The national debt of the United States is the total amount of federal debt owed by the government to holders of Treasury securities. At any given point in time, the national debt equals the face value of all outstanding Treasury securities. The current interest rates are a result of economic conditions. The government borrows from trust funds to pay for Government programs.
Interest rates are a byproduct of economic conditions
Economic conditions and national debt are two of the major drivers of interest rates. They affect the cost of borrowing, and are both irreversible. The Federal Reserve is unable to monetize much of the nation’s debt, and the growing national debt threatens to push interest rates even higher. In the meantime, the financial markets may lose faith in the federal government’s ability to manage its debt over the long run, thereby baking a risk premium into interest rates.
The projected doubling of the nation’s debt will raise interest rates by 3 basis points, and would require a rapid acceleration of offsetting factors to maintain current interest rates.
Government programs are financed by borrowing from trust funds
Borrowing from trust funds is a common way for the government to fund a variety of programs. Trust funds receive revenue from earmarked taxes and other revenue collections and make payments to recipients who meet eligibility requirements. There are over 150 federal trust funds, including funds for Medicare, retired federal employees’ pensions, airports, infrastructure construction, and more. These funds are restricted from being used for general government spending, so they are used to pay for specific programs. However, borrowing from these funds increases the national debt and adds to the cost of servicing the debt.
Unlike private-sector trust funds, federal trust funds are not held by trustees. Instead, they serve as accounting mechanisms that track the inflows and outflows of specific government programs. The largest federal trust fund is used to finance Social Security and portions of Medicare. It also finances highways, mass transit, and government employee pensions.
Presidents have added to the debt
Every president since Herbert Hoover has added to the national debt, resulting in a staggering amount of debt. The debt is comprised of public debt, intragovernmental debt, and debt owed to foreign governments. The public debt is made up of Treasury bills, notes, and bonds, as well as debt owed to the Federal Reserve and foreign governments.
Presidents have added to the national debt in two main ways: war and economic growth. Presidents often face unforeseen challenges that take precedence over balancing the budget. The largest increases in national debt are associated with major national crises. For example, the Pearl Harbor attack, the 2008 financial crisis, and the COVID-19 pandemic all contributed to substantial increases in the national debt.
Plans to reduce the debt
While the federal government borrows money to pay its bills, it has also increased its debt. The increase is due to higher spending and lower tax payments by middle and lower income people. This has led to an estimated deficit of $3.8 trillion by 2020. This is equal to about 17% of GDP. While this is a large number, it does not reflect the full scale of the problem.
According to the government, nearly half of the national debt is owned by foreign investors. The ratio of foreign ownership to domestic saving is likely to increase over the next 25 years, resulting in a transfer of resources and a negative change in the terms of trade.
Cost of financing the debt
The cost of financing the national debt will increase significantly during the next few years due to rising interest rates and high inflation. As of 2022, interest costs will exceed $400 billion, an increase of 13 percent from the current fiscal year. Higher inflation will increase the face value of Treasury securities, driving up interest costs. While inflation has been low over the past few decades, it spiked in recent years due to disruptions in the supply chain, a war in Ukraine, and a pandemic in Japan.
Interest costs will continue to rise. By 2026, interest costs will be nearly three times higher than in the last decade. By 2052, interest costs will account for nearly 40 percent of the federal budget. This is the highest percentage ever. The rise in interest costs is a result of the Federal Reserve’s large holdings of Treasury securities.