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One thing we did not hear much about in the presidential campaign was the national debt—or the gaping annual federal budget deficits that drive the debt ever higher. Just since the end of August, the national debt has jumped by $1 trillion—or about 10 percent in less than three months. Put differently, the federal government spent nearly $1 trillion more than it collected in tax revenue over that brief interval.
In a way, this sudden and startling increase in the national debt provides a fitting crescendo to the last eight years. When President Bush took office on January 20, 2001, the debt was about $5.7 trillion. As the first chart shows, as of November 12, debt has risen to $10.6 trillion. When President-Elect Obama takes office next January, the national debt will likely have doubled over the eight years of the Bush Administration. The national debt is the sum of all the budget deficits (net of a few budget surpluses), the federal government has run over the course of American history. A budget deficit occurs whenever tax revenues fall short of government spending—a circumstance that requires the government to borrow in the capital markets by issuing new treasury securities. In round numbers, the federal government has been spending about $3 trillion a year, while collecting about $2.5 trillion in taxes. The budget deficit for the fiscal year that ended September 30 was $455 billion—or roughly 3 percent of the size of the economy, as measured by gross domestic product (GDP). In the view of some economists, 3 percent of GDP, while high, can be lived with. But that was before the recession and the explosion of subprime bailout spending. Now, the monthly shortfalls are approaching $500 billion (half a trillion dollars), and rising. This implies annual deficits of 4 or even 5 percent of GDP, which few observers view as business as usual. White House spokespeople contend that what really matters is not the total size of the debt, but the portion of it that is held by “the public.” Currently, $4.3 billion of the $10.6 billion debt is owned by the Fed and by the Social Security and Medicare trust funds. The balance, more than $6 trillion, is held by the public. But this argument has two drawbacks. First, the portion of the debt owned by the government is already “spent.” When the Social Security trust fund runs a surplus, for example, it uses it to buy Treasury securities. The trust fund receives a piece of paper, and the Treasury uses the proceeds to pay for current programs. So that cupboard is bare. When it comes time for the Treasury to “repay” the trust funds a few years from now when trust-fund surpluses come to an end, new taxes or spending cuts or new borrowing will be required. The other issue with focusing on the portion of the debt held by the public is that “the public” increasingly consists of foreign governments and central banks. As the second chart shows, the foreign-owned portion has risen from 36 percent in 2001 to 55 percent at the end of June. Putting it another way, virtually all (85 percent) of the increase in the publicly held debt since 2001 has resulted from foreign purchases of treasury securities. Source: Treasury Bulletin, September 2008, p. 38.
If the U.S. were a third-world country, that majority stake by foreigners would set off alarm bells. As it is, the nation’s debtor status vis-à-vis the rest of the world raises issues of sovereignty that have yet to be worked out. It could be that the sideshow surrounding Fannie Mae and Freddie Mac’s creditworthiness earlier this year presages similar tensions (with China, say) over our foreign-held debt. A foreign government could unload its U.S. Treasury securities either out of caution or because it was displeased by U.S. actions. To that extent, the U.S. must take special measures (compromises) to placate the foreign bondholders. The candidates’ silence on this topic could have reflected a consensus that in a time of financial crisis, more immediate (that is, bailout and stimulus) issues took center stage. Or maybe it reflected the reluctance of either candidate to commit to the tough measures required to close the budget deficits and slow the galloping growth of the debt. Talking about tax increases or spending cuts seems to be a bad idea during an election year. Whatever the explanation, political realities must now give way to economic realities. As the debt cascades ever higher, interest costs in the federal budget will climb apace, competing with spending on new programs, military or domestic. It will be interesting to see how the new administration resolves these tensions.
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I tell every young person to do two things: first, buy gold at pace, and second, open a foreign bank account, fund it, pay your taxes, and file a report to treasury if necessary.
When my father was born in 1900, the National Debt was $2 billion. Early in Ronald Reagan's first administration crossed the $1 trillion plateau. Today the number is $10.7 trillion, only 25 years later. In another 25 years, it will easily have crossed $100 trillion (since the 2nd derivative of the slope of debt vs. year is positive.) Does anyone know what the dollar will "command" then?