The National Debt and How it Affects Investors, Intragovernmental Holdings, and Foreign Governments

The National Debt is the amount of debt owed by the United States to the holders of Treasury securities. This debt is equal to the face value of all outstanding Treasury securities at any given time. It is important to note that this debt is not just a financial concern for the government. It also affects investors, intragovernmental holdings, and foreign governments.

Public debt

The United States is heavily indebted. The national debt is $23.6 trillion. About a third is held by private and public entities. The rest is held by the Federal Reserve. At the end of 2003, the federal debt was slightly larger than the total GDP. In addition to the debt held by the government, households and corporations also hold a significant amount of debt.

The amount of public debt varies greatly between countries, ranging from less than ten percent of GNP to over double that amount. It is generally believed that public borrowing has an inflationary effect on the economy. Generally, public borrowing is used during recessionary times in order to stimulate investment, consumption, and employment.

Intragovernmental holdings

Intragovernmental holdings and the national debt are related to the amount of debt a nation owes to creditors. Federal agencies such as the Treasury purchase bonds in the public’s name and redeem them when they need money to pay for programs. Approximately half of intragovernmental debt is for social security and disability insurance. Another third is for military retirement funds.

The current amount of federal intragovernmental holdings totals $6.5 trillion, up from $4.8 trillion a decade ago. By FY 2031, this debt will be reduced to about $5.1 trillion. By that time, major trust funds will be forced to sell bonds to pay for expenses.

Foreign governments

Almost half of the national debt is held by foreigners. China, Japan, and other foreign governments are the biggest holders. Combined, they hold over $2 trillion in U.S. Treasury securities. The Federal Reserve owns nearly another half. Its holdings of Treasury securities have increased significantly since the COVID-19 financial crisis began.

The amount of government debt in a given year is determined by the deficit. Total government debt is the cumulative amount of debt the government has borrowed over time. When the government runs a deficit, the debt increases, and when it runs a surplus, the debt shrinks. The total debt held by the public includes debt taken out by the government from the private sector and foreign governments.

Today, the national debt is over $24 trillion. Some government agencies transfer excess revenue to the general fund and redeem Treasury notes for cash. To raise cash, the government also increases taxes and issues more debt. It publishes the Treasury statement every month. While the public holds most of the public debt, foreign governments own the rest.

Investors

Investors in the national debt have increased by about one-third since 2009. By end-September 2019, private entities in Japan and China held $2.2 trillion in Treasury securities, equal to 14 percent of all outstanding public debt. However, the shares of Japanese and Chinese entities declined slightly compared to 2009. The largest increase in foreign ownership was among non-residents of Hong Kong and Cayman Islands.

The investors in the national debt include banks and insurance companies. These financial institutions invest in government bonds because they offer low interest rates and are easily negotiable. Furthermore, the bonds can serve as liquid funds in the event of a bank run.

Interest payments

Interest payments on the national debt have become the fastest growing line item in the federal budget. By 2032, the federal government will spend over $300 billion annually on interest payments. This amount represents a serious threat to the future of the American economy and societal health. As a result, policymakers must pursue a combination of entitlement reforms, spending reductions, and revenue increases to address the debt issue.

In recent years, the federal government’s net interest payments have increased by 25 percent relative to the size of the U.S. economy, despite historically low interest rates. Moreover, the national debt has grown by 65 percent over that period.