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    Your Guide to the National Debt (Part 1)



    Understanding the debt


    The first category, intragovernmental debt, is the amount that the federal government owes to itself. When one federal agency borrows money from another, such as when the Treasury borrows from the Social Security and Medicare trust funds in exchange for Treasury bonds, intragovernmental debt is created. Right now, this portion of the gross national debt stands at nearly $4.9 trillion. While intragovernmental debt certainly isn't a good thing, it presents a different and lesser problem in terms of avoiding a debt crisis.


    The ownership of the public debt itself is interesting and worth considering. According to the December issue of the Treasury Bulletin, more than $1.7 trillion of the debt is owned by the Federal Reserve. More than $5.3 trillion of the remaining debt is owned by foreign countries. Although many countries own a portion of that amount, China and Japan are by far the largest holders of our debt, accounting for more than $1.1 trillion each. Other countries with significant holdings of our debt includes Brazil, Taiwan, Switzerland, Russia, Luxembourg, Hong Kong, Belgium, and the United Kingdom. The rest of our public debt is held internally by state and local governments, banks, firms, and citizens.

    What problems are caused by a large national debt?


    In theory, this increase in demand has the effect of raising real interest rates, which makes borrowing money more expensive. As the interest rate rises because the federal government borrows more and more to finance the debt, private investment will be "crowded out." This "crowding out" effect on private investment is where we start to run into serious economic trouble. Why?

    Sustainable economic growth is dependent on investment. As economist David N. Hyman explains in the ninth edition of his work Public Finance: A Contemporary Application of Theory to Policy:


    Think about this in practice. Let's say that you win a few thousand dollars in the lottery. You could spend that money now on something for your own personal consumption, such as a vacation, or you could put the money in the bank and save it. If you put the money in the bank, then the bank will use that money to provide loans, among other things. One of the loans could go to a local factory owner attempting to expand his business by purchasing new machinery, for example. In effect, your decision to save increased the supply of loanable funds, and those who borrowed from that supply will invest the money to increase their own productivity going forward. The result is greater economic growth than would have occurred if not for your savings.


    There's also the considerable cost of servicing the debt. Table 3.1 of the White House Office of Management and Budget's Historical Tables estimates that the federal government paid about $225 billion in net interest on the debt in 2012. That's a big chunk of the federal budget. To put that figure in perspective, the OMB estimates in the same table that we spent about $716 billion on national defense. We spend about a third as much just paying off the interest on our existing debt as we do on national defense. As the national debt continues to rise, this problem will worsen and eventually grow to consume an unsustainable portion of federal expenditures.


    part two