A new idea I had the other day (which I’m sure many other people have had before me), was “Remove Fear With Knowledge”. With that idea in mind I am going to start by thinking about removing the fear of the “US Foreign Debt Crisis” by sharing some information about it.
The USA has so much debt!
Our debt has increased to $X trillion dollars.
China owns to much of our debt!
The headlines cry. The topic of debt of a country is no small matter, especially when it’s your own country. We start to talk in trillions of dollars. At that level most people just breeze over the numbers. They just can’t fathom them. Most people probably don’t believe that these numbers have any effect on their lives and that “the system will sort itself out” so they don’t worry abou it too much. But some people do get to thinking about these numbers, usually with incorrect facts. I wanted to read a bit into who exactly owns the US debt. How much debt do we own of other countries? And other thoughts related to debt.
To find the most up to date numbers here is the US DEBT CLOCK. From now on I will be referencing various article for general snapshot from recent points in history but for the latest rough numbers use the debt clock.
Here are the debt clocks for many different countries.
You might ask what exactly is a debt? An debt is a liability that a government owes to another government or person. I personally own about $1,000 in individual EE bonds from the US government. Each bond returns a different interest rate depending on when it was purchased. The reason I own the bonds are because they are helping my money grow. Making my money work for me. This is good because if money is not growing by being in bonds or in some other investment like a stock or if I am not investing it in some other company that money is effectively losing value because of inflation. Inflation is a good thing. It encourages people to spend money and look for ways to make money grow. If you have deflation it leads to people not spending money because it will be worth more the next day. This can lead to an economic death if no one is willing to spend money!
Why does the USA issue debt?
The USA issues debt so it can balance its budget. The US government has a yearly budget (sometimes) that they (usually) exceed. To make up the difference they need to get more money from somewhere. People and other governments actually give their money to the US government to meet this deficit.
What does the US government do with this money?
They pay for roads, schools, military and other services for the US people. The US government has a budget that is part mandatory and part discretionary. This is an important distinction to understand
“71 percent of our 2015 budget is Mandatory. Discretionary spending is only 29 percent our total budget.Of our Discretionary spending, half goes to defense.” “ – agenerationempowered
Why would people give their money to a government that is overspending?
People give their money to the government in exchange for a promise of more money in the future. A bond is really a type of loan from you (or another government) to our government.
Is the USA the only country in debt?
NO! There are only 5 (tiny) countries in the world with no debt. The list of all countries by their total debt can be found here.
Doesn’t China hold all our debt? What will happen if they decide to collect on it?
Only ⅓ of our total debt is held by foreign governments or individuals and China only own a fraction of that. In order for “all debt to be collected tomorrow” that would require that the people who hold that debt would have thought of a better way to make money on their investments other than the US debt. It’s unlikely that’d happen all at once so there is little likelihood of all the debt being simultaneously collected at once. Also if something as massive and disruptive as that was proposed we could always just say no. Being the most powerful country in the world it would take a war to get your money back. Luckily the US government is, mostly, trustworthy, and usually pays their bonds back. But not all governments do.
You can read more about Argentina’s debt crisis here.
“He buys debt from countries, such as Peru and Congo-Brazzaville, that have defaulted. He gets this “distressed debt” for pennies on the dollar. Then he tries to force those countries to pay up through international courts. It’s a take-no-prisoners approach to debt negotiations. It’s time-consuming, it’s costly and it can get ugly. But the profits can be huge. In Peru’s case, for example, Singer paid a reported $11 million but won court judgments for $58 million, which the South American republic eventually paid because it had no choice. These tactics have won Singer and other such firms the nickname “Vulture Funds.”’ – Buzzfeed
The US has not hit a point where it is not paying its debts back.
Who owns US debt?
Many individual people and parts of the US government (Social Security) own US debt (of other parts of the US government) (65.6%) ($11.71 trillion dollars) while some foreign governments also hold US debt (34.4%) (totaling $6.147 billion dollars) when the US debt was $17.86 trillion. While these numbers all change slowly over time they more or less remain steady percent wise while overall debt is rising. So any debt we tried to reduce payments on would actually end up hurting our own citizens more than foreign holders of debt.
You can find the link to the table below here for US debt held by foreign countries.
What debt of other countries does the US hold?
As you can see from the table below the US holds debt of other countries equal to $9.4 trillion dollars. This is compared to our own total debt of $19 trillion dollars. The debt we hold of foreign countries should be compared to the debt other countries hold of ours.
We owe $6.147 billion dollars to foreign governments.
Foreign governments owe us $9.455 trillion dollars.
You can see in this comparison we actually come out ahead $3.308 trillion dollars. That sounds like a good position to be in!
You can find the link to the “Report On U.S. Portfolio Holdings Of Foreign Securities” here. Table shown below.
Why does the US debt keep going up? Is that ok? When will we have to pay back our debt?
To understand why the US debt can keep going up you need to rethink your idea of the US government. The government is not like a family. Ideally, the government will not end. Therefore there is never a time when all the debt will come due. Old debt comes due every day and it is paid. New debt is issued everyday also.
It’s ok for the debt to keep going up as long as the people of the country keep making more. Debt is a count of ability to repay in the future. If the government continues to collect taxes it will continue to pay back its debts. If we are always projecting making more in the future we can borrow more. There is no projected end date for government operation so there is not a need to pay off debt.
How should we quantify debt?
Debt is obviously counted in dollars. But how do we know if it’s a lot of debt or not? Debt is often compared to Gross Domestic Product. This is how much money a country makes in goods each year. I don’t see this as a very useful measure since the government doesn’t get all the money of it’s GDP. Debt would more usefully be compared to the taxes a government takes in since that is the money it is able to use to pay the debt.
“The federal government took in a record of approximately $3.2 trillion in taxes in fiscal 2015 (which ended on Sept. 30), according to the Monthly Treasury Statement released today. That equaled approximately $21,833 for every person in the country who had either a full-time or part-time job in September.” – CSN news
This is compared to the US debt of $19.5 trillion.
You should also realize that each state in the USA has it’s own budget. All states are also in debt. You can ready more about that here.
It is not useful to be scared of debt. The best reaction is to understand it and what it really means.