To most people the National Debt is an unimaginable amount, over sixteen trillion dollars
that the United States Government or the taxpayers owe to foreign entities like China and Japan, whose interest payments alone will eventually bankrupt the nation. This also seems to be the image projected by the Republicans in Congress. It is total misinformation and nonsense, more mythical than real.
The initial debt was incurred during the Revolutionary War and under the Articles of Confederation. With the exception of the year 1835, the United States has continually held a public debt since the Constitution went into effect on March 4, 1789.
The National or Public Debt of the United States consists of two components. The first is debt held by the public and the second is debt held by government accounts or intergovernmental debt. Debt held by the public consists of Treasury securities held by investors outside the Federal Government. These include individuals, corporations, foreign states like China and Japan, and local governments, both in and out of the United States.
Debt held by government accounts includes non-marketable Treasury securities held in accounts administered by the Federal Government that are owed to program beneficiaries such as the Social Security Trust Fund. This account currently exceeds 2.7 trillion dollars. Other large intergovernmental holders include the Federal Housing Administration, the Federal Savings and Loan Corporation’s Resolution Fund, and the Federal Hospital Insurance Trust Fund (Medicare). Debts held by governmental accounts represent the cumulative surpluses, including interest earning of these accounts that have been invested in Treasury securities. In 2012 there were at least two direct transfers of 89 billion dollars from the FED to the Treasury that were mostly interest paid on the National Debt.
By my estimate the Federal Government owns well over fifty percent of its own debt. Dr. Ben Bernanke, the Chairman of the Federal Reserve, recently stated (May 2013) that the FED, which had monthly been investing 85 billion dollars in the National Debt for well over the last twelve months, 40 billion in re-buying government securities and 45 billion in purchasing mortgage paper, would increase or decrease the monthly amount according to the nation’s needs. He indicated that this would depend upon whether or not Congress would utilize fiscal policy, which it has not done since 2011.
It is interesting to note that the deficit under President Obama, which increased when he took office in 2009 because of the economic disaster facing the nation, has been dropping significantly and could by 2015 reverse itself and generate a surplus as it did in President Clinton’s last year in office.
Up to the end of 2008 there seemed to be endless amounts of money available. Banks were refinancing real estate at 125 percent of their appraised value and in the process creating endless amounts of money. People were spending like there was no tomorrow. All of this ended when the Real Estate Bubble burst. Every dollar in circulation suddenly became a nickel. Virtually overnight there wasn’t enough money available to meet the needs of the economy. If Presidents Bush and Obama had not bailed out the banks the nation would have been in a far worse depression than that of 1929. The government, under the guidance of President Obama saved the economy from total ruin. This was done by bailing out the financial institutions that had brought about the crash and then by bailing out some core industries like the automobile companies. Where did the money come from? The government created it and gave the needing companies the financial backing to recover.
Foreign trade has been unequal; we buy far more than we sell to others. The two foreign nations that hold large amounts of the National Debt are Japan and China; each holding about 1.1 trillion dollars worth.
Keep in mind that each nation has its own currency that has value only within the boundaries of that nation. While money can be exchanged internationally if the trading is totally out of balance/unequal, then an international exchange of currency following the laws of supply and demand, could drop the value of the money fifty or more percent causing the nation that has acquired it to take a substantial loss in its profits. Actually the money becomes a prisoner in the country of the sale and has to be invested there. The value of this to the country making the massive purchases is that it gets the goods it wants and in a slightly convoluted fashion retains the funds it has spent for these items.
Several decades ago Japanese businessmen purchased large amounts of real estate in the United States, particularly in Hawaii. They actually bought high and ended up eventually having to sell much of it far below what they had originally paid. While China is very adept at selling goods and services to the rest of the world she has problems with certain aspects of her economy. On 2012 many thousands of pigs died, presumably from drinking polluted water. China has the largest population in the world and has to be able to successfully feed them. It seems that she is in the process of buying food-producing companies in other nations (June 2013). She is currently in the process of buying Smithfield Foods, the largest producer of pork in the U.S., for 4.7 plus billion dollars. She is probably doing this also with countries other than the United States. She will be importing what she needs from companies all over the world that she will own.
The Federal Government utilizes Macroeconomics. Here money is the tool that it uses to allow the economy to function properly. Ultimately the government prints/creates the money it needs to allow the economy to work. It can do this knowingly or blindly. The manner in which the state performs and controls the process determines the success of its economy.
On April 2, 2013, the National Debt was 16,805 trillion dollars. What is the significance of this massive amount of money that the government has created? Does this in any way hamper the productivity of the nation? The answer to the first question is that there isn’t any real significance other than functionality. The answer to the second question is NO. It has become, as far as many of our conservative legislatures are concerned, the tail that is wagging the dog!