The total amount of money that can be borrowed by the government without further authorization by Congress is known as the "total public debt subject to limit," typically shortened to the "debt limit.
The public debt is calculated daily. After receiving end-of-day reports from about 50 different sources, such as Federal Reserve Bank branches, regarding the number of securities sold and redeemed that day, the U.
Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding i. The national debt can only be reduced through five mechanisms: increased taxation, reduced spending, debt restructuring, monetization of the debt, or outright default. The federal budget process directly deals with taxation and spending levels and can create recommendations for restructuring or possible default.
Debt has been a part of this country's operations since its beginning. The U. Since then, the debt has been fueled over the centuries by more war and by economic recession. Periods of deflation may nominally decrease the size of the debt, but they increase the real value of debt. Since the money supply is tightened, money is valued more highly during deflationary periods.
Even if debt payments remain unchanged, borrowers are actually paying more. As of Q2, , it was That is the highest level since Since , when the national debt stood at about Bush presidencies. It peaked in Q1 at It started climbing again under George W.
Bush, slowly at first, and then sharply. As the financial crisis hit with the worst recession since the Great Depression, government revenues plummeted and stimulus spending surged to stabilize the economy from total ruin. This economic catastrophe, combined with an enormous reduction in revenue from the Bush tax cuts and the continued expenses of the Afghanistan and Iraq Wars, caused the debt to balloon.
Under the two terms of the Obama administration, federal debt held by the public rose from While Trump further slashed federal revenue with his Tax Cuts and Jobs Act , the national debt didn't expand sharply as the economy had largely recovered from the financial crisis. The virus forced widespread quarantines, shutdowns, enormous stimulus and relief expenditures, and drastically lowered government revenue. President Biden's term began at that level and since then dropped to Political disagreements about the impact of the national debt and methods of debt reduction have historically led to many gridlocks in Congress and delays in the proposal, approval, and appropriation of the budget.
Whenever the debt limit is maxed out by spending and interest obligations, the president must ask Congress to increase it. More recently, on Sept. From a public policy standpoint, the issuance of debt is typically accepted by the public, so long as the proceeds are used to stimulate the growth of the economy in a manner that will lead to the country's long-term prosperity.
However, when debt is raised simply to fund public consumption, the use of debt loses a significant amount of support. When debt is used to fund economic expansion , current and future generations stand to reap the rewards. However, debt used to fuel consumption only presents advantages to the current generation.
Because debt plays such an integral part in economic progress, it must be measured appropriately to convey the long-term impact it presents.
Unfortunately, evaluating the country's national debt in relation to the country's gross domestic product GDP , though common, is not the best approach, for several reasons. For one thing, GDP is very difficult to measure accurately. It's also too complex. Finally, the national debt is not paid back with GDP, but with tax revenues although there is a correlation between the two. Comparing the national debt level to GDP is akin to a person comparing the amount of their personal debt in relation to the value of the goods or services that they produce for their employer in a given year.
Using an approach that focuses on the national debt on a per capita basis gives a much better sense of where the country's debt level stands. Another approach that is easier to interpret is simply to compare the interest expense paid on the national debt outstanding in relation to the expenditures that are made for specific governmental services, such as education, defense, and transportation.
Economists and policy analysts disagree about the consequences of carrying federal debt. Certain aspects are agreed upon, however. Governments that run fiscal deficits have to make up the difference by borrowing money, which can crowd out capital investment in private markets. Debt securities issued by governments to service their debts have an effect on interest rates.
This is one of the key relationships that is manipulated through the Federal Reserve's monetary policy tools. Proponents of the Modern Monetary Theory MMT believe that not only is a long-term budget deficit sustainable, but it is also preferable to a government surplus; however, this view is not held by the majority of economists.
Keynesian macroeconomists believe it can be beneficial to run a current account deficit in order to boost aggregate demand in the economy. Most neo-Keynesians support fiscal policy tools like government deficit spending only after the monetary policy has proven ineffective and nominal interest rates have hit zero. Chicago and Austrian school economists argue that government deficits and debt hurt private investment, manipulate interest rates and the capital structure, suppress exports, and unfairly harm future generations either through higher taxes or inflation.
As indicated above, debt is the net accumulation of budget deficits. It is important to look at the top expenses, as they constitute the major factors of the national debt. The top expenses in the U.
This represents the portion of the national budget that is allocated for military-related expenditures. Defense Budget in Transportation, veterans' benefits, international affairs , and public education are also government expenses. Interestingly, the common public belief is that spending on international affairs consumes a lot of resources and expenses, but in truth, such expenditures lie within the lower rung in the list.
History tells us that the Social Security program, defense, and Medicare have been the primary expenses even when the national deficit levels are low, as they last were in the s. How did the situation worsen from then to where we are now? There are various opinions. Overall, limited incoming and more outgoing cash flows are making Social Security a big component of the national debt. In part, this is due to the following:. The disproportionate amount the U. Tax cuts introduced by multiple presidential administrations have continued to grow the national debt:.
Primarily within the defense budget, continued involvement in these engagements cost the U. Given that the national debt has grown faster than the size of the American population, it is fair to wonder how this growing debt affects average individuals. While it may not be obvious, national debt levels may directly impact people in at least four direct ways.
As the national debt per capita increases, the likelihood of the government defaulting on its debt service obligation increases. The situation means that the Treasury Department will have to raise the yield on newly issued Treasury securities in order to attract new investors. This reduces the amount of tax revenue available to spend on other governmental services because more tax revenue will have to be paid out as interest on the national debt.
Over time, this shift in expenditures will cause people to experience a lower standard of living , as borrowing for economic enhancement projects becomes more difficult. As the rate offered on Treasury securities increases, corporate operations in America will be viewed as riskier, also necessitating an increase in the yield on newly issued bonds. This, in turn, will require corporations to raise the price of their products and services in order to meet the increased cost of their debt service obligation.
Over time, this will cause people to pay more for goods and services, resulting in inflation. As the yield offered on Treasury securities increases, the cost of borrowing money to purchase a home will also increase because the cost of money in the mortgage lending market is directly tied to the short-term interest rates set by the Federal Reserve and the yield offered on Treasury securities issued by the Treasury Department.
Given this established interrelationship, an increase in interest rates will push home prices down because prospective homebuyers will no longer qualify for as large a mortgage loan. The result will be more downward pressure on the value of homes, which in turn will reduce the net worth of all homeowners.
Since the yield on U. Treasury securities is currently considered a risk-free rate of return and as the yield on these securities increases, investments such as corporate debt and equities, which carry some risk, will lose appeal. This phenomenon is a direct result of the fact that it will be more difficult for corporations to generate enough pre-tax income to offer a high enough risk premium on their bonds and stock dividends to justify investing in their company.
Debt rising to this nearly unprecedented level will have many negative consequences for the economy and policymaking. Large sustained federal deficits cause decreased investment and higher interest rates. With the government borrowing more, a higher percentage of the savings available for investment would go towards government securities.
This, in turn, would decrease the amount invested in private ventures such as factories and computers, making the workforce less productive. As the CBO notes, this would have a negative effect on wages:. Because wages are determined mainly by workers' productivity, the reduction in investment would reduce wages as well, lessening people's incentive to work.
It is worth noting that the higher interest rates would increase incentives to save. But, the CBO qualifies:.
However, the rise in savings by households and businesses would be a good deal smaller than the increase in federal borrowing represented by the change in the deficit, so national saving total saving by all sectors of the economy would decline, as would private investment. Although deficits increase demand for goods and services in the short-term, this boost would not be sustained once the economy fully recovers.
Stabilizing forces such as price or interest rate rebounds and actions by the Federal Reserve would push output back down to its potential growth path. As interest rates return to more typical levels from historically low levels and the debt grows, federal interest payments will increase rapidly. As interest takes up more of the budget, we will have less available to spend on programs.
If the government wants to maintain the same level of benefits and services without running large deficits, more revenue will be required. As the CBO states:. That could be accomplished in different ways, but to the extent that such increases occurred through higher marginal tax rates the rates that apply to an additional dollar of income , those higher rates would discourage people from working and saving, thus further reducing output and income.
Alternatively, lawmakers could choose to offset rising interest costs at least in part by reducing government benefits and services. If these cuts reduced federal investments, they would reduce future income further.
The question is what we get for that debt, and how long the world keeps buying it depends in large part on what we do with that spending power.
Beyond COVID relief, the Biden administration has big plans for spending — on infrastructure , for example, or combating climate change — that could generate more economic activity and certainty in the future.
The Trump administration, by contrast, championed tax reform , which can also spur capital investment and economic growth.
Gale says policymakers need to choose what we spend our money with an eye not only to the debt, but to the future that debt will enable. Community Banking.
Credit unions. Log In. Follow Us In Real Time twitter facebook linkedin. Tags Economy Monetary policy. By Hannah Lang CloseText. About Hannah. Close extra sharing options. Speaker of the House Nancy Pelosi leaving a news conference in February. As congressional committees turned their attention to passing another coronavirus relief bill, concerns about the national debt resurfaced.
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