Sourced: "Debt.org"
US public debt is different from regular household debt. It represents the amount of money investors are willing to invest in the US. It is similar to when a corporation issues bonds. Investors buy those bonds (which are promises to be paid back at a later date). When investors want to purchase very, very safe investments they buy US debt (that is, they lend the US money). Right now, investors are willing to purchase US bonds at ridiculously low rates of return and thus it costs the US very little to pay back those bonds. Also, keep in mind that the promise to pay back the bonds is in US dollars, which we can print for free. There are reasons we don't want to just print money to pay back the debt, but we could...if every one in the world suddenly said, "Pay me back now or else..." we could pay them back immediately, no problem. The amount of US debt is an indicator that everybody trusts, and is willing to invest in, the US.
Is debt at that level a problem?
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For now, it isn’t. The U.S. government borrows trillions of dollars a year at very low interest rates on global financial markets, and there doesn’t appear to be much private sector borrowing that is crowded out by U.S. Treasury borrowing right now. Indeed, the fact that global interest rates remain very low while governments around the world are borrowing heavily to fight the COVID-19 recession suggests that there is still a lot of savings around the world, more than is needed to finance private investment.
No one really knows at what level a government’s debt begins to hurt an economy; there’s a heated debate among economists on that question. If interest rates remain low, as currently anticipated, the government can handle a much heavier debt load than was once thought possible. And the recent increase in borrowing—while enormous—is a temporary increase intended to combat an emergency; it changes the level of the debt, but not its long-run trajectory.
There was a lot of concern that the size of the debt would limit the amount of flexibility the U.S. government had if it confronted a financial crisis or a deep recession and wanted to borrow heavily, as it did during the Great Recession. As it turned out, the U.S. government was able to borrow readily during the pandemic. But even if the government can continue to borrow at low interest rates, politicians may be reluctant to do so because they’ve already borrowed so much.
Doesn’t a big debt mean big interest payments?
Yes, but the recent increases in Treasury borrowing have come at a time of very low interest rates. Rates on long-term U.S. Treasury debt in the markets were low even before the COVID-19 pandemic, and they have fallen further since. In late June, the Treasury was borrowing for 10 years at an interest rate of below 1%—0.625%, to be precise. In fact, in the first nine months of the fiscal year (from October 2019 to June 2020), the government’s interest outlays were 10.5% lower than in the same months of the previous fiscal year, even though government borrowing was up.
Even at low rates, the government spent about $260 billion on interest in the first eight months of the fiscal year, roughly equal to the combined spending of the Departments of Commerce, Education, Energy, Homeland Security, Housing and Urban Development, Interior, Justice, and State. And, of course, if interest rates rise, the government’s interest tab will go up.
U.S. National Debt Clock (Live)
What about the debt ceiling?
Congress has always restricted federal borrowing. Before World War I, Congress often authorized borrowing for specific purposes and specified what types of bonds the Treasury could sell. That gave way to an overall ceiling on federal borrowing in 1917, which Congress has raised repeatedly, often with a lot of political controversy. “Increasing the debt limit does not authorize new spending commitments,” former Treasury Secretary Jack Lew once said. “It simply allows the government to pay for expenditures Congress has already approved, thereby protecting the full faith and credit of the United States.” In August 2019, as part of a bipartisan budget deal that raised spending levels, Congress suspended the debt limit for two years. On August 1, 2021, the debt limit will be reinstated at a level covering all borrowing that occurred during those two years.
So what now?
Now the real question is, "How do we spend (reinvest) that money?" Like a corporation, we could expand the markets we sell to. Or we could invest in making things more efficient. Or we could retrain our workers. Or we could install software to spy on the employees. Or, etc., etc. The real question we should be asking is: Given that we can borrow for almost free, how much should we borrow and what investments would be most profitable? Just like a corporation, the US can borrow money, invest it wisely and actually make a profit - enough to pay back the debt and still have money left over. The US is not exactly making good investing decisions right now, but that's a different discussion that should be had, to be continued...
By Sunny Wadhwani
October 2nd, 2022
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