The national debt, explained


The U.S. debt is $20.5 trillion and rising. Should Americans be worried? Here’s everything you need to know:

Why does the U.S. owe so much?
Apart from a four-year stretch during the economic boom of the late 1990s, the federal government has run a budget deficit every year since 1970. In 2017, the shortfall was $666 billion. The national debt is now slightly larger than the size of the entire U.S. economy, equal to 106 percent of the country’s gross domestic product. Overall, the Congressional Budget Office (CBO) expects the national debt to surpass $30 trillion by 2028, as Medicare and Social Security costs soar to cover aging baby boomers. Outgoing Federal Reserve Chair Janet Yellen has warned that the country’s growing debt load could eventually become unsustainable. “It’s the type of thing that should keep people awake at night,” she told Congress in November.

Why is it a problem?
Like any credit card user, the government must pay interest on its debt. For much of the past decade that hasn’t been a major problem, because of historically low interest rates. Net interest payments on the debt represented 6.8 percent of the federal budget in 2017, or $276.2 billion, compared with more than 15 percent in the mid-1990s. But with the Fed unwinding its post-recession stimulus campaign, interest rates are expected to rise steadily in the coming years. As a result, the CBO estimates, the cost of servicing the national debt is expected to nearly triple by 2027 — leaving the government paying more on interest payments than on national defense.

Is everyone worried?
No. Economists point out that debt can be used to fund important investments, such as stimulating the economy during a recession or fighting unavoidable wars. The nation’s debt is also wildly different from a household’s budget, because the government can print its own money and has a theoretically infinite life span to pay off its obligations. Some theorists even argue that deficits and the debt are mostly irrelevant. One emerging school of thought, known as Modern Monetary Theory, argues that inflation is the only obstacle standing in the way of the government creating and spending as much money as it wants. “The national debt is not a national crisis,” says economist Stephanie Kelton, a former adviser to Sen. Bernie Sanders. “The fact that 21 percent of all children in the United States live in poverty — that’s a crisis.”

Who owns the debt?
About three-quarters is held by investors in the form of Treasury securities sold by the government to raise money. The rest is intragovernmental debt that comes from Washington borrowing against government trust funds, such as Social Security and Medicare. Americans own most of the public debt, which means they benefit from the interest paid on it. That includes corporations, state and local governments, and individual investors, many of whom hold Treasury bonds in their retirement funds. Foreign investors own about 30 percent of the nation’s total debt, or about $6.3 trillion. America’s biggest foreign creditor is China, which holds about …read more

Source:: The Week – Politics

      

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