How Much Is the U.S. National Debt? Lombardi Letter 2017-09-07 02:13:48 who owns the national debthow much does each citizen owe on the national debtwho owns the U.S. national debtcurrent national debthow much is the national debt under president Trumphow much is the U.S. national debt in 2017 How much is the U.S. national debt? Who owns the U.S. national debt? Here's the situation. U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/02/us-national-debt-150x150.jpg

How Much Is the U.S. National Debt?

What Is the Current National Debt?

How much is the U.S. national debt in 2017? As of this writing, the U.S. national debt in 2017 is $19.9 trillion and rising over $14,000 per second. At debt-to-gross-domestic-product (GDP) levels of 106.67%, this represents the second-highest level in recorded American history, just under the post-Word War II (WWII) peak of 121.70%. (Source: “National Debt Of United States,” National Debt Clocks, last accessed February 17, 2017.)

The U.S. national debt has been a runaway freight train for decades. Low interest rates and deficit spending have allowed the government to gorge off of the debt trough with little regard for payback. So how much is the national debt under President Donald Trump currently? It’s uncomfortably high, based on historical standards.

Unfortunately for those concerned about the rapidly approaching ramifications of out-of-control debt spending, the U.S. national debt in 2017 is about to get worse.

How Much Is the National Debt Under President Trump?

According to Trump’s most current tax plan, his proposed tax cuts would decrease federal revenues between $4.4 and $5.9 trillion, necessitating the need for additional Treasury debt issuance beyond what is currently needed. Even accounting for the stimulatory effects that cutting taxes would have to the economy at large, revenues would decrease on aggregate between $2.6 trillion and $3.9 trillion. (Source: “Details and Analysis of Donald Trump’s Tax Plan, September 2016,” Tax Foundation, September 19, 2016.)

This is on top of the non-partisan Congressional Budget Office’s (CBO) own forecasts of surging debt ahead. Before any reduction of taxes takes place, the CBO predicts that trillion-dollar deficits will return by 2023, the public portion of the debt will rise from $14.2 trillion to $24.9 trillion by 2026, and post-WWII debt will hit records by 2035. (Source: “CBO’s January 2017 Budget and Economic Outlook,” Committee for a Responsible Federal Budget, January 24, 2017.)

Keep in mind that the CBO is frequently proven to be over-optimistic when it comes to its Keynesian-based forecasts.

With such staggering amounts owed and so little discussion in the media, you may be wondering: what exactly is all this debt comprised of? In a nutshell, it’s comprised of both intragovernmental debt and public debt.

The intragovernmental portion of the debt—roughly 30% of debt outstanding—is owned by the 230 federal government agencies. The net revenue-positive agencies, like the Social Security Trust Fund, end up reinvesting surpluses into U.S. Treasury debt and other investment vehicles. They do this to receive a safe, guaranteed return on surplus revenues.

When intragovernmental debt increases, it can actually be interpreted as a good thing. It means that federal agencies have the means to buy more Treasury debt, which in turn increases their ability to fund future liabilities. Although these agencies will need to sell their Treasury debt eventually, the pace is gradual, and thus exerts little pressure on interest rates.

Ultimately, this debt stays inside the federal government system, boosting debt demand while simultaneously funding government agency obligations. Most would surmise that this is a quintessential “win-win” situation.

The public component of the U.S. national debt in 2017, however, is a different animal altogether. Not only does it keep rising astronomically (as discussed above), this debt is not necessarily contained within the Federal architecture.

Who Owns the U.S. National Debt?

The bulk of the U.S. national debt in 2017 (over $14.5 trillion worth), is owned by a consortium of public sector groups, foreign governments, banks, insurance companies, and others. Some of this debt is concentrated, not only in U.S. Treasuries, but in savings bonds and Treasury Insurance Protected Securities (TIPS).

When this debt rises in an unsustainable manner, such as is the case today, it increases the long-term obligations of the U.S. government and increases interest payments necessary to service the debt load. Since the government receives the bulk of revenues in the form of taxes, higher interest payments and future obligations put upward pressure on taxes down the line.

This threatens the viability of essential government services like Social Security and Medicaid in future years, in turn forcing the government to issue more debt. It’s a vicious cycle with no happy ending.

Group Amount of Debt Owned
Foreign Holders $6,281,000,000,000
U.S. Federal Reserve $2,643,000,000,000
Mutual Funds $1,379,000,000,000
State and Local Governments $847,000,000,000
Banks $570,000,000,000
Private Pension Funds $544,000,000,000
Insurance Companies $304,000,000,000
U.S. Savings Bonds $169,000,000,000

(Source: “Who Owns the U.S. National Debt,” the balance, February 4, 2017.)

The “Foreign” component of the public debt is easily the biggest. This is comprised of sovereign nations who purchase U.S. debt for a variety of reasons. The biggest foreign holders of debt, Japan and China, actually recycle a sizable portion of trade surpluses back into U.S. treasuries as a form of credit issuance to allow the U.S. to purchase more exports. The reasons behind this are complex but, as economist Hyman Minsky once noted, whenever credit is issued, money is created. That’s essentially what is boils down to.

Top 10 Foreign Holders of Treasury Securities (in $ billions)

Country December 2016
Japan $1,090.8
China (mainland) $1058.4
Ireland $288.2
Cayman Islands $263.5
Brazil $259.2
Switzerland $229.3
Luxembourg $223.4
U.K. $217.1
Hong Kong $191.4
Taiwan $189.3

(Source: “Major Foreign Holders Of Treasury Securities,” U.S. Department of the Treasury, last accessed February 17, 2017.)

The U.S. Federal Reserve (the Fed) has also been a growing contributor to the U.S. national debt in recent years. Between 2007 and 2014, the Fed doubled its Treasury holdings as part of its open-market operations. This created an insatiable demand for Treasury debt, which ultimately drove down interest rates to boost a struggling economy. As a result of these activities, the benchmark 10-year Treasury rate reached a 20-year low of 1.442 in October 2014.

This activity no doubt helped the U.S. out of the nasty recession caused by the 2008 housing bubble bursting. At the time of the crisis, the 10-year Treasury rate was over four percent; by the time December 2008 rolled around, it was just over two percent. This helped cushion the amount of delinquencies and spurred a refinancing boom, which helped consumers ease their debt burdens.

In conjunction with a big supply already coming from China and other inflationary headwinds, it will be interesting to see if rates can be contained.

Who Owns the U.S. National Debt?: The Aftermath 

Ultimately, the answer to the question “who owns the national debt?” would be all Americans. Since every new Treasury security (bills, notes, bonds) sold by the Fed becomes a future liability subject to coupon interest, more debt means more liabilities for all Americans. When the debt gets too high (especially the public portion of it), it can lead to serious consequences.

In the example I wrote about above, the Fed became a huge buyer of Treasury securities to drive down interest rates in the aftermath of the U.S. housing market crisis. Now that the economy has normalized, the Fed must sell some of its Treasury portfolio to ease liabilities.

This could pose a problem for interest rates, as the Fed has shifted from a prime source of demand to a net seller. Blackrock, Inc.‘s (NYSE:BLK) Investment Institute notes that $785.0 billion of the Fed’s Treasury portfolio (about one-third), comes due at the end of 2018. Unwinding this position outright could spook the market and send benchmark rates skyrocketing. (Source: “The taming of the Fed’s balance sheet,” Financial Times, May 26, 2015.)

Should the Fed be unsuccessful in unwinding the Treasury security portfolio in an orderly manner, higher interest rates along the yield curve will result. This means the cost to finance purchases of all types increases. Mortgages, credit cards, and car loans are among the most common consumer purchases on credit.  This poses significant challenges to people accustomed to making lower interest payments for an extended period of time.

Keep in mind, when the Fed purchases Treasuries using credit conjured out of thin air, this has a money-printing effect. It allows the government to finance deficit spending at ultra-low rates, presumably for justifiable causes. This in itself isn’t a bad thing as long as the Fed’s accumulation of Treasury securities is temporary.

The problem is, with annual growth stuck in stall mode (between 1.6%–2.6% annual growth since 2010), and the government financing costs rising exorbitantly, the Fed may be tempted to maintain every-increasing levels of Treasury securities on its balance sheet. This would create a larger monetary base, eroding the purchasing power of the dollar. It’s simply economics: higher supply equals less value. This would certainly affect us all.

Also, the foreign interests that hold America’s Treasury securities may may not have the United States’ best interests in mind. For example, the Chinese have indicated that they could dump large amounts of Treasury securities onto the market if policies seen as unfavorable get pushed through by U.S. legislators. U.S. citizens are thus affected not only by rising rates pressures, but by foreign policy which is beholden to outside interests.

In the end, regardless of who are the purchasers of public Treasury debt, we’re all affected. This debt eventually needs to be sold, exerting rising pressure on rates. It could also be used as political leverage or Fed could continue to monetize the debt on a permanent basis, affecting the purchasing power of the dollar. Just because a person doesn’t own the debt personally doesn’t mean they aren’t affected by it.

How much does each citizen owe on the national debt? The number may shock some: $61,423 for every man, woman, and child in the United States. That money will be extracted one way or another, be it through taxes, inflation, or debt monetization. The new normal of lower economic growth is here to stay, which means the U.S. national debt in 2017 can only keep increasing.

Plan wisely.

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