When consumers spend more than they make, they often find themselves in debt. The same is true for countries, and the United States is no exception. When the United States spends more than it earned through taxes and other revenue sources, it creates a deficit.
The United States borrows money, typically by issuing Treasury securities, such as treasury bills (T-Bills), notes (T-Notes) and bonds (T-Bonds), to cover that difference. Every year the United States cannot pay the deficit between revenue and expenses, the national debt grows.
Here’s everything you need to know about the national debt, how it impacts the American economy, and who owns US debt.
How Much Debt Does the US Have?
As of June 2021, the United States is $28.3 trillion in debt and continues to climb. Some economists prefer to look at national debt as a percentage of gross domestic product (GDP). At 127%, the current US debt level is higher than the country’s GDP.
Who Is the US in Debt to?
There are generally two categories of debt: intragovernmental holdings and debt from the public. The debt that the government owes itself is known as intragovernmental debt. In general, this debt is owed to other government agencies such as the Social Security Trust Fund.
Because the Social Security Trust Fund doesn’t use all its generated capital, it invests the excess funds into U.S. Treasuries. If the Social Security Trust Fund needs money, it can redeem the Treasurys. As of June 2021, intergovernmental debt hovers around $6 trillion, making the US government the largest single owner of US debt.
The public debt consists of debt owned by individuals, businesses, governments, and foreign countries. Foreign countries own roughly one-third of U.S. public debt, with Japan owning the largest chunk of American debt hovering around $1.26 trillion. US debt to China ranks second, with that country owning roughly $1.07 trillion of American debt.
What is The History of the National Debt?
Since the founding of the United States and the American revolution, debt has been a grim reality in America. When America needed funding for the Revolutionary War in 1776, it appointed a committee, which would later become the Treasury, to borrow capital from other countries such as France and the Netherlands. Thus, after the Revolutionary War in 1783, the United States had already accumulated roughly $43 million in debt.
To cover some of this debt obligation Alexander Hamilton, the first Secretary of the Treasury, rolled out federal bonds. The bonds were seemingly profitable and helped the government create credit. This bond system established an efficient way to make interest payments when the bonds matured and secure the government’s good faith state-side and internationally.
The debt load steadily grew for the next 45 years until President Andrew Jackson took office. He paid off the country’s entire $58 million debt in 1835. After his reign, however, debt began to accumulate again into the millions once again.
Flash forward to the American Civil war, which ended up costing about $5.2 billion. Because the war dragged on, the U.S. was strained to revamp the financial systems in place. To manage some of the debt at hand, the government instituted the Legal Tender Act of 1862 and the National Bank Act of 1863. Both initiatives helped lower the debt to $2.1 billion.
The government borrowed money again to fuel World War I, and then substantially more money to pay for public works projects and attempt to stem deflation during the Great Depression, and even more to pay for World War II, reaching $258 billion in 1945.
Since 1939, the United States has had a “debt ceiling,” which limits the total amount of debt that the federal government can accumulate.The Treasury can continue to borrow money to fund government operations, but the total debt cannot exceed the prescribed limit. However, Congress regularly raises the ceiling. The latest change came in 2019 when former President Trump signed a bill that suspended the limit for two years.
After that, American debt’s growth continued growing, with the pace accelerating in the 1980s. US debt tripled between 1980 and 1990. In 2008, quantitative easing during the Great Recession more than doubled the national debt from $2.1 trillion to $4.4 trillion.
Recommended: US Recession History: Reviewing Past Market Contractions
More recently, the national debt has increased substantially, with Covid-related stimulus and relief programs adding nearly $2 trillion to the national debt over the next decade.
Why The National Debt Matters to Americans
Over the past 12 years, U.S. debt has grown over 400%, while the U.S. income has only grown 30%, according to the Federal Reserve Bank of St. Louis.
As the national debt continues to skyrocket, some policymakers worry about the sustainability of rising debt, and how it will impact the future of the nation. That’s because the higher the US debt, the more of the country’s overall budget must go toward debt payments, rather than on other expenses, such as infrastructure or social services.
Those worried about the increase in debt also believe that it could lead to lower private investments, since private borrowers may compete with the federal government to borrow funds, leading to potentially higher interest rates and lower confidence.
In addition, research shows that countries confronted with crises while in great debt have fewer options available to them to respond. Thus, the country takes more time to recover. The increased debt could put the United States in a difficult position to handle unexpected problems, such as a recession, and could change the amount of time it moves through business cycles.
Additionally, some worry that continued borrowing by the country could eventually cause lenders to begin to question the country’s credit standing. If investors could lose confidence in the US government’s ability to pay back its debt, interest rates could rise, causing inflation or other investment risks. While such a shift may not take place in the immediate future, it could impact future generations.
The Takeaway
The national debt is the amount of money that the US government owes to creditors. It’s a number that’s been steadily increasing, which some investors and policymakers worry could have a negative impact on the country’s economic standing going forward.
Some economists believe that the growing national debt could eventually lead to higher interest rates and lower stock returns, so it’s a trend that investors may want to factor into their portfolio-building strategy, especially over the long-term.
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