America’s gross national debt hit a staggering $33 trillion for the first time in September, just months after eclipsing the $32 trillion mark earlier in the year.
The United States is also currently spending more to pay interest on the national debt than on national defense, according to the Treasury’s monthly report.
do not miss
In the current fiscal year through August, the Treasury has spent $807.84 billion in interest on its debt securities, while the Defense Department’s budget for military programs totaled only $695.44 billion in the same period.
This is particularly alarming when you consider how much of the federal budget goes to defense, since the United States spends more than any other country.
The last few years have been expensive.
A deficit is what happens when the government spends more money in a fiscal year than it brings in through taxes, and the last few years have been costly for the United States.
Since the start of the COVID-19 pandemic, several major bills have been passed with big price tags, including the American Rescue Plan Act, which cost $1.9 trillion.
The Congressional Budget Office estimates that the debt ceiling package enacted this summer to avoid a national default could result in a deficit decline of $1.5 trillion over the next decade. However, the Committee for a Responsible Budget (CRFB), a nonprofit organization that addresses federal fiscal and budget issues, says the savings could fall to $1 trillion depending on “side agreements” that are left out of the deal.
“Getting the debt under control will require a serious look at health care, Social Security and the tax code,” CRFB President Maya MacGuineas said in a news release.
Much of the borrowing in recent years occurred when interest rates were historically low, but now that they are not, with prices still rising, the cost of this debt will be amplified.
According to the Peter G. Peterson Foundation, nearly $2 billion is spent every day on interest on the national debt alone.
And when the government owes a lot, it becomes harder for corporations to borrow money.
“Federal debt squeezes other debt out of the economy,” Phillip Braun, a clinical professor of finance at Northwestern University’s Kellogg School of Management, told Moneywise last year.
“There is a limited amount of money in the economy. And so, because the government borrows such large amounts, there is a limit to how many people are willing to lend in general in the economy, so other types of borrowing crowd out.”
The government could have refinanced its debt while interest rates were low, but it didn’t.
“Which means that borrowing costs today and in the future are unnecessarily higher because of that,” Braun said.
Read more: Thanks to Jeff Bezos, you can now use $100 to cash in on prime real estate, without the headache of ownership. That is how
So who owns the US national debt?
There are different types of national debt. Think of it like having a credit card, a mortgage, and a car payment: They all represent debt, but they are different.
The U.S. Treasury Department manages the national debt by dividing it into two different types: debt owed by one government agency to another and debt held by the public.
Intragovernmental debt accounts for about $6.8 trillion of the national debt, according to the CRFB.
The much larger portion of the debt is in the hands of the public. Right now, that equates to about $26.2 trillion.
Foreign governments, as well as banks and private investors, state and local governments, and the Federal Reserve, own the majority of this debt, and it is held in Treasury securities, bills, and bonds.
Foreign governments and private investors are one of the largest holders of public debt, with around $8 trillion.
About 50% of this debt is held by domestic public and private entities, while the Federal Reserve Bank owns approximately 20%. But there is good news when it comes to the debt held by the Federal Reserve.
“The Federal Reserve owns a lot of public debt,” Braun said. “The Treasury pays interest to the Fed, but then the Fed turns around and gives it back to the Treasury, which alleviates some of the problems.”
A warning sign
Ultimately, rising interest rates will only exacerbate the national debt, making it more difficult for the government to respond to a slowing economy.
“As we have seen with the recent growth in inflation and interest rates, the cost of debt can increase suddenly and rapidly,” Michael A. Peterson, executive director of the Peter G. Peterson Foundation, said in a statement.
“With more than $10 trillion in interest costs over the next decade, this compounding fiscal cycle will only continue to hurt our children and grandchildren.”
What to read next
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.