What is the Amount of the Debt?
The total national debt is now about $17.3 trillion, which is more than the U.S. GDP of $16.8 trillion. This fact especially worries debt-dreaders. They point to the ratio of debt-to-GDP as a sign of eventual economic disaster. Often these facts are mentioned by debt-dreaders in the same breath as the recent economic difficulties of Greece, with the implication that the U.S. economy is on the
What is the National Debt?
The national debt is the amount of money owed by federal government as measured by the value of the U.S. Treasury securities issued by the government to pay for deficit spending (deficit spending is spending by the government in excess of its tax revenues, which difference it makes up by borrowing money from the buyers of its bonds). The total debt has two parts. One part is "debt held by the public", individuals and institutions. This includes individual investors, banks, pension funds, U.S. states and cities, the Federal Reserve, and the central banks of foreign governments such as the People's Bank of China, the Bank of England, and the Bank of Japan. The other part is "intragovernmental debt", debt held by the federal government itself: money that the federal government owes to itself and to the beneficiaries of government programs such as social security. Debt held by the public in December of 2013 was about $12.3 trillion, and intragovernmental debt was at $4.9 trillion. So the "public debt" was 73% of the total and "intragovernmental debt" was 27%. The difference between the two is significant. This brings me to the terms "gross debt" and "net debt".
Gross Debt & Net Debt
I will refer to the total debt as the gross debt, and the portion of the debt held by the public as the net debt. The reason for this will become clear below. The distinction is needed because the internal structure of the debt affects the way the government has to manage its debt payment obligations, and because this key fact is almost never mentioned in discussions of the debt by the news media. To understand the origins and future of the debt it is necessary to understand how the two parts of the debt differ - failure to do so by politicians and the media has contributed to public misunderstanding of the debt.
The distinction between the gross debt and the net debt is debated by economists. The debate is spurious. The significance of the difference rests in the function of the net debt: Which part of the total debt affects interest rates, inflation, economic growth, and unemployment ? Careful analysis (i.e., not sloppy media reporting or politicized "analysis") reveals that the part of the debt that affects the economy is the net debt of $12.3 trillion, and not the gross debt of $17.3 trillion. This is because the intragovernmental debt does not affect the economy in the same way that the debt held by the public does because the intragovernmental debt is a debt that the government owes to itself, but not to private investors, foreign banks, and other non-government actors. As I will discuss later, this means that intragovernmental debt does not affect the economy the way the net debt does. If one were to use the analogy of the government to a family household then you would need to imagine a family that had created a "debt" that it owed to itself, perhaps a commitment to "pay" itself a future amount that it periodically took from its regular earnings (But this is to use "debt" to mean something else than its ordinary meaning - such a misuse of words has become common in recent discussion of the debt and related topics, as I'll show below). Such a payment is usually called "saving". For what? Retirement is the conventional answer. If so, then you could legitimately compare such a payment to social security and Medicare payments. But I think anyone would agree that such a comparison has not been part of public discussion of this subject since 2009. Why? Because public discussion of the debt has been driven by fear of poorly understood headlines like "the national debt is now bigger than the GDP", and neither our political leaders nor the media have offered competent analytical context. The result has been an unfounded and irrational fear of the debt - debt dread.
