do it when any new borrowing by the US government can be form itself (e.g., the Social Security Trust Fund) or the Chinese government? The answer is obvious and requires no expertise in economics: ’financial markets’ cannot drive up US interest rates. Quite the contrary, the bizarre ‘downgrade’, by creating international economic instability, increased the demand for US government debt, putting downward pressure on US interest rates.
Interest Payments on Public Debt
Percentage of GDP, 2010
| United Kingdom |
2.6 |
|
| France |
2.3 |
|
| Germany |
2.0 |
net |
| USA |
1.6 |
1.0 |
| Japan |
1.4 |
Source:
OECD Economic Outlook 89 database
The US government is not and never has failed to meet its debt obligations. The obligations it has flagrantly failed to meet are providing for the education and health of its population, repairing the country’s public infrastructure, and preventing state and local governments from going bankrupt, thus reducing or eliminating their ability to do their social duty. The false claims of federal default are the mechanism by which the rich and powerful, aided by the rating agencies, will further enforce the real default on social and economic justice for people in the United States of America.
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The US Federal Governent Debt is Approaching 15 Trillion or 100% of GDP.
Add State Debts+Local Debts+Current Account Debts(Trade),Consumer Debts,Corporate Debts,Future Liabilities on Medicare and Social Security, etc….The Debts as of now is…$150 Trillion?? IF you use standard accounting this is the number you would reach. The Government does not use Standard Accounting but Smoke and Mirrors. Add The Interest to these Figures and the figure is much higher yet.
The USA has had a Current Account Deficit for almost 30 years and over the past 10 years it has been huge…Countries like Germany, japan,Saudi Arabia, etc who are all Creditors have purchased huge sums of Assets in the USA(Land,Resources,Buildings, Factories,etc) Making deals on K-Street with our whore Government. THE USA Infrastructure was rate a D(Roads, Water systems, Electrical Systems, Ports, Airports, Dams, etc) and needs almost 4 trillion to fix, Our Heathcare system is ranked 37th in Quality, leaves over 50 million without insurance and many more with only partial coverage and poor Quality.
The USA is a Energy Hog and refuses to go towards a Sustainable/Renewable System using 55% more Energy per unit of GDP Output compared to a Germany or Japan with a lower quality of life/standard of living for most in the states(Lived in Germany and can compare). Our K-12 Education is ranked near the bottom and out University System is out of Reach for the Majority of people with the high cost and inflexible nature(Work Schedules, No Government Assistence with cost of living, etc) and the USA Trade/Vocational System has been gutted and weak. We spend Trillion on Oil Wars and Trillion on Military bases flung all over the globe basically because this is a Debtor Nation we are "Beholden" To the Creditors and do their bidding. The USA has almost 8 Million in Corrections(Prison, Parole, Probation, etc) 40% of world totals and the death penalty while over 130 countries do not have the death penalty.
USA Life Expectency is ranked 50th and falling while health living rankings(Living with no injury, illnesses, mental disorders, etc) we are ranked 70th and falling. Some Part of the states of Statistics compared to third world countries.
The UK is also a Huge Debtor nation, Losing much of it's manufacturing/high end services to places like Germany while the Creditor Nation Buys up the Debtor Nation.
The Left/Right BS should stop it should always be remembered it's top to bottom! The Left/Right is an Imperial Government like in Rome where the so called Left would battle the so called Right and all the other spectrums of people and thoughts and philosophy would be left out. This is not a Democracy and niether was Rome…The UK Was a Global Empire and So Was America..not now but the it was set up as an Imperial System and now what the UK and America used to do to others is being done to them since they are weak and places like Germany are strong. European Social Democracy/Economy was started in Germany after World War 2 and spread to much of Europe. England was influenced by it but never gave up the old Top/Down Structure Completely with Thatcher reversing many of the gains in the UK back in the 1980's not all of the gains but many. Greece was a Military Dictatorship right up into the late 1970's both influenced by the Uk and USA who at the time were still "Empires" Portugal was also a Dictatorship as well as Spain in the 1970's all have improved..Spain the most but Greece the least having more Corruption and also Dogmatic Thinking not willing to change like England or the USA!
Excellent article. The only thing which could have been pointed out at the outset is that the US public debt is not only "owed" to itself, but is "paid" with its own currency, over which it has monopoly control. The US, like Britain, is the sovereign issuer of its currency. The Euro countries are not issuers, they are users. They stupidly gave up their sovereignty and are now in the position of the several states of the US. There is never an insolvency problem with the sovereign issuer of its own currency–by definition and by operational reality. As for the debt owed the Chinese, it is, again, a non-issue. See Warren Mosler's 7 Deadly Innocent Frauds: http://moslereconomics.com/wp-content/powerpoints…
The public deficit necessarily equals the private surplus, to the penny. It is an accounting identity. This is something that the politicians seem unable to comprehend, as they are stuck back in the days of the gold standard, whereas today we operate with a floating exchange, non-convertible fiat currency. Totally different systems. The worst solution for our situation is the one that is being undertaken currently: austerity measures. As if taking the petrol out of an automobile to make it lighter will help it go farther.
Another important consequence: the government funds nothing with taxes. It doesn't "need" taxes, because it issues all the currency with which taxes will be paid! The various states and cities do indeed need to tax to fund public words, but not the federal government, for it issues the currency in the first place, and merely with keystrokes. Taxes are there to serve as a political purpose in relation to income distribution, but above all for two reasons: first, to make sure that the currency is used, since it is the only thing that the government will accept in payment of taxes; and secondly, in the case where the government is close to full employment (not exactly the case now!) to forestall the possibility of inflation.