Things We Don't Talk About (But Should): National Debt and $2 Trillion Deficits

It has been around for decades, and has been ignored by many for just as long. However, the US national debt stands to finally be thrown into the forefront of political discussion as the record for a single-year deficit looks to be beaten – by threefold.

According to the government-run TreasuryDirect.gov, US national debt is the largest it has been in history at $10.6 trillion, or $10,638,425,746,293.80. This is at a time when the US is facing the worst economic crisis since the Great Depression, which requires record-shattering government spending to stabilize the faltering economy. In addition, global demand for US national debt is waning as countries world-wide are implementing their own financial stimulus packages. Yet economists are virtually unanimously advocating for radical government spending to stabilize the economy, which leaves future generations of Americans holding extremely large amounts of national debt.

The problem for the average American is twofold: national debt doesn’t seemingly affect their daily lives and $10.6 trillion is a hard number to conceptualize. After a certain point, the human brain stops comprehending the magnitude of a given number, and simply categorizes it as “extremely large.” Subsequently, there is little public outrage or discussion when the US has run up a few hundred billion dollar deficit in years past. It doesn’t seem to affect their lives, no government projects are cut, and adding $0.2T onto $10.6T seems relatively insignificant.

However, when viewed in another light, the enormity of the national debt is astonishing. According to the 2007 United States budget, and TreasuryDirect.gov, the interest alone on national debt is approximately $460 billion. It accounts for the second-highest expenditure on the US budget and if the US could forgo paying that interest on national debt for one year, the United States government could:

1) Pay for the entire education budget of the United States six times over

2) Reduce federal taxes by 33% for all Americans, or

3) Write a check to every man, woman, and child in the United States for $1,500.

Yet, that $460 billion in annual interest looks to grow substantially with looming deficits in the years to come.

A New York Times article entitled “Obama Warns of Prospect for Trillion-Dollar Deficits,” stated: “President-elect Barack Obama on Tuesday braced Americans for the unparalleled prospect of ‘trillion-dollar deficits for years to come.’” President-elect Obama did not give details about the size of the deficit, but projections place the proposed deficit at close to $1.2 trillion for 2009, shattering the record from President Bush last year at $455B.

That is not counting the proposed $800B 2-year stimulus package which could easily raise the deficit into the $1.7 trillion range – bringing the national debt to roughly $12.3 trillion by the end of 2009. Assuming deficits run at approximately $1 trillion per year for the next two years, which may or may not be conservative, the US could see its national debt as high as $15 trillion in three years.

Subsequently, Obama added emphasis on tighter government regulation, quoted in the NYTimes article as saying: “’ We’re not going to be able to expect the American people to support this critical effort unless we take extraordinary steps to ensure that the investments are made wisely and managed well.’” In correlation, he created a new position, chief performance officer, in charge of eradicating government inefficiencies.

This comes at a time however, when global demand for US debt is falling sharply. A prime example is China, one of the largest creditors to the US, which has heavily curtailed its purchases of US debt in light of the recent financial crisis. Another NYTimes article entitled: “China Losing Taste for Debt from U.S.,” states that: “China’s foreign reserves will increase by $177 billion this year — a large number, but down sharply from an estimated $415 billion last year.” The Chinese government is dealing with their own economic woes – a stock market which has shed two thirds of its value in the last year – and is attempting to implement their own economic stimulus package. Furthermore, the sharp outflow of foreign direct investment in China has further complicated the issue. The situation is similar across the world, as the Emerginvest heat map shows the damage from the past quarter (click to enlarge):

The lack of global demand for US national debt could put severe pressure on US interest rates in the years to come if demand continues to shrink drastically. However, there is a political buffer, as the article stated that: “China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia. ‘This is a political decision,' he said. 'This is not purely an investment decision.’”

Yet even in the face of significant strain on government debt and sagging global demand, economists are virtually unanimous in calling for exorbitant amounts of government spending to stabilize the economy. Yet another NYTimes article entitled: “A Crisis Trumps Constraint,” states that: “To a degree that would have been unimaginable two years ago, economists and politicians from across the political spectrum have put aside calls for fiscal restraint and decided that Congress should spend whatever it takes to rescue the economy,” in addition to: “’It pains me to say that because I am a fiscal conservative who dislikes budget deficits and increases in government spending,’ Mr. Feldstein told the lawmakers. But he said, ‘Reviving the economy requires major fiscal stimulus from tax cuts and increased government spending.’”

Therefore, it looks as if the U.S. is inexorably tied to unparalleled government spending in the short term, nearly guaranteeing a national debt of over $14 trillion within a few years. The Obama administration has hinted at overhauling Medicare and Social Security as ways of dampening the gargantuan deficits, but the method, and certainly the net effect of such an undertaking remains ambiguous until the budget is revealed. It seems as if, in the interest of short term self-preservation, future generations of Americans will be inevitably saddled with incomparable amounts of national debt which will heavily shape future American fiscal policy for decades.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. Emerginvest provides impartial information about world stock markets, and does not have any holdings in foreign equities.

Comments

[Dan / The C...:]

the interest alone on national debt is approximately $460 billion and if the US could forgo paying that interest on national debt for one year, the United States government could write a check to every man, woman, and child in the United States for $1,500.

This leaves me wondering, what percentage of the $460 billion is going to men, women and children of the United States in the form of interest payments, and what percentage is going abroad?

Jan 08 08:59 AM

[Jubilee Year:]

The solution to all of our problems is quite simple, but quite "outside the box": we need to cancel our debt. All of it. With no debt load, price levels could harmlessly deflate, and our productive economy would get a stimulus like no other.

Jan 08 10:45 AM

[falstaff:]

If you add in the IOUs in the empty vault rooms of Social Security, Medicare/Medicaid then the number is somewhat larger at around $53T in . The payments for just SS, Medicare and National Debt will be 100% of the USA budget within 20 years...no bridges, no defense, no subsidies, just IOUs....Jubilee Year above has it right, there are three ways to address this: much higher taxes, significantly reduced public spending, write off of debt or some combination. However it happens, it will be painful

mwhodges.home.att.net/...

Jan 08 11:34 AM

[Dr.Jackpot:]

I don't see how you can include a 6 year old child into the debt equation in present times. There are actually only about 100 million people producing any significant wealth in this country. That leaves the debt per producer at about $140,000. But then WHY keep worrying about future generations?? It's all relative and if science continues to advance then future generations (if alive) will be far better off the we are-----regardless of paper numbers ($). Just as we are better off now than our forefathers even WITH our debts. The young have a lifetime ahead. We older ones just have the grave to come. So get off this kick about passing debt to kids who haven't even been born. They will have free sex, no diseases, automated lifestyles, etc. Personally, I'll take the debt if you'll let me be reborn right now.

Jan 08 12:03 PM

[OperaMan:]

If you think slow consumer spending is an issue now, wait until the baby boomers who haven't retired contemplate how much more they will need to save to be able to survive cutbacks in Social Security payments.

Those nearing retirement will have to go into panic savings mode to compensate, which in turn will greatly reduce the amount of money flowing into the consumer economy.

Jan 08 12:51 PM

[Emerginvest:]

Dan,

Thanks for the comment! I really just meant to have it be a simple comparison to give some perspective on the idea of spending $460B on something which doesn't add any value to the US. I still find it shocking how large it really is.


On Jan 08 08:59 AM Dan / The Common Man wrote:

> the interest alone on national debt is approximately $460 billion
> and if the US could forgo paying that interest on national debt for
> one year, the United States government could write a check to every
> man, woman, and child in the United States for $1,500.
>
> This leaves me wondering, what percentage of the $460 billion is
> going to men, women and children of the United States in the form
> of interest payments, and what percentage is going abroad?

Jan 08 12:56 PM

[Emerginvest:]

OperaMan,

I completely agree. I think as the baby boomers age, it will seriously affect consumer spending - at a time when Obama says he is hoping to overhaul Medicare and Social Security. We'll see how it plays out, but at a minimum there will be significant challenges.


On Jan 08 12:51 PM OperaMan wrote:

> If you think slow consumer spending is an issue now, wait until the
> baby boomers who haven't retired contemplate how much more they will
> need to save to be able to survive cutbacks in Social Security payments.
>
>
> Those nearing retirement will have to go into panic savings mode
> to compensate, which in turn will greatly reduce the amount of money
> flowing into the consumer economy.

Jan 08 12:59 PM

[huangthomas:]

The US GDP is $15-16 trillion. We use only 3% of GDP to serve the national debt. I don't see the problem there. In any discussion, the most important issue is how to spend the borrowed money wisely, not the burden of the interest.

When you are born, highways, streets, bridges, rail ways, airports, school houses........are all there. Who pay for them? Your parents, grand parents.........paid. Leaving a little debt to your children, grand children......is not a problem because we want them to grow up in a better society, so we borrow the money on their behalves to build a better society for them.

Jan 08 01:05 PM

[Kunst:]

On Jan 08 10:45 AM Jubilee Year wrote:

> The solution to all of our problems is quite simple, but quite "outside
> the box": we need to cancel our debt. All of it. With no debt load,
> price levels could harmlessly deflate, and our productive economy
> would get a stimulus like no other.

I think this is more or less what will happen.

DOES ANYONE REALLY BELIEVE WE ARE GOING TO PAY BACK ALL THIS DEBT, EVER?

Since our debts are in our own currency, we could just write every creditor a check and say see-ya-later. The dollar would drop like a rock, and don't plan to borrow in dollars ever again, but as a one-time escape, it could happen. It probably won't be that extreme, but increasing the money supply (e.g., the Fed "buys" treasuries with dollars it creates out of thin air) will lead to inflation and a drop in the value of the dollar. Theoretically, creditors can force up interest rates by withholding their dollars until that happens. But with the USG able to create money instead of debt, they don't have control. Japan recently suggested the US issue yen-denominated bonds. What a non-starter that was in Washington.

There are some up-sides to all this. Inflation will largely "solve" the financial and foreclosure problems by reinflating asset values. Homeowners will have equity and lower mortgage payments compared to higher cheap-dollar incomes. Mortgage-backed securities have some backing again. A cheaper dollar will make the US more competitive and reduce the trade deficit. On the other hand, prices will rise faster than incomes (especially imports -- we WILL use a LOT LESS oil) and Americans as a whole will be poorer. Those on fixed incomes will be hurt the worst.

Jan 08 01:26 PM

[huangthomas:]

About the size of national debt in relation to national GDP. USA is 65 to 68% of GDP; Germany, 80%; Japan 175%..... For average American, the mortgage is at least x3-4 of annual income. Not to mention car loan or credit card debt, that is 300 to 400% of annual income. I don't mean big debt is good; but if you have good justification for it, it may not be that bad.

You may wonder why fiscally conservative German have such high national debt. Because they have national health insurance, generous social welfare systems, subsidized higher education.....all these are for people to decide. The size of the national debt is not a problem yet for the United States.

Jan 08 01:31 PM

[Crocodilian:]

One statistic that is not considered is total debt, adding private debt to Government debt. We are witnessing a sea change in the leverage of the private sector, through default, cram downs or pay downs. A good chunk of TARP money went to stabilize the money market system: dollars that you and I once loaned overnight (through intermediaries like money market funds) to GE are now being loaned by the Government to GE.

I have not seen good current numbers on the extinction of private debt, but my guess would be that with no issuance and lots of retirements, margin paydowns and bankruptcies, its falling quite quickly.

Thus, much of the increase in Government debt may be offsetting a fall in private debt; the numbers aren't current enough to say for sure, but that would be my guess.

Jan 08 03:03 PM

[Thomas J. G...:]

Some of this debt is owed to the Federal Reserve and that portion should be ignored. The U.S. gov't has a right to some legitimate long term borrowing. If an aircraft carrier is purchased, it is not reasonable to charge the current year for the entire amount of an asset that has a 20 yr useful iife. That said, the government was in a deficit position before all this bailout stuff and now we are really spending a lot of money we don't have. The author's concern about the level of the debt is vaild. The government does not create wealth, it merely reallocates the wealth the private sector produces. Hence their bailouts are largely subsidizing poor sectors of the economy with proceeds from the successful sectors of the economy.

Jan 08 03:54 PM

[axelrod608:]

Dust off your crystal ball and see what our huge and growing national debt means. One likely result is that the Fed will make the ZIRP (zero interest rate policy) permanent because if interest rates were ever allowed to rise, the interest on the debt would soon exceed the government's income.

Also consider that the "national debt" is our loan paper only. The current accounts deficit, which includes the unfunded mandates for Soc Sec , Medicare, etc, is - depending on whose figure you use - somewhere in the range of $45 - $75 trillion.

As for the comment that US GDP is $15 - $16 T, I have no idea where that number came from. 2007 esimates for 2008 looked for $13T, but there's no way we made that level in such a bad year. $12 - $12.5T will probably be the number once the bean counters finish their work.

Debt service is predicated on a number of assumption. One of the most important is INCOME, which is falling for individuals, the gummint, the states, cities, counties, corporations - in short everyone. Using outdated income projections to talk about future debt service is totally misleading. Read HOW TO LIE WITH STATISTICS.

Way too many policies and opinions are based on assumptions and theories that are no longer valid. The world as we knew it has changed. The economy we brought into the 21st century was and is unsustainable. Trying to spend our way back to prosperity is little different than doubling down in Vegas. The odds are waaay against winning. And, as usual, the DC crowd is a decade behind the learning curve.

Jan 08 03:55 PM

[X-15:]

There is ONE way to pay down the debt. Only one, other than DE-fault.

One thing we all use in the USA that if taxed at 2.00 dollars per gallon

20,000,000 barrels(per day) times 40 gallons per barrel = 800,000,000 gpd

take 800,000,000 gpd times $2.00(tax per gallon) =

$ 1.6 Billion dollars per day in tax revenue.

$1.6 B times 365 days per year = 5.84 trillion

OR we dump the debt on our kids & the USA becomes a footnote in history.

Jan 08 06:36 PM

[X-15:]

The above comment is true test of Patriotism

Jan 08 06:38 PM

[axelrod608:]

X 15 - I absolutely love outside the box thinking. Unfortunately, NOBODY in DC does. A gas tax is absolutely essential.

Jan 08 07:50 PM

[pdxbob:]

I have this wild idea. We could actually *reduce* spending, paying for things as we go.

That wouldn't be very Keynesian, though. If people won't spend like drunken sailors, then government must!

Jan 08 08:40 PM

[Chris B:]

"the interest alone on national debt is approximately $460 billion. It accounts for the second-highest expenditure on the US budget and if the US could forgo paying that interest on national debt for one year, the United States government could:
1) Pay for the entire education budget of the United States six times over
2) Reduce federal taxes by 33% for all Americans, or
3) Write a check to every man, woman, and child in the United States for $1,500."

This is the current problem. Ideally, the citizens pay taxes and get the benefits of government in exchange - infrastructure, security, property rights, services, utilities, etc. In the US however, we seem to be getting very little for our money, as a massive chunk of our taxes go to pay interest on debts accrued earlier. Someday soon, interest could be 50% of your taxes, even as crime runs rhampant, infrastructure decays, and education becomes unaffordable. That's the price we pay for having a ultra-short-term outlook.

Jan 09 12:12 PM