US National Debt passes $28 Trillion
March 1st, 2021, the US National debt passed $28 Trillion, 5 months after crossing $27 Trillion. The US government spent about $6.5 Trillion in 2020, while tax revenues remained at roughly $3.4 Trillion, leaving a deficit of $3.1 Trillion (more than double their largest deficit ever). With US GDP estimated at around $21 Trillion, the current debt vs GDP ratio has reached over 130 %.
Breakdown of the debt:
- Roughly 78% or about $22 Trillion, is held by the public, such as foreign countries, mutual funds, pension funds and other larger and smaller investors.
- Roughly 22% or about $6 Trillion, is held as intragovernmental debt owed by the treasury to other federal agencies such as Social security trust fund and Military retirement fund.
About $7 trillion of the public debt is held by foreign countries, with top 3 being:
- Japan – 1.256 billion
- China – 1.061 billion
- United Kingdom – 446 billion
The running average of the 4 biggest budget expenses already covers the total tax income of $3.4 Trillion. To balance the budget, they will have to increase taxes or reduce spending. However, there is currently no short-term incentives, for politicians who are running for re-election, to take these unpopular decisions. The current 4 largest budget items are:
- Medicare – $1.2 trillion
- Social Security – $1.1 trillion
- Military – $700 billion
- Debt interest – $380 billion
The topic of the US national debt is complicated, and there are arguments both for and against running a budget deficit. The US have run a budget deficit more or less every year since they came off the gold standard in 1971. The debt interest has passed 10% of their yearly tax revenues, and the current expenses of the other fixed items on their budget exceeds their total revenues. With the debt increasing quicker than the GDP, the warnings signs are many.
Here are some pros and cons about the debt itself.
Pros:
- The US hold the debt in their own currency (USD), giving them better control compared to having debt in a foreign currency. With control over the supply of dollars, they have more options regarding the inflation, and easing the burden of the debt.
- USA is still a leading superpower, with the world’s biggest military.
- They hold by far the largest gold reserves of any country (over 8 tonnes), seen by many as the alternative/real form of money.
Cons:
- Massive outstanding future liabilities in social security and medicare.
- A current workforce of only 150 million of a total population of 330 million.
- The old age dependency ratio is expected to grow in the coming years.
- No incentives for politicians to pay down debt (increasing taxes or reducing spending are both unpopular actions)
- The size of the debt vs the GDP has surpassed 130 %, with the rate of debt increasing quicker than the GDP.
Considerations:
While running a deficit to rebuild the country, or dampen a possible recession can have positive long-term effects, there are many things to consider. One of the worries is that the current generation’s spending, resulting in higher debt, imposes a cost for future generations. Higher debt levels along with higher interest payments will eventually have to be paid down. The end solution will likely have to be increased taxes, reduced spending or increasing inflation down the road. To what extent can the current generation live off future generation’s sacrifices? Time will tell, in the meantime the can is kicked further down the road.
Other statistics:
- At the end of 2019, 11 out of 27 EU Member States reported debt to GDP ratios higher than the reference value of 60 %.
- As of 2019 Greece national debt was about $409 billion, with a GDP of about $209 Billion. This gives Greece a debt vs GDP of 195%.
- As of September 2020, Italy’s total public debt is estimated to be over $3.070 billion, with a GDP of approx. $1.800 billion. Giving a debt to GDP of 170 %.
- US official gold reserves as of January 2021 total 261.5 million troy ounces (over 8 000 metric tons). As of 2019 it is estimated that all the gold ever mined totals about 190 000 metric tons.
Sources:
https://www.usdebtclock.org/
https://home.treasury.gov/
Federal Reserve, U.S. Treasury