States United public debt
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US Debt from 1940 on. Red lines indicate the public debt and black lines indicate the gross debt, the difference being that the gross debt includes funds held by the government (i.e. the Social Security Trust Fund). The second chart shows debt as a percentage of U.S. GDP or dollar value of economic production per year. Data from the FY 2009 U.S. Budget historical tables
The United States total public debt, commonly called the national debt, or U.S. government debt, is the amount of money owed by the United States federal government to creditors who hold U.S. debt instruments. Debt held by the public is all federal debt held by states, corporations, individuals, and foreign governments, but does not include intragovernmental debt obligations or debt held for Social Security. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds, and State and Local Government Series securities.[1]
As of April 2008, the total U.S. federal debt was approximately $9.5 trillion[2], about $31,100 per capita (that is, per U.S. resident). Of this amount, debt held by the public was roughly $5.3 trillion.[3] If, in addition, unfunded Medicaid, Social Security, Medicare, etc. promises are added, this figure rises to a total of $59.1 trillion.[4] In 2007 the public debt was 36.8 percent of GDP ranking 65th in the world.[5] The total debt is currently 66.5% of GNP. It is important to differentiate between public debt and external debt. The former is the amount owed by the government to its creditors, whether they are nationals or foreigners. The latter is the debt of all sectors of the economy (public and private), owed to foreigners. In the U.S., foreign ownership of the public debt is a significant part of the nation's external debt (see also below). The Bureau of the Public Debt, a division of the United States Department of the Treasury, calculates the amount of money owed by the national government on a daily basis.
[6][7][8][9]
The US budget deficit has been declining for the last three years and the Congressional Budget Office projects a surplus by 2012. However, this estimate is based on current law, which assumes sizable tax reductions will expire in 2010.[10] When the U.S. Government has a surplus, it may pay down its outstanding debt by paying back the principal of the outstanding bonds redeemed for payment while not issuing new bonds. The U.S. Government could also purchase its own outstanding securities on the open market if it was searching for a way to use a surplus to reduce outstanding debt that was not due for redemption in a given year. [11] [12]
Contents
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1 Arguments against paying down the national debt
2 Arguments for paying down the national debt
3 Risks and obstacles
3.1 Risks to the U.S. dollar
3.2 Long-term risks to financial health of federal government
4 Amount of foreign ownership of U.S. debt
5 History
6 Debt clocks
7 Recent additions to the public debt of the United States
8 Statistics and comparables
9 Calculating and projecting the debt
10 See also
11 References
12 External links
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Arguments against paying down the national debt
Since the money supply is reduced when the U.S. Government pays down its debt, the unintended result of a government surplus could be a deflationary recession as the money supply contracts in the reverse of the process of monetization described below. The government can avoid this consequence by instead focusing on expanding its GDP and thereby "reducing" the percentage of GDP that debt represents. The hope is that the deficit spending that increases the debt will increase GDP by a greater amount, and thus in relative terms, at least the debt would decrease. This worked to great effect in the U.S. between the end of World War II and 1980, even though the debt showed a net increase in absolute value over the same period.[13] Kenneth L. Fisher's May 1, 2007, article "Learning to Love Debt" is a good representation of the argument that "more debt is [a] good thing" because of after effects the resulting money creation will have on the economy.[14]
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Arguments for paying down the national debt
Debt as a percentage of GDP, 1791-2006
Economists from the Austrian School point out that the United States experienced depreciation of 43% of CPI (from CPI of 51 to 29) from 1800-1912: a period of strong economic growth in U.S. history.[15] [16][17] Furthermore, those who would argue that an expansion of the money supply is necessary to expand the economy need to explain the colossal failure of Japan's Central Bank to do just that. In an attempt to follow Keynesian economics and spend itself out of a recession, Japan's central bank engaged in ten stimulus programs over the 1990s that totalled over 100 trillion yen.[18] This did nothing to cure Japan's recession and has instead left the nation with a national debt that is 194% of GDP [4]. In the absence of debt monetization, when the Government borrows money from the savings of others, it consumes the amount of savings there are to lend. If the government were to borrow less, that money would be freed to work in the private sector and would lower interest rates overall. Lastly, raising interest rates is one of the traditional ways that the U.S. Federal Reserve uses to combat inflation (which can be brought on by government debt), but a large national debt figure makes it difficult to do so because it raises the interest paid in servicing that debt. Net interest on the U.S. national debt was approximately $240 billion in fiscal years 2007 and 2008. This represented approximately 9.5% of government receipts. Interest was the fourth largest single disbursement category, after defense, Social Security, and Medicare.[19]Paying off the debt would theoretically free up these funds for other purposes.
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Risks and obstacles
Risks to the U.S. dollar
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By definition, international trade is the exchange of goods and services across national borders. Historically the currencies of nations involved were backed by precious metals (typically using some form of Gold Standard), which would cause a nation operating under a trade imbalance to send precious metals (economic goods in and of themselves) to correct any trade imbalances. In the current scheme of fiat money, the U.S. government is free to print all the money it wants. Consequentially, the government cannot technically go bankrupt as any debtor nation can just issue more money through a practice known as seigniorage.[20] If there is a gross imbalance between the amount of new money being brought into circulation and the amount of economic goods that are represented by an economy, then there is an unstable situation that can lead to hyperinflation.[21] This has been observed in smaller nations such as Argentina in 1989; the International Monetary Fund and World Bank try to end such crises by working with the problem country to institute sound economic policies and restore faith in the international community that the country can again service its debt with a stable currency.[22] The interest rate offered on new bond issues is the one that clears the market. On December 13 2006, the U.S. 30-year treasury note had a rate of 5.375%. Were investors to become concerned about the future value of the US Dollar, they would demand a higher interest rate on US bonds to compensate them for the risk they are assuming.[23] [edit]
Long-term risks to financial health of federal government
Main article: United States federal budget
Risks Due to Increasing Entitlement Spending
Several government agencies provide budget and debt data and analysis. These include the Government Accountability Office (GAO), Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S. Treasury Department. These agencies have reported that the federal government is facing a series of critical long-term financing challenges. This is because expenditures related to entitlement programs such as Social Security, Medicare and Medicaid are growing considerably faster than the economy overall, as the population matures. These agencies have indicated that under current law, sometime between 2030 and 2040 mandatory spending (primarily Social Security, Medicare, Medicaid, and interest on the national debt) will exceed tax revenue. In other words, all discretionary spending (e.g., defense, homeland security, law enforcement, education, etc.) will require borrowing and related deficit spending. These agencies have used such language as "unsustainable" and "trainwreck" to describe such a future.[24] While there is significant debate about solutions,[25] the significant long-term risk posed by the increase in entitlement spending is widely recognized[26], with health care costs (Medicare and Medicaid) the primary risk category.[27][28] In 2006, Professor Laurence Kotlikoff argued the United States must eventually choose between "bankruptcy," raising taxes, or cutting payouts. He assumes there will be ever-growing payment obligations from Medicare and Medicaid.[29] Others who have attempted to bring this issue to the fore of America's attention range from Ross Perot in his 1992 Presidential bid, to Investment guru Robert Kiyosaki, David Walker, head of the Government Accountability Office, and most recently, 2008 Presidential Candidate Ron Paul.[30][31]
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Amount of foreign ownership of U.S. debt
A traditional defense of the national debt is that we "owe the debt to ourselves", but that is increasingly not true. The US debt in the hands of foreign governments is 25% of the total[32], virtually double the 1988 figure of 13%.[33] Despite the declining willingness of foreign investors to continue investing in dollar denominated instruments as the US Dollar has fallen in 2007,[34] the U.S. Treasury statistics indicate that, at the end of 2006, foreigners held 44% of federal debt held by the public.[35] About 66% of that 44% was held by the central banks of other countries, in particular the central banks of Japan and China. In total, lenders from Japan and China held 47% of the foreign-owned debt.[36] Some argue this exposes the United States to potential financial or political risk that either banks will stop buying Treasury securities or start selling them heavily. In fact, the debt held by Japan reached a maximum in August of 2004 and has fallen nearly 3% since then.[37] In 2006, the central banks of Italy, Russia, Sweden, and the United Arab Emirates announced they would reduce their dollar holdings slightly, with Sweden moving from a 90% dollar-based foreign reserve to 85%. [38] On May 20, 2007, Kuwait discontinued pegging its currency exclusively to the dollar, preferring to use the dollar in a basket of currencies.[39] Syria made a similar announcement on June 4, 2007.[40] [edit]
History
See also: National debt by U.S. presidential terms
US public debt historical trend from 2008 budget.
The United States has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly reported value of $75,463,476.52 on January 1, 1791. Over the following 45 years, the debt grew, briefly contracted to zero on January 8, 1835 under President Andrew Jackson but then quickly grew into the millions again.[41][42] The first dramatic growth spurt of the debt occurred because of the Civil War. The debt was just $65 million in 1860, but passed $1 billion in 1863 and had reached $2.7 billion following the war. The debt slowly fluctuated for the rest of the century, finally growing steadily in the 1910s and early 1920s to roughly $22 billion as the country paid for involvement in World War I.[43] The buildup and involvement in World War II brought the debt up another order of magnitude from $51 billion in 1940 to $260 billion following the war. After this period, the debt's growth closely matched the rate of inflation until the 1980s,
when it again began to increase rapidly. Between 1980 and 1990, the debt more than tripled. The debt shrank briefly after the end of the Cold War, but by the end of 2005, the gross debt had reached $7.9 trillion, about 8.7 times its 1980 level.[44]
End of US Public Debt % of GDP[46] Fiscal Year USD billions[45]
1910
2.6
1920
25.9
1930
16.2
1940
43.0
44.2
1950
257.4
80.2
1960
290.2
45.7
1970
389.2
28.0
1980
930.2
26.1
1990
3233
42.0
2000
5674
35.1
2005
7933
37.4
2007
9008
36.8
2008
37.9(est)
At any given time (at least in recent decades), there is a debt ceiling in effect. Whereas Congress once approved legislation for every debt issuance, the growth of government fiscal operations in the 20th century made this impractical. (For example, the Treasury now conducts more than 200 sales of debt by auction every year to fund $4 trillion in debt operations.) The Treasury was granted authority by the Congress to issue such debt as was needed to fund government operations as long as the total debt (excepting some small special classes) did not exceed a stated ceiling. However, the ceiling is routinely raised by passage of new laws by the United States Congress every year or so. The most recent example of this occurred in September 2007, when the Congress raised the debt limit to $9.815 trillion.[47] [edit]
Debt clocks
In several cities around the United States, there are national debt clocks electronic billboards which supposedly show the amount of money owed by the government. Some also attempt to show the money owed per capita or per family. There is a significant level of fluctuation day-to-day, both up and down, so any "clocks" must be continually re-set with proper values. The most famous debt clock, located in Times Square[48] in New York City, was created by eccentric real estate mogul Seymour Durst. The clock is now owned by his son Douglas Durst. Durst's clock was deactivated in 2000 when the debt began to decrease. However, following large increases, the clock was reactivated a few years later, though had to be moved to make way for One Bryant Park. According to Durst the National debt is now increasing at such a rate that his clock will be obsolete (for lack of digits) when the debt reaches the $10 trillion mark, expected in Spring 2009.[49] There is an online debt clock at: brillig A free debt clock for web sites is available at: zFacts [edit]
Recent additions to the public debt of the United
States
Recent additions to U.S. public debt Fiscal year (begins 10/01) 2001 2002 2003 2004 2005 2006 2007 Value $144.6 billion $409.3 billion $589.0 billion $605.0 billion $523.2 billion $536.5 billion $527.9 billion % of GDP 1.4% 3.9% 5.5% 5.3% 4.3% 4.1% 3.9%
The cumulative debt of the United States in the past 5 completed fiscal years was approximately $2.78 trillion, or about 29.5% of the total national debt of ~$9.5 trillion.[50][51]
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Statistics and comparables
U.S. official gold reserves are worth $261.5 billion[citation needed] (as of March 2008), foreign exchange reserves $63 billion[citation needed] and the Strategic Petroleum Reserve $77 billion[citation needed] (at a Market Price of $110/barrel). The national debt equates to $30,400 per person U.S. population, or $60,100 per head of the U.S. working population,[52] as of February 2008. In 2003 $318 billion was spent on interest payments servicing the debt, out of a total tax revenue of $1.95 trillion.[53] Total U.S. household debt, including mortgage loan and consumer debt, was $11.4 trillion in 2005. By comparison, total U.S. household assets, including real estate, equipment, and financial instruments such as mutual funds, was $62.5 trillion in 2005.[54] Total U.S Consumer Credit Card revolving credit debt was $937.5 billion in November 2007.[55] Total third world debt was estimated to be $1.3 trillion in 1990.[56]
The U.S. balance of trade deficit in goods and services was $725.8 billion in 2005.[57] The global market capitalization for all stock markets was $43.6 trillion in March 2006.
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Calculating and projecting the debt
Tracking current levels of debt is a cumbersome but rather straightforward process. Making future projections is much more difficult for a number of reasons. For example, before the September 11, 2001 attacks, the George W. Bush administration projected in the 2002 U.S. Budget that there would be a $1.288 trillion surplus from 2001 through 2004.[58] In the 2005 Mid-Session Review, however, this had changed to a projected deficit of $850 billion, a swing of $2.138 trillion.[59] The latter document states that 49 percent of this swing was due to "economic and technical re-estimates," 29 percent was due to "tax relief," (mainly the 2001 and 2003 Bush tax cuts), and the remaining 22 percent was due to "war, homeland, and other enacted legislation" (mainly expenditures for the War on Terror, Iraq War, and homeland security). Projections between different groups will sometimes differ because they make different assumptions. For example, in August 2003 a Congressional Budget Office report projected a $1.4 trillion deficit from 2004 through 2013.[60] However, a mid-term and long-term joint analysis a month later by the Center on Budget and Policy Priorities, the Committee for Economic Development, and the Concord Coalition stated that "In projecting deficits, CBO follows mechanical 'baseline' rules that do not allow it to account for the costs of any prospective tax or entitlement legislation, no matter how likely the enactment of such legislation may be." The analysis added in a proposed tax cut extension and Alternative Minimum Tax reform (enacted by a 2005 act), prescription drug plan (Medicare Part D, enacted in a 2003 act), and further increases in defense, homeland security, international, and domestic spending. According to the report, this "adjusts CBO's official ten-year projections for more realistic assumptions about the costs of budget policies," raising the projected deficit from $1.4 trillion to $5 trillion.[61][12]
The ultimate consequence of monetizing U.S. debt is that it expands the money supply which will tend to dilute the value of dollars already in circulation. Thus, expanding the pool of money puts downward pressure on the dollar, downward pressure on short-term interest rates (the banks have more to lend) and upward pressure on inflation. Typically this causes an inflationary boom that ends in a deflationary bust to complete the business cycle. Note that money supply expansion is not the only force at work in inflation or interest rates. United States Dollars are essentially a commodity on the world market and the value of the dollar at any given time is subject to the law of supply and demand. In recent years, the debt has soared and inflation has stayed relatively low in part because China has been willing to accumulate reserves denominated in U.S. Dollars. Currently, China holds over $1 trillion in dollar denominated assets (of which $330 billion are U.S. Treasury notes). In comparison, $1.4 trillion represents M1 or the "tight money supply" of U.S. Dollars which suggests that the value of the U.S. Dollar could change dramatically should China ever choose to divest itself of a large portion of those reserves.
Just who owns the U.S. national debt?
And is growing foreign investment in the U.S. bad for America?
COMMENTARY
By John W. Schoen Senior Producer MSNBC
This week, readers are worried about the about the dangers of the steady rise in U.S. debt after back-to-back warnings from sources as diverse as Fed Chairman Ben Bernanke presidential candidate Hillary Clinton and investment guru Warren Buffet. Dick in Michigan wants to know just
where this borrowed money comes from; Kim in Maryland is worried that foreign lenders like China may be gaining an unhealthy upper hand in its relations with the U.S.
The Bush administration talks about spending a million here and a billion there adding up to trillions for the war. Since the country is so far in debt, where is all this money they are talking about spending, coming from? I know it is borrowed, but from whom? -- Dick, Howard City, Mich.
The money is borrowed from buyers of Treasury securities -- which are basically a big batch of IOUs that are auctioned off every three months. As the auction date approaches, the Treasury figures out how much it will need to pay off old debt and cover the governments latest round of overspending.
When the auction day comes, buyers submit bids in the form of the interest rate theyre willing to accept. You can choose to make a competitive bid (you ask for a specific rate) or a non-competitive bid (you agree to accept the average rate of other winning bids.) When all the bids are in, the Treasury starts at the bottom, taking the lowest bids until it has collected enough money to cover that round of borrowing.
The money flows in from all over the place: from individual investors and corporations, pension funds and governments, both in the U.S. and around the world. Basically, anyone with a large amount of cash looking for a safe place to put it is a good candidate for holding U.S. Treasury debt.
So just who are these lenders? As of last June (the latest complete breakdown available), the biggest holder of Treasury debt was the U.S. government itself, with about 52 percent of the total $8.5 trillion in paper that's out there. Most of the governments holdings are massive savings accounts for programs like Social Security and Medicare. Just as you may prefer to keep your
Individual Retirement Account in the safe Treasury the bonds, folks who manage the Social Security Trust Fund are looking for a secure investment, too.
Thats leaves a little over $4 trillion in public hands. The biggest chunk (about 25 percent of the $8.5 trillion total) is held by foreign governments. Japan tops the list (with $644 billion), followed by China ($350 billion), United Kingdom ($239 billion) and oil exporting countries ($100 billion).
Other big holders of Treasury debt include state and local governments ($467 billion); individual investors, including brokers ($423 billion); public and private pension funds (319 billion); mutual funds ($243 billion); holders of US savings bonds ($206 billion); insurance companies ($166 billion) and banks and credit unions ($117 billion.)
Once issued at auction, Treasury securities enjoy a healthy second life when theyre traded in the socalled secondary market (aka the bond market.) The prices of bonds bought on the open market go up and down as the market reacts to changes in demand and news about the economic outlook like inflation. But no matter what you pay for a bond, if you hold it until it matures, the government has to pay back the full amount that was borrowed when the debt was first auctioned and issued.
Why should I invest in US treasuries if in the past I would have made more money in the stock market? -- Grant M., Richmond, Va.
Because you face a substantial risk of losing money in the stock market in the future. Its true that the historical average return on stocks is higher than the current yield on Treasuries. But as mutual funds are required to warn new newcomers: Past performance is no guarantee of future results.
If youre investing for the long haul and figure you can ride out stock market downturns - and still sleep nights when the market behaves like it did last week - you may be better off with stocks. On the other hand, if youre retired and living on a fixed income or counting on the money being there in a few years - or you just cant stand the idea of losing money - you may not want to take on the added risk of stocks.
National budget
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National debt
Main article: United States public debt
The national debt, also known as the U.S. public debt (part of which is the gross federal debt), is the overall collective sum of yearly budget deficit owed by all branches of the United States government, plus interest. The economic significance of this debt and its potential ramifications for future generations of Americans are controversial issues in the United States of America. As of January 30, 2008, the total U.S. federal debt was approximately $9.20 trillion, or about $79,000 in average for each of the 117 million American taxpayers. The borrowing cap debt ceiling as of 2005 stood at $8.18 trillion.[12] In March 2006, Congress raised that ceiling an additional $0.79 trillion to $8.97 trillion, which is approximately 68% of GDP.[13] Congress has used this method to deal with an encroaching debt ceiling in previous years, as the federal borrowing limit was raised in 2002 and 2003.[14] While the U.S. national debt is the world's largest in absolute size, a more convenient measure is that of its size relative to the nation's GDP. When the
national debt is put into this perspective it appears considerably less today than in past years, particularly during World War II. By this measure, it is also considerably less than those of other industrialized nations such as Japan and roughly equivalent to those of several western European nations.[15] [edit]
Sectors
Sectors of the US economy ranked by number of sales, receipts, or shipments in the year Sales per sector compared to employees per sector in the United States economy in the 2002. Includes both year 2002 employers and nonemployers
Accounting
All credit is debt, a liability. Debt is created by lenders and borrowers agreeing to exchange the use of money for the promise to repay. The unit of money lent is the asset of the creditor and the liability of the debtor.
Notes are paper with terms of exchange, hence credits or access to money. All currencies are notes ("This note is legal tender for..."). Money is based on a fiat whereupon all agree upon the exchange values of similar pieces of paper. This extends to savings and checking accounts which are depository receipts for money loaned to bankers who in turn lend it to other borrowers. And thus it multiplies, a deposit becomes a loan that becomes another deposit and so on. The terms of the lending agreement are the key elements of the contractual terms of a promissory note regarding repayment including the amount(s) loaned and to be repaid, loan fees, time value and risk value interest charges, due dates, balloon payments, default terms and more. All material information should be disclosed on financial statements or footnotes. [edit]
Flows
2004
[edit]
World-wide debt and equity underwriting reached a record $5.69 trillion. World-wide debt underwriting grew 4.3% year-over-year to $5.19 trillion. Syndicated lending was up 34.3% year-over-year. world-wide high-yield corporate debt climbed to over $163 billion eclipsing the previous record of $150 billion set in 1998. US Asset-backed securities volume increased 41.7% to $857 billion. World-wide equity & equity-related issuance totaled $505bn for the year, representing a 29.9% increase over the $389bn raised in 2003. Initial public offerings increased nearly 220%. [edit]
2003
World-wide Debt, Equity and Equity-related issuance reached record-breaking levels with over $5 trillion in proceeds raised, surpassing 2001s record of $4.4 trillion. The $5 trillion of borrowings represented 14% of the GDP flow during the year (4.938/36.3) (see world economy). 93% of the issuance was debt, 7% was equity. Note that these numbers don't include all mortgage borrowing, which was $3.8 trillion in the United
States during 2003. $900 billion of it is in mortgage-backed securities, at least $546 billion in US Federal Credit Agency.
Government debt
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Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government; either central government, federal government, municipal government or local government. As the government represents the people, government debt can be seen as an indirect debt of the taxpayers. The government accumulates debt over time by running a deficit: that is, by spending more than it taxes. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities such as government bonds and bills. Less credit worthy countries sometimes borrow directly from commercial banks or supranational institutions. Some consider all government liabilities, including future pension payments and payments for
goods and services the government has contracted for but not yet paid, as government debt. Another common division of government debt is by duration. Short term debt is generally considered to be one year or less, long term is more than ten years. Medium term debt falls between these two boundaries. [edit]
Government and sovereign bonds
Main articles: government bond and sovereign bond A government bond is a bond issued by a national government denominated in the country's domestic currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Government bonds are theoretically risk-free bonds, because the government can raise taxes, reduce spending, or simply print more money to redeem the bond at maturity. Investors in sovereign bonds have the additional risk that the issuer is unable to obtain foreign currency to redeem the bonds. [edit]
Municipal, provincial or state bonds
Further information: Municipal bond Municipal bonds, "munis" in the United States, are debt securities issued by local governments (municipalities). [edit]
Denominated in reserve currencies
Governments borrow money in a currency for which the demand is strongest. The advantage of issuing bonds in a currency such as the pound,euro or the US dollar, is that the universe of investors for the bonds is very large. Countries such as the United States, France and Germany have only issued in their domestic currency. Relatively few investors are willing to invest in currencies that do not have a long track-record of stability. The disadvantage for a government issuing bonds in a foreign currency, is that there is a risk that they will not be able to obtain the foreign currency to pay the interest or
redeem the bonds. In 1997/1998, during the Asian financial crisis this became a serious problem when many countries were unable to keep their exchange rate fixed due to speculative attacks. [edit]
Risk
Main article: Credit risk Lendings to a national government in the country's own sovereign currency are often considered "risk free" and are made at a so-called "riskfree interest rate". This is because the debt and interest can be repaid by raising tax receipts (either by economic growth or raising rates), a reduction in spending, or failing that by simply printing more money. Some economists argue that, in an economy near the full employment, this would increase inflation and reduce the value of the invested capital. An extreme example of this is provided by Weimar Germany of the 1920s which suffered from hyperinflation due to its government's inability to pay the national debt. A politically unstable state is anything but risk-free as it may, being sovereign, cease its payments with impunity. Famous examples of this phenomenon include the Spain of sixteenth and seventeenth centuries which nullified its government debt seven times during a century and revolutionary Russia of 1917 which refused to accept the responsibility for Imperial Russian debt. Another political risk is caused by external threats. It is most uncommon for invaders to accept responsibility for the national debt of the annexed state or that of an organization it considered a rebellion. For example, all debts taken by Confederate States of America were left unpaid after the American Civil War. U.S. Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S. but this ignores the risk to foreign purchasers of currency exchange rate movements. In addition, this implicitly accepts the stability of the US government and its ability to continue repayments in a difficult financial crisis.
Lendings to a national government in a currency other than its own does not allow for the same confidence in the ability to repay but this is offset somewhat by reducing the exchange rate risk to foreign lenders. On the other hand, national debt in foreign currency cannot be disposed of by starting a hyperinflation, which increases the credibility of the debtor. Usually small states with volatile economies have most of their national debt in foreign currency. For countries in the Eurozone, the euro is the local currency, although no single state can trigger inflation by creating more currency. Lendings to a local or municipal government can be just as risky as a loan to a private company, unless the local or municipal government has the power to tax. In this case, the local government can escape its debts by increasing the taxes, or reduce spending, just as a national one. Local government loans are sometimes guaranteed by the national government and this reduces the risk. In some jurisdictions, interest earned on local or municipal bonds is tax-exempt income, which can be an important consideration for the wealthy. [edit]
Clearing and defaults
Main articles: clearing (finance) and default (finance) Public debt clearing standards are set by the Bank for International Settlements, but defaults are governed by extremely complex laws which vary from jurisdiction to jurisdiction. Globally, the International Monetary Fund has the power to intervene to prevent anticipated defaults. It has been very heavily criticized for the measures it advises nations to take, which often involve cutting back essential services as part of an economic austerity regime. In triple bottom line analysis, this can be seen as degrading capital on which the nation's economy ultimately depends. Private debt, by contrast, has a relatively simple and far less controversial model: credit risk (or the consumer credit rating) determines interest rate, more or less, and entities go bankrupt if they fail to repay. Governments cannot really go bankrupt (and suddenly
stop providing services to citizens), thus a far more complex way of managing defaults is required. Smaller jurisdictions, such as cities, are usually guaranteed by their regional or national levels of government. When New York City over the 1960s declined into what would have been a bankrupt status (had it been a private entity) by the early 1970s, a "bailout" was required from New York State and the United States. In general such measures amount to merging the smaller entity's debt into that of the larger entity and thereby gaining it access to the lower interest rates the large one enjoys. The larger entity may then assume some agreedupon oversight in order to prevent recurrence of the problem. It is highly unlikely that a government which defaults will be foreclosed upon; however, it is theoretically possible. [edit]
Structure
In the dominant economic policy generally ascribed to theories of John Maynard Keynes, sometimes called Keynesian economics, there is tolerance for fairly high levels of public debt to pay for public investment in lean times, which can be paid back with tax revenues that rise in the boom times. As this theory gained popularity in the 1930s globally, many nations took on public debt to finance large infrastructural capital projects such as highways or large hydroelectric dams. It was thought that this could start a virtuous cycle and a rising business confidence since there would be more workers with money to spend. Some have argued that the greatly increased military spending of World War II really ended the Great Depression. Of course, military expenditures are based upon the same tax (or debt) and spend fundamentals as the rest of the federal budget, so this argument does little to undermine Keynesian theory. Indeed, some have suggested that significantly higher national spending necessitated by war essentially confirms the basic Keynesian analysis (see Military Keynesianism).
(There is much debate as to what exactly ended the Great Depression, in particular from Austrian Economics.) Nonetheless, the Keynesian scheme remained dominant, thanks in part to Keynes' own pamphlet How to Pay for the War, published in his native United Kingdom in 1940. Since the war was being paid for, and being won, Keynes and Harry D. White, Assistant Secretary of the United States Department of the Treasury, were, according to John Kenneth Galbraith, the dominating influences on the Bretton Woods agreements. These agreements set the policies for the BIS, IMF, and World Bank, the so-called Bretton Woods Institutions, launched in the late 1940s. These are the dominant economic entities setting policies regarding public debt. Due to their role in setting policies for trade disputes, the GATT and World Trade Organization also have immense power to affect foreign exchange relations, as many nations are dependent on specific commodity markets for the balance of payments they require to repay debt. Understanding the structure of public debt and analyzing its risk requires one to:
Assess the expected value of any public asset being constructed, at least in future tax terms if not in direct revenues. A choice must be made about its status as a public good some public "assets" end up as public bads, such as nuclear power plants which are extremely expensive to decommission these costs must also be worked in to asset values. Determine whether any public debt is being used to finance consumption, which includes all social assistance and all military spending. Determine whether triple bottom line issues are likely to lead to failure or defaults of governments say due to being overthrown
Determine whether any of the debt being undertaken may be held to be odious debt, which permits it to be disavowed without any effect to a country's credit status. This includes any loans to purchase "assets" such as leaders' palaces, or the people's suppression or extermination. International law does not permit people to be held responsible for such debts as they did not benefit in any way from the spending and had no control over it. Determine if any future entitlements are being created by expenditures financing a public swimming pool for instance may create some right to recreation where it did not previously exist, by precedent and expectations.
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Scale
Global debt is of great concern since, very often, social capital is depleted (such as cases of pestilence or welfare services on families or friends), and natural capital is ravaged for "natural resources" to make interest payments. This has led to calls for universal debt relief for poorer countries. A less extreme measure is to permit civil society groups in every nation to buy the debt in exchange for minority equity positions in community organizations. Even in dictatorships, the combination of banks and civil society power could force land reform and overthrow unaccountable governments, since the people and banks would be aligned against the oppressive government. Creditary economics and Islamic economics argue that any level of debt by any party simply represents a violent and coercive relationship that must end. As the existing system of public debt finance based on Bretton Woods is critical to the financial architecture, significant monetary reform would be required to realize this. Using a debt to GDP ratio is one of the most accepted measures of assessing a nation's debt. For example, one of the criteria of
admission to the European Union's Euro currency is that a country's debt does not exceed 60% of that country's GDP. [edit]
Problems
Sovereign debt problems have been a major public policy issue since World War II, including the treatment of debt related to that war, the developing country "debt crisis" in the 1980s, and the shocks of the Russian financial crisis in 1998 and Argentina's default in 2001. For a comprehensive discussion of the procedures that have evolved for resolving the problems of governments that have defaulted on their contractual debt obligations, see: Restructuring Sovereign Debt: the Case for Ad Hoc Machinery, by Lex Rieffel, Brookings Institution Press, 2003. [edit]
Implicit debt
Government "implicit" debt is the "promise" by a government of future payments from the state. Usually long term promises of social payments such as pensions and health expenditure are what is referred to by this term; not promises of other expenditure such as education or defence (which are largely paid on a "quid pro quo" basis to government employees and contractors, rather than as "social welfare", including welfare per se, to the general population). The problem with the implicit government insurance liabilities is that it's very hard to make any accurate assumptions about these liabilities, since the scale of future payments depends on so many factors. First of all, the social security claims are not any "open" bonds or debt papers with a stated time frame, "time to maturity", "nominal value", or "net present value". In the United States there is no money in the governments coffers for social insurance payments, or for any payments, more than what's required to run day-to-day business. This insurance system is called PAYGO (pay-as-you-go) as opposed to save and invest. The fear is that when the "baby boomers" start to retire the working population in the United States will be a smaller
percentage of the population than it is now, for a perhaps incalculable time into the future. This will make the government expenditures a "burden" on the country - larger than the 35% of GDP that it is now. Remember that the "burden" of the government is what it spends, since it can only pay its bills through taxes, debt, and inflation of the currency (government spending = tax revenues + change in government debt held by public + change in monetary base held by the public). "Government social benefits" paid by the United States government during 2003 totalled 1.3 trillion dollars. [1] [edit]
Causes
The main cause of government debt is overspending. When governments hire private businesses to perform a service or manufacture objects or buildings for the government, these private businesses have the tendency to overcharge more than normal prices/rates, especially if the private businesses know that the government is especially wealthy. Some types of overspending are in:[citation needed]
new construction expensive repair of government buildings pet projects too much money paid in social security, disability, welfare, subsidies, grants, or disaster relief more self serving government jobs bureaucratic middle-men payback through overly-expensive contracts of businesses that have donated to political campaigns of elected officials expensive wars
expensive private services that supply militaries with food, transportation of weapons and products new expensive construction products for entertainment to attract tourists, such as government-paid resorts, parks, airports, hotels, etc. too many government bonds sold at high interest