Understanding federal debt, its components, and its consequences is crucial to grasp the broader economic context within which governments operate. Let's delve into this vast topic and shed some light on the complexities of Federal Debt.
Introduction to Federal Debt
In essence, Federal Debt, also widely known as National Debt, is the total amount owed by the government. As of now, this massive figure stands at approximately $19 trillion. Predominantly, this debt arises from the issuance of Treasury Bonds or Treasury Notes, which serve as debt obligations. Interestingly, about a quarter of the current national debt is internally owed, majorly to entities like the Social Security Trust Funds, existing within the government's framework itself.
The Mechanics of Federal Debt and Deficits
To understand how this debt balloons over time, one must comprehend the economic concept of deficits. A deficit occurs when a government's expenditures outstrip its revenues. It's important to note that the country has not seen a balanced budget since the presidency of Bill Clinton. In recent years, the government has consistently operated at a deficit, thereby contributing to the debt's acceleration. The live tracker available on usdebtclock.org vividly demonstrates the compounding of this debt, where interest quickly contributes to the overall debt pile.
International Interplay and Federal Debt
The global landscape plays a significant role in shaping a nation's Federal Debt. Countries like China and Japan have historically purchased Treasury Bonds en masse. The objective? To decrease their currency's value against the dollar, making their exports cheaper and spurring economic growth. This practice underscores that Federal Debt is not just an isolated domestic issue; it's intricately linked to international finance and global economic strategies.
Understanding Debt Securities
Federal Debt is a form of debt securities, akin to those issued by corporations, bought and sold in the market. This is not the kind of debt accrued for nothing; it involves financial instruments like bonds. However, it's essential for any entity, be it a government or corporation, to avoid excessive issuance of these debt securities if other capital-raising options are viable.
Why the caution? Because high debt ratios compared to revenues or valuations can endanger an entity's creditworthiness. In layman terms, an entity is considered less likely to fulfill its debt obligations, thereby increasing the risk of default. This is what transpired in the aftermath of the 2008 crisis when the US credit rating was downgraded from AAA to AA.
Federal Debt is a multifaceted concept that has a profound impact on national and global economics. From international trade strategies to domestic fiscal policies, its influence is pervasive. Understanding it in its entirety allows for better policymaking and more informed financial decision-making on a macroeconomic level. As financial analysts, we must consistently monitor these developments and their potential repercussions on the financial landscape.
Summary:
Federal debt is the money owed by the government. The primary source of this debt is Treasury Bonds (Notes), which constitute debt obligations.
About 25% of the current national debt is owed internally between different government agencies, mostly to the Social Security Trust Funds. The Federal Debt is also, and perhaps more commonly, referred to as the National Debt. Currently the debt is approximately $19 Trillion.
A quick visit to usdebtclock.org will reveal how much momentum this amount of debt has, because you can watch how quickly the interest adds to the total amount owed. It doesn’t help that the country hasn’t had a balanced budget since Bill Clinton was president.
Every other year in recent history the government has operated at a deficit, adding to to debt and accelerating the buildup. Primarily the debt is in the form of Treasury Bonds, many of which were sold en masse to countries like China and Japan who desired to manipulate the value of their own currency down versus the dollar in order to make their exports more appealing (cheaper) to help grow their economy.
So it’s not the kind of debt you have when you got something for nothing and you owe someone (found here). This is the corporate / organization form of debt which is purchased and sold on the market and commonly known as bonds. Companies should try not to issue too many debt securities to raise capital if they have other options.
When debt ratios get too high in comparison to revenues or valuations, the creditworthiness of companies can be downgraded due to an increased risk of default, which is exactly what happened to the US in the wake of the 2008 crises, when it was downgraded from AAA to AA.
What is Foreign Debt?
What is the Size of our National Debt?