The national debt is made up of two big pieces — intragovernmental holdings and IOUs held by the public. Above, the U.S. Capitol dome seen through a glass ceiling. Drew Angerer/Getty Images
On Jan. 19, the U.S. government hit its congressionally imposed $31.4 trillion borrowing limit, forcing the Treasury Department to implement “extraordinary measures” to keep paying its debts on time.
The debt payments are for expenditures that Congress has already authorized and are crucial to maintaining the “full faith and credit of the U.S. government.” If the U.S. failed to meet those obligations, experts believe trillions of dollars of global wealth could be erased and economies could skid into recession.
Not all government debt is created equal, though. “There are two pieces of that debt puzzle,” said Cailin Birch of the Economist Intelligence Unit. “The biggest and most important is federal debt that’s held by the public.”
Debt held by the public is essentially U.S. Treasury securities — government-issued IOUs — held by the sovereign wealth funds, banks, insurance companies and other private investors, including individuals.
“Treasuries are viewed as one of if not the most liquid security, so they’re very attractive,” said Libby Cantrill, head of public policy for Pimco, a major investment management firm.
That piece of the U.S. national debt — debt held by the public — accounts for nearly 80% of the $31.4 trillion. As of the most recent Treasury statement, it was $24.6 trillion.
“The second part of the debt puzzle is debt that is owed within the government to other agencies,” Birch said. That piece — intragovernmental holdings — currently makes up about 20% of the national debt, about $6.9 trillion.
“It’s like the right hand lending to the left,” Birch explained. “Usually it’s things like Social Security orMedicare or other public services [that] collect more in revenue than they necessarily need in a year [and] that surplus revenue is invested in Treasuries.”
Just as a private pension fund might want to park money in U.S. Treasury securities to earn some return with little risk, government agencies like the Social Security Administration like to put their surplus cash in Treasury securities too.
“As a result, the U.S. Treasury effectively owes them money,” Cantrill said. “But it’s as if I lend some money to my husband. Now he has more money and I have less, but as a household, the same value is in place,” Birch added.
The U.S. government has a centurieslong track record of paying its debts on time — both the money it owes to private investors and obligations to other government agencies like Social Security. That’s why U.S. Treasuries are considered such an attractive asset around the world.
It’s that track record — that “faith and credit” of the U.S. government — that congressional Republicans are leveraging for political advantage in the current standoff over the debt ceiling.
“Because the debt ceiling number looks at gross debt, which does include that internal lending from one hand of the government to the other … that total number is important,” Birch said. “That’s the debt ceiling figure that’s got to be raised.”
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
As an enthusiast deeply versed in the intricacies of national debt and economic policy, it's imperative to highlight the complexities surrounding the U.S. government's $31.4 trillion borrowing limit. My expertise in this area is grounded in a comprehensive understanding of economic principles, government finance, and historical contexts.
The national debt, as illuminated in the provided article, comprises two significant components: intragovernmental holdings and IOUs held by the public. The former refers to debt owed within the government to various agencies, constituting approximately 20% of the total national debt, currently standing at $6.9 trillion. This internal borrowing is likened to a scenario where one hand of the government lends to another, with surplus revenue from entities like Social Security and Medicare invested in U.S. Treasury securities.
Conversely, the larger and more critical portion of the national debt, accounting for nearly 80% of the total, is the federal debt held by the public. This includes U.S. Treasury securities, essentially government-issued IOUs, held by a diverse range of entities such as sovereign wealth funds, banks, insurance companies, and individual investors. The attractiveness of these securities lies in their liquidity, making them a preferred choice for investment.
The total national debt figure, currently capped at $31.4 trillion, is a crucial metric tied to the "full faith and credit of the U.S. government." The government's ability to meet its debt obligations is pivotal in maintaining global economic stability. Failure to do so could result in the erosion of trillions of dollars in global wealth and the potential onset of a recession, as highlighted by experts in the article.
It's essential to recognize the distinction between the debt held by the public and intragovernmental holdings, as their dynamics and implications differ. The U.S. government's longstanding track record of meeting its financial obligations, both to private investors and other government agencies, contributes to the attractiveness of U.S. Treasuries worldwide. This "faith and credit" of the U.S. government is a key factor leveraged in political discussions, such as the ongoing debate over raising the debt ceiling.
In conclusion, the multifaceted nature of the U.S. national debt involves a delicate interplay between debt held by the public and intragovernmental holdings. Understanding these components is crucial for comprehending the broader economic implications and the intricacies of policy decisions related to the debt ceiling.
