According to the USDebtClock.org, the US national debt stands at $19.980 trillion. That means our national debt will top $20 trillion later this month or next.
Over the past 20 years, our national debt has quadrupled under both Republican and Democratic presidents and Congresses. The debt actually doubled during the eight years of President Obama, from $10 trillion to almost $20 trillion.
Our nearly $20 trillion in national debt consists of two components: “debt held by the public” and “intra-governmental debt.” Debt held by the public, now at apprx. $14.4 trillion, includes Treasury securities held by US and foreign investors and foreign governments including Japan, China, the UK and most developed countries.
Intra-governmental debt, now at apprx. $5.6 trillion, includes Treasury securities held in US government accounts for beneficiaries such as the Social Security Trust Fund (half of the entire amount), military and civil-service retirement funds and the like.
There is a long-standing argument that the $5.6 trillion in intra-government debt should not count toward the national debt. Proponents of this position argue that intra-governmental debt is debt that “we owe to ourselves.”
Myself and most others who analyze government debt believe this theory is hogwash. Why? Because 100% of US Treasury securities (bonds, notes, bills) mature at some point and must be rolled-over – meaning they mature and new Treasuries must be purchased to replace them. Further, interest must be paid on all Treasury securities, whether they are held by the public or by government agencies.
You should be aware, however, that many in the media often refer only to the debt held by the public when they address our national debt. For example, many in the media say that our national debt is only about 77% of our $18.6 trillion Gross Domestic Product.
To get that figure, they only use the $14.4 trillion debt held by the public. If we use the total national debt of almost $20 trillion, the debt equals 107% of GDP. That’s a huge difference! Notice below that the debt-to-GDP ratio exploded during the eight years of Obama.
Equally important is the cost of maintaining that debt (interest payments). While homebuyers can take out fixed-rate mortgages, the cost for the US government to maintain its debt is highly variable. As interest rates shift and US Treasuries mature, new bonds are issued at current interest rates.
Over the past two decades, the US has been in an environment of falling rates, with the effective cost (interest rate) of the debt declining from 6.5% in 1997 to only 2.2% last year, according to US Treasury statistics.
Thus, over a timeframe when the outstanding Treasury debt quadrupled, total interest expense increased only modestly, from about $356 billion in 1997 to roughly $432 billion in 2016 As a result, the cost of maintaining even a significantly higher debt has actually fallen relative to total federal spending from 21% to just 11% last year – because interest rates are so low.
Of course, we all know that interest rates will not remain at today’s historically low levels. As I wrote in my February 16 Blog, the Fed is intent on raising short-term interest rates three times this year. Fed Chair Janet Yellen was adamant about this in her mid-February congressional testimony. The next rate hike could come as early as March 15 when the next policy meeting ends.
In the spirit of full disclosure, I must admit that I have been warning about our exploding national debt for over 30 years. No nation in the history of man has run-up this amount of debt. At some point, investors are going to wake up and realize that US Treasuries may not be as safe as they think.
In fact, as I wrote last week, foreigners are already reducing their holdings of US government debt. “From Tokyo to Beijing to London, the consensus is clear: fewer overseas investors want to step into the nearly $14 trillion publicly-held US Treasury market right now.”
As I concluded last week, I don’t think we should be overly worried about this just yet. But the day is coming, and it remains to be seen what happens when our national debt tops $20 trillion in the weeks ahead.