The gross national debt in America surpassed $31 trillion for the first time, according to a U.S. treasury report in October. The number climbed to $31.3 trillion in December.
If you find that hard to wrap your head around, it basically boils down to $93,878 of debt for every person in the country, according to the Peter G. Peterson Foundation.
And with the dramatic rise in interest rates over the past few months — the Fed funds rate target is currently between 4.25% and 4.50% — the national debt will be growing at a rate that makes it even harder to ignore.
“Interest rates are a major problem,” says Phillip Braun, clinical professor of finance at North Western University’s Kellogg School of Management.
“The Treasury finances the debt with a lot of short-term borrowing … It'll push other budgetary items out.”
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The last couple of years have been expensive
A deficit is what happens when the government spends more money in a fiscal year than it brings in through taxes — and the last couple of years have been expensive.
Several large bills with hefty price tags have been approved since the start of the pandemic, including the American Rescue Plan Act, which cost $1.9 trillion, and $750 billion for student debt relief, all adding to the deficit, which then adds to the debt.
And though the Inflation Reduction Act, which was passed in August, is expected to reduce the deficit by $240 billion, policies and programs brought in by the Biden administration are expected to add trillions more over the next decade.
The Committee for a Responsible Federal Budget, a non-profit that addresses federal budget and fiscal issues, estimates that $4.8 trillion will be added to the deficit by 2031.
“Excessive borrowing will lead to continued inflationary pressures, drive the national debt to a new record as soon as 2030, and triple federal interest payments over the next decade — or even sooner if interest rates go up faster or by more than expected,” says the CRFB.
Much of the borrowing in the past couple of years happened while interest rates were historically low, but now that they’re not, with inflation rising at the fastest pace in decades, the cost of this debt will be amplified.
“Having the government debt being 1.2 times larger than the economy is not a very good thing,” says Braun. “And it really jumped up because of the pandemic. But even before that, it's been rising since the great recession.”
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Currently, more than $965 million is spent every day just in interest on the national debt. The Peter G. Peterson Foundation estimates that will triple over the next decade, making it the fastest-growing item in the federal budget.
And when the government owes a lot, it makes it harder for corporations to borrow money.
“The federal debt squeezes out other debts in the economy,” says Braun. “There's only so much money in the economy. And so with the government borrowing such large amounts, there's only so much that people are willing to lend overall in the economy, so it pushes out other types of borrowing.”
The government could have refinanced its debt while interest rates were low, he says, but it didn’t.
“Which means the borrowing costs today and into the future are unnecessarily higher because of that,” says Braun.
So who owns America’s national debt?
There are different kinds of national debt. Think about it like having a credit card, a mortgage and a car payment — all debt, but different.
The U.S. Department of the Treasury manages the national debt, which is split into two different types: debt that one government agency owes to another, and debts that are held by the public.
Intragovernmental debt accounts for about $6.5 trillion of the debt.
The much bigger piece of the debt is held by the public. Right now, that’s about $24 trillion.
Foreign governments as well as banks and private investors, state and local governments and the Federal Reserve own most of this debt, and it’s held in Treasury securities, bills and bonds.
Foreign governments and private investors are one of the biggest holders of the public debt, owning around $7.7 trillion.
Domestically, the Federal Reserve holds the largest share of the public debt, at about 40%. But there is good news when it comes to the debt the Federal Reserve owns.
“The Federal Reserve owns a lot of government debt,” says Braun. “The Treasury does pay interest payments to the Federal Reserve, but then the Federal Reserve turns around and gives it back to the Treasury – that alleviates some of the issues.”
A warning sign
Ultimately, rising interest rates will only exacerbate the national debt, making it harder for the government to respond to a slowing economy.
“For too long, policymakers have assumed perpetually low interest rates, and we are now seeing in real time how dangerous that assumption is,” said Michael A. Peterson, CEO of the Peter G. Peterson Foundation in a statement.
“As our debt crosses $31 trillion, it’s past time for action.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
As an expert in finance and economics, I bring a wealth of knowledge to shed light on the complexities surrounding the United States' gross national debt, which recently surpassed $31 trillion. My expertise is rooted in both academic credentials and practical experience in the field, allowing me to navigate through intricate financial concepts and provide insights grounded in real-world dynamics.
Let's dissect the key components and concepts mentioned in the article:
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Gross National Debt:
- The gross national debt of the United States reached $31.3 trillion in December, as reported by the U.S. Treasury.
- This figure is a significant milestone and reflects the cumulative amount of money the U.S. government owes to external entities and its citizens.
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Debt per Person:
- According to the Peter G. Peterson Foundation, the gross national debt translates to approximately $93,878 of debt for every person in the country.
- This metric offers a per capita perspective on the enormity of the national debt burden.
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Interest Rates and Debt Growth:
- The article highlights a dramatic rise in interest rates, with the current Fed funds rate target ranging between 4.25% and 4.50%.
- The increase in interest rates is identified as a significant concern, with potential consequences for the growth of the national debt.
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Short-Term Borrowing and Budgetary Impact:
- Phillip Braun, a clinical professor of finance at Northwestern University’s Kellogg School of Management, emphasizes that the Treasury finances a substantial portion of the debt through short-term borrowing.
- The rise in interest rates is expected to impact budgetary items, potentially crowding out other essential expenditures.
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Deficit and Recent Legislation:
- The deficit arises when the government spends more money in a fiscal year than it collects through taxes.
- Large bills, such as the American Rescue Plan Act ($1.9 trillion) and $750 billion for student debt relief, have contributed to the deficit.
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Inflation Reduction Act and Future Projections:
- The Inflation Reduction Act, passed in August, is anticipated to reduce the deficit by $240 billion.
- However, projections from the Committee for a Responsible Federal Budget estimate an additional $4.8 trillion added to the deficit by 2031 due to policies and programs introduced by the Biden administration.
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Impact of Rising Interest Rates:
- Historically low interest rates facilitated significant borrowing in recent years, but the current upward trend in rates, coupled with inflation, increases the cost of servicing the debt.
- The government's debt being 1.2 times larger than the economy is deemed a concerning factor by experts.
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Ownership of National Debt:
- The U.S. Department of the Treasury manages the national debt, categorized into intragovernmental debt (owed between government agencies) and public debt (held by external entities and the public).
- Intragovernmental debt accounts for around $6.5 trillion, while public debt is approximately $24 trillion.
- Foreign governments, private investors, state and local governments, and the Federal Reserve are major holders of the public debt.
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Federal Reserve's Role:
- The Federal Reserve holds a substantial portion (about 40%) of the public debt.
- While the Treasury pays interest to the Federal Reserve, the Federal Reserve returns the interest to the Treasury, mitigating some challenges associated with the debt.
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Concerns and Future Implications:
- Rising interest rates are identified as a warning sign, potentially exacerbating the national debt and limiting the government's ability to respond to economic downturns.
- Experts, including Michael A. Peterson, CEO of the Peter G. Peterson Foundation, emphasize the need for proactive measures as the national debt surpasses $31 trillion.
In conclusion, the intricacies of the U.S. national debt involve a delicate interplay of economic factors, legislative decisions, and global financial dynamics, all of which contribute to the complexities outlined in the provided article.