Disclaimer: I am not an economic expert by any stretch of the imagination. I hold a minor in economics which basically means I can remember a few graphs from my college classes. However, I do love to learn about this topic, and thought I’d try to get my head around the current debt crisis. I’m tired of being fed information on the topic and plan to research the facets of this crisis, with that research being posted here for both of our benefits (I hope).

What is national debt? 

From Merriam-Webster, debt is at it’s most basic:

something owed

Our national debt is the amount of stuff (usually denominated in our own currency, the US$) our government cumulatively owes to other entities. Stated in another way, it’s the amount of money that we have borrowed from somebody else (and are obligated to repay).

There is also another way to view the national debt, as an investor/investment relationship. The investment is our guarantee of future payment, (through the offering of Treasury securities) and the investor is whomever purchases the security. We get their cash and they get our promise of a future payment based on our spectacularly reliable economy 😉

One of these views sounds much more “glass is half full”, and the other sounds much more stodgy. One paints debt in a favorable light, and the other alludes to it’s negativity. Any guesses as to which view our leadership has been following over the last 30 years?

How does a national credit transaction occur? 

In its most simplest form, our government says “Hey, we could use some money to do xxxxxx. We really need the money NOW, and we’re willing to pay it back in the future, plus interest if someone will just give us some cash” The government then issues securities to the public to raise that financing. John Doe (or China) then buys those securities and looks forward to the interest payments (or guaranteed value increase, depending on the security) that go along with them.

According to the National Treasury website, national securities are issued by the U.S. Department of the Treasury, and the Federal Financing Bank services those obligations.

What types of securities are there?

  • Bills – T-Bills (short for Treasury Bills) mature within one year of their issue (usually 3, 6, or 12 months), and are thus considered a short-term security. A T-Bill is purchased for less than its face value by an investor, and at maturity the government pays the full face value of the bill to the owed. For example, a $1000 face (par) value bond is purchased at a price of $9750, yielding the investor the face value (or a profit of $250) upon maturity in one year.
  • Bonds & Notes- These are investment purchases that pay a fixed rate of return every six months until maturity. Notes mature between 1-10 years after issue, and bonds mature greater than 10 years after issue.
  • TIPS – These are inflation protected securities where the principal value is adjusted for inflation every 6 months.
  • U.S. Savings Bonds – Similar to regular treasury bonds, only they are solely payable to the issued person.

Why do we have debt? 

Opinions vary as to why our government is in such a pickle. To answer this question, we’ll need to look at governmental spending. The absolute most interesting way to view government expeditures is through the Death & Taxes poster . I first heard about this great resource at GetRichSlowly.org. By viewing this poster, it’s easy to grasp in a moment which government departments and programs are the largest spenders. Note: the graphic below is just for kicks, to get a good look at the poster, click here.

According to the D&T poster, the 2011 Federal Discretionary budget is $3.834 Trillion.  The largest recipient of this money is the Department of Defense/National Security Spending, at $895 Billion, a number that has increased by 6% from 2010, and 134% since 2001. Whoa. The next highest spender is the Social Security Administration, at $730 Billion (an increase of 4% from 2010, and 39% from 2001). Third in line is Income Security (Federal retirements?) at $580 billion (a 15% decrease from 2010 and an 89% increase from 2001). Fourthly is non-military/national security discretionary spending, at $520 Billion (a 6% decrease from last year, and a 29% increase from 2001). Fifth and sixth are medicare and medicaid which result in a combined spending of $788 billion (up 8% from 2010, and 87 percent from 2001). The sixth place spot is held by a heftier contender, an indicator of the giant pickle: National Debt Interest ($251 Billion, up 34% from last year!).

In a more eye pleasing format:

  1. D of D/National Security              – $895 billion
  2. Medicare & Medicaid                     – $788 billion combined
  3. Social Security Administration   – $730 billion
  4. Income Security                               – $580 billion
  5. National security discretionary   – $520 billion
  6. National Debt Interest                   – $251 billion

It’s easy to see that little cuts here and there can add up, but the real elephant in the room is the combined defense and so-called entitlement spending. In our current two party system, one loves cutting taxes and increasing defense spending, and the other holds a death grip on social security and medicare. THIS IS CRAZY!

Looking at governmental receipts (yep, you guessed it, just a fancy word for income), this year’s $2.567 Trillion is 19% greater than last year’s, and 8% greater than 2001. The largest chunk of receipts is due to income taxes, at $1.121 Billion (up 20% from 2010, though down 8% from 2001). Coming in second is social insurance/Retirement receipts at $934 Billion (up 7% from last year, and 10% from 2001). Corporate and various other taxes comprise the remainder. And then, of course there’s the $1.267 Trillion budget deficit.

What has been the historical national debt?

According to Wikipedia, our country has nearly always carried a slight debt. The Treasury department once again provides us with the historical numbers for debt. Using these Treasury listed historical debt numbers here and here, and the Bureau of labor statistics inflation calculator, I’ve created this graph detailing the inflation-adjusted historical debt:

From 1950 to 1980 the national debt (in 2010 dollars) remained consistently close to the $2 trillion mark. Beginning in the early 1980’s, this number began to scale up dramatically, passing $4 trillion in 1986, $6 trillion in 1992, and $8 trillion in 2003. Uh-Oh. What accounts for this increase? Was it due to increased spending, decreased receipts, or a combination of both? In the interest of keeping this article relatively short, I’ll set that issue aside for later study 🙂

Have we faced a debt crisis like this one in the past?

Yes… kind of. During the late 1940’s, the national debt as a percentage of GDP (Gross Domestic Product, a measure of a country’s production) reached a peak of 94%. Hmmmm, didn’t a major event happen around that time? That’s right, WWII was just ending, and the U.S. had borrowed like crazy to fund its battles. Additionally, GDP growth had leveled and even dropped during the war years, as US resources (including men) were routed to military operations. Post-war the GDP experienced healthy growth as factories once again produced goods at capacity. At the same time, government spending dropped drastically post-war from the $100 billion that was being spent at the height of the period, down to a sustainable $40 billion. They spent, but then they cut back. Common sense, no?

Coming Soon: Part II – The Present Pickle, including the debt ceiling and economic indicators