The national debt is the net debt that the US government owes to its lenders. Over the years it has continues to rise steadily as America dealt with wars, recessions, the Great Depression, the Cold War, and much more. What is the national debt today and why is national debt a problem? Let’s take a closer look at this to understand how it impacts you.
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National Debt Definition Economics
The national debt is a measure of the debt that is owed by the US government to its creditors. It is the debt owed by both the public and the intragovernmental departments and is to be paid off by the federal government. Basically, all the budget and fiscal deficits combine to make the national debt. The debt exists because the US government always crosses its expenditure and is unable to pay for it all by its expenses. Since the government is spending more than it is earning, the economy is said to go suffer from the national debt. The Department of Treasury then issues bonds, Treasury bills, and notes to make up for the deficit. These are known as Treasury securities. Citizens of the United States, as well as corporations, financial institutions, and other governmental institutes and foreigners, can purchase these bonds. The US government ‘borrows’ money this way.
Effects Of National Debt On The Economy
The national debt can never be completely gotten rid of. A moderate level of the national debt is healthy for the economy. It gives a gentle push to the economy to grow so that the debt can be paid off. However, if the national debt is too high, the economy might try to goo at a much faster rate to match that, leading to an economic boom. Though an economic boom sounds like something we should be on board with, it is almost always followed by a bust that can create an atmosphere of uncertainty and disorientation amongst investors.
If the debt continues to rise more than a certain percentage every year, the debt holders start to increase the interest rate as well. They do this because the risk of people not paying back rises. With a 1% increase in national debt, the interest jumps 2-3 points. Since the rate of borrowing increases, businesses borrow less. The production slows down and workers are laid off. Since businesses are not expanding, the demand also starts to suffer. People tend to spend less money shopping and firms start to suffer more. Firms reduce prices, which leads to more loss economically, and the country can go into recession.
The national debt can reach a point of being declared as a crisis when the country can no longer pay off its debts and is unable to get a smaller rate of interest from lenders and banks. Banks do not agree to lower rates because they are not sure if the government will be able to pay back the debt or not. They charge a higher interest rate to compensate for the higher risk of defaulted payments. So it becomes even more expensive for the country to get a new loan to finance the old one.
Another effect of national debt on the economy is that investors tend to be hesitant with their investments after the debt to GDP ratio reached a certain point. The debt to GDP ratio is a measure that investors use to determine if the country has the financial ability to pay off its debts. The ‘tipping point’ for this ratio is 77% for developed countries. Investors worry about a country’s financial status after it’s debt to GDP ratio crosses the tipping point. The country has to pay in slowed economic growth by 0.017% for every percentage increase in the ratio after the tipping point.
In a nutshell, the main effects of national debt on the economy include:
- Decreased national savings and income
- Increase in taxes
- More spending cuts
- Increase in interest rates
- Decreased response to crises and problems
- Increased risk of a fiscal crisis
- Decreased investments, more layoffs
- Decrease in spending
If the national debt reaches a point where the country can no longer keep rolling it, then the country goes into a national crisis. This is what happened in Greece in 2008.
Who Is Responsible For The National Debt?
The national debt is the debt on the entire nation. Both the public and the government owes it. The debt exists as outstanding payments, about 75 percent of which exist as Treasury bills, bonds, and notes. These Treasury securities are owned by the public, the Federal Reserve, investors, and foreign corporations. 25 percent of the debt is the Government Securities owned by the governmental agencies, like the Social Security Trust Fund, and the funds for the federal public employees and military retirements.
The public helps in paying off the debt by paying the taxes and the interest on loans. They also help the government by purchasing Treasury securities.
Why Is National Debt A Problem?
The national debt can become a matter of national security issue if it goes unchecked. Countries might have to take extreme measures in an effort to try to pay off the debt. The greater burden of these measures is borne by the public.
If the national debt crosses a certain limit and continues to climb while the GDP does not grow at the same rate, then the national debt becomes a sovereign debt. As the country starts to lose its power to pay back the debt, and the risk of defaulting looms over the economy, the country may start to lose the foreign and domestic investment. The social, economic, and political power of the country, especially one as globally important as the United States, can be jeopardized. As the country’s economy is thrown in turmoil, people can lose assets and an economic crash, like the one that occurred in 2008, can occur.
What Is The National Debt Today?
The National Debt today stands at more than a solid $27 trillion. Out of this, the public debt is a whopping $21 trillion! The rest of the $6 trillion-plus is by the intragovernmental agencies.
To help you better fathom the size of the debt, we have some individual estimates. Currently, a $27 trillion debt means that every child, man, and woman owes more than $82,000 to the government! This figure is representative of the population of the US, which is reported to be 328 million. The amount owed individually is more than the per capita income, which is a mere $32,000.
Compared to the rest of the developed world, the national debt of the US is a little more than all of Europe combined. There are 27 countries in Europe.
National Debt By President
The daily debt in the US is being recorded daily since 1993 by the US Treasury. Compared to other US Presidents of the recent past, including President George W.Bush, President Bill Clinton, and President Obama, the current US President Trump does not have shocking figures. He added a total of $2 trillion between his inauguration in January 2017 till February 2019. This is the second-highest figure for any President in the recent past. Snatching the top position is ex-President Obama, who added $3.46 trillion between January 2009 until February 2011.
Following are the figures for the national debt for the past 5 presidents, including President Trump:
- President Donald J. Trump
National Debt at the Start of Term: $20.24 trillion
National Debt at the End of the Term: $27.1 trillion
Percentage Debt Change: 33.62 percent
- President Barack Obama
National Debt at the Start of Term: $11.9 trillion
National Debt at the End of the Term: $20.2 trillion
Percentage Debt Change: 69.98 percent
- President George W.Bush
National Debt at the Start of Term: $58.07 billion
National Debt at the End of the Term: $11.9 billion
Percentage Debt Change: 105.08 percent
- President William J.Clinton
National Debt at the Start of Term: $44.11 billion
National Debt at the End of the Term: $58.07 billion
Percentage Debt Change: 31.64 percent
- President George H.W. Bush
National Debt at the Start of Term: $28.6 billion
National Debt at the End of the Term: $44.11 billion
Percentage Debt Change: 54.39 percent
US National Debt By Year
The US national debt has increased throughout the years due to the various ups and downs that the country has experienced. The US has faced as many as 47 recessions in the past, going all the way back to the Articles of Confederation in 1777. During a recession, the country experiences lowered economic activity hence lower tax revenue is collected, which means the expenses fall further below the expenditure of the country. The national debt is further increased as the country goes into war, and when benefits like Medicare are introduced. Additionally, the current global pandemic has also put a big dent in the total national debt.
Below are the figures for the US national debt for the past two decades, along with the debt to GDP ratio for each year:
|End Of Fiscal Year||Debt In Billions Of US Dollars||Debt to GDP Ratio|