The National Debt
Is it possible to wrap our minds around a $16 trillion dollar debt? Most of us have a hard time comprehending millions or billions. A trillion dollars would be one thousand billions. To put that in some sort of perspective, spending $1,000 an hour, forty hours a week, it would take you 480 years to spend a billion dollars. Now multiply that a thousand times and you have some clue about a trillion dollars. Put me down for that little spending job.
The United States GDP (Gross Domestic Product), the total value of all the goods and services produced are a little over $16 trillion dollars. What exactly does that mean? Is there actually $16 trillion dollars in cold, hard cash running around out there somewhere? The short answer is no.
According to the Federal Reserve, there is approximately $829 billion of actual cash and coin in banks and wallets across the USA. Ones and zeros on computer screens around the world represent the difference between $16 trillion and $829 billion. In other words, that money doesn’t exist in the physical world. It only exists, and moves, electronically.
Who Owns Our Debt?
If you asked 100 people on the street, “Who owns our debt?” you would probably hear China. That answer, of course, would be incorrect. The correct answer is the American People own the bulk of our debt. While its true foreign investors own 47% of our debt, the remaining 53% is busy earning money for the American people. You will find the bulk of our public debt owned by, investors (14%), the Federal Reserve (10%), private pensions, state and local governments, mutual funds (6% each), banks and credit unions (4%), state and local pension plans and savings bonds (2% each).
China, on the other hand, only owns about 7.5% of our debt, followed by Japan (6.9%), the UK (2.8%), OPEC (1.5%) and all other countries (12.7%). Here’s the problem with China. They buy our bonds, our bonds mature and we pay China off. But, they won’t go away. They keep buying our bonds. Why? Even with all our problems and faults we are still the best deal on the planet. In real dollars we owe China about the same amount as any single one of our last three stimulus packages. In theory, we could write them a check tomorrow and never miss it.
Putting Debt In Perspective
It’s not really the size of the debt that causes a problem. It’s our ability to “service” the debt. Suppose you and Bill Gates, one of the richest men in the world, bought a private jet. Which of you would have a harder time making the payments on that jet? I’m guessing you would have a much tougher time than Bill. The size of the debt is no big deal to Bill Gates but it would create a major hardship on you.
There are only three ways to handle debt. You can apply higher payments to the debt. You can increase income. Or, you can use a combination of both. Suppose you are making $30,000 a year. Your mortgage is 30% of your pay. If you get a second job making an additional $10,000 a year your mortgage is no longer 30% of your pay. It’s a slightly lesser amount and therefore your debt is more manageable.
The Federal Government has three areas called mandatory spending. They must pay three things before any other money can be spent. Those three things are Medicare and Medicaid, Social Security and the interest on the debt. The national debt fluxuates up and down every day. Bonds mature and are paid off and the debt goes down. New bonds are sold and the debt goes up. Keep in mind that buying bonds as China does is not buying debt, it’s investing in America.
Some Final Thoughts
We will never pay off a $16 trillion dollar debt. The good news is we don’t have to. During World War II our debt was 120% of GDP. In other words for every dollar we were bringing in we owed $1.20. We did not pay that debt off. We simply increased the income and the debt became more manageable. For some reason our leaders can’t seem to comprehend this process. Rather than encouraging growth they are resorting to raising taxes on producers. I am hopeful that they will quickly see the error of their ways and put us back on the fast track to prosperity. But, I have to honestly say I’m not holding my breath.