The U.S. will shortly raise the limit on its national debt. The
stubborn recession and deteriorating economic situation in several
European countries have underscored, again, the danger of excessive
debt, but it’s difficult to know exactly where the tipping point
is. The national debt is $14.3 trillion while the gross domestic
product, GDP, is $14.7 trillion. Theoretically, each of American
household owes $92,260.
The U.S. will shortly raise the limit on its national debt. The stubborn recession and deteriorating economic situation in several European countries have underscored, again, the danger of excessive debt, but it’s difficult to know exactly where the tipping point is. The national debt is $14.3 trillion while the gross domestic product, GDP, is $14.7 trillion. Theoretically, each of American household owes $92,260.
The national debt is the amount the treasury would need to pay off all the loans taken by the government, a situation that is never going to happen, but we must still pay the interest. The national debt is the total of two components, public debt and intergovernmental debt. Public debt – loans from people, businesses and foreign governments who own treasury securities – make up two-thirds of the total. The other third is intergovernmental debt, loans to the treasury from other government accounts. For example, in 2010 the treasury borrowed $2.5 trillion dollars from the Social Security Trust Fund. Since the public is paying itself the interest on that loan and will have to pay back the principal, things get complicated.
Annual deficits contribute to the national debt, but don’t confuse the debt with the deficit, the trade deficit or underfunded obligations on everything from Social Security to Fannie Mae – the national debt is money we already borrowed.
The annual interest on the national debt is $395 billion or $2,550 per U.S. household. It comes out of the government’s pocket. Naturally, they just withhold that amount from program spending to cover it. At least they are supposed to. Those interest payments could carry the current debt forever if interest rates behave. There is, however, a catch or two: You can’t use the $395 billion a year for anything else, the payments do not reduce the principal, and it does not include any added borrowing.
Added borrowing comes from deficits. Deficits are the amount expenses exceed revenues in a given year. Unfortunately, the government’s economic forecast is that we will be running annual near-trillion-dollar deficits for as long as the forecasts go, to year 2020. Those will add $8.4 trillion to the national debt. To pay the additional interest we have raise the annual household holdback to $2,713 in 2012 and every year after. By 2020, it increases to $4,037 per household taking $627 billion out of the economy annually. Meanwhile the national debt, in 2011 dollars, will have grown to $22.7 trillion; a 58 percent increase.
To add debt, we have to find lenders; the higher our debt as a percent of income, the higher interest rates we must pay. Our current national debt is 97.5 percent of GDP; my forecast for 2020 is that our debt will equal 120 percent of GDP. We are now at historically low interest rates, should rates increase significantly all bets are off.
As of the February 2011, foreign interests held $4.5 trillion, 31 percent, of the national debt. That equals 46 percent of public debt, nearly equal to all the private domestic debt holders – people, businesses and organizations. Top foreign holders were mainland China, $1.15 trillion, Japan, the United Kingdom, Oil Exporters, Brazil, Caribbean Banking Centers, Taiwan, Russia, Hong Kong and Switzerland. By 2020, foreign interests will probably hold more than half the public debt.
The size and direction of our national debt is not an immediate death sentence, but it’s certainly not a clean bill of health; it’s an early diagnosis of economic cancer. If we do not treat the disease now we may not be able to treat it in the future short of the most drastic measures. Â
Marty Richman is a Hollister resident.
