What does US Debt mean?

Watch the video above for an easy explanation of the US Debt situation.

The US adds debt every year by spending more and collecting less. This continues to happen because the two sides of government cannot agree on anything.

 Can it ever be paid off?

Many underline the fact that the pressing US debt issue has not received enough attention:

The federal government of the United States owes an amount that manifests itself as the “national debt” of the States.  What does this really mean?

The measure of this debt is a value of the Treasury safe keepings at a point of time that were issued by the Treasury along with other federal government agencies. The terms national debit and national surplus refer to the federal government budget, balanced year after year, it is not the collective total. A dearth year raises the debt as more money is spent than received. Debt held by the public, like the Treasury securities controlled by investors from outside the federal government, including few  individuals, corporations, the Federal Reserve System. Intra-governmental debts are held in accounts managed by the federal government that own beneficiaries, such as the Social Security Trust Fund. Debt held by government, represents the increasing leftovers, such as increasing interest earnings of the accounts that have invested in Treasury securities. Government debt escalates as a result of government spending, and declines from tax – both fluctuate during the course of a fiscal year.

The US public debt was a share of Gross Domestic Product (GDP) that increased through wars and depressions, which subsequently declined. Debt held by the public as a share of GDP peaked soon after World War II. That was a hike of 113% of GDP in the year 1945, but then it was demolished over the next 35 years. On the 29th of April this year the debt held by the public was $13.8 trillion, that’s about 76% of the previous 12 months of GDP. Inter governmental holdings were worth $5.3 trillion, giving a combined gross national debt of $19.1 trillion which is about 106% of the previous 12 months of GDP. About $6.2 trillion, approximately 45% of the debt held by the public was possessed by foreign investors. The largest was the People’s Republic of China and Japan. China having $1.25 trillion and Japan $1.15 trillion as of February this year. The United States public debt is articulated as a ratio of public debt to the gross domestic product (GDP). The ratio of debt to GDP may diminish as a result of a government excess as well as the growth of GDP and inflation.

How exactly do we go about calculating the burden of debt?

GDP is calculated as the total size and output of the economy. This measure of the debt burden is the size relative to GDP, called the “Debt to GDP ratio.” Mathematically, this is the debt divided by the GDP amount. The Congressional Budget Office which includes historical budget and debt tables along with the annual “Budget and Economic Outlook.”  The ratio can also decrease as the debt grows, but till the rate of increase in GDP is greater than the rate of the increase in debt. On the other hand, the debt to GDP ratio can increase while the debt is being reduced, that is if the decline in GDP is adequate.

From the September of 2014, foreign person owned $6.06 trillion of the U.S. debt, approximately 47% of the debt held by the public of $12.8 trillion and 34% of the total debt of $17.8 trillion. The main holders were China, Japan, Belgium, the Caribbean banking centers, and exporters of oil. The share held by foreign regimes has grown-up over time, growing from 13% of the public debt in 1988 to 25% in the year 2007.

As of September 2014 the largest single holder of U.S. government debt was the nation of China, with about 21% of all foreign held in US Treasury securities (10% of total U.S. public debt). This exposure to potential financial and political risk has caused foreign banks to stop buying Treasury securities and to start selling them heavily, this was addressed in June of  2008 report issued by ‘the Bank of International Settlement’s, which indicated, “Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely.”

Paul Krugman says, “It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.”

A lot of American along with other economic analysts have articulated certain concerns on account of the People’s Republic of China’s “extensive” holdings of United States government debt . The National Defense Authorization Act of the year 2012 included a provision requiring the Secretary of Defense to mien a “national security risk assessment of U.S. federal debt held by China.” The Department issued the report in July stating that “attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States. As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options, whether in the diplomatic, military, or economic realms, and this would remain true both in peacetime and in scenarios of crisis or war.” According to the Government Accountability Office, the United States is on a “fiscally unsustainable” route as the probable future increases in Medicare and Social Security spending.

It’s a forty year old controversy with Saudi Arabia:

In July 1974- A steady drizzle gave way to overcast the skies when Mr. William Simon, was newly appointed as U.S. Treasury secretary, and as his deputy Gerry Parsky, stepped on an 8 a.m. flight from Andrews Air Force Base. The oil crisis had hit home that year. Officially, Simon’s two-week trip was publicized as a tour for the economic diplomacy taking them across Europe and the Middle East but the actual mission, kept in confidence only to President Nixon’s inner circle, would be a four-day halt in Jeddah, Saudi Arabia. The goal being to counterbalance crude oil as an economic weapon and to find a new way to convince a kingdom to finance America’s growing deficit with its new petro-dollar wealth. According to Parsky, Nixon made it ample clear that there was simply no coming back empty handed. Failure would jeopardize America’s financial health but would also give the Soviet Union a door to further inroads into the Arab world. It “wasn’t a question of whether it could be done or it couldn’t be done,” said Parsky, at 73, one of the few officials with Simon during the Saudi talks. While oil collapsing deepened the concern that Saudi Arabia needs to liquidate its Treasuries to nurture money. The kingdom, using its position in the world’s most important debt market as a weapon, the same as was done with oil in the 1970s. In April, Saudi Arabia warned it would start selling its $750 billion in Treasuries and other assets if Congress passed a bill allowing the kingdom to be held liable in U.S. courts for the September 11th terrorist attacks stated the New York Times.

This was the start of a mysterious arrangement between two nations, which was not known for more than 40 years until now, after Bloomberg News demanded information on the amount of US bonds possessed by the Saudi government. It found out through its recent request from the “Freedom of Information Act” that Saudi Arabia was one of the biggest holders of US debt, with an amount of $117 billion, which currently sums up to a chunk of Saudi Arabia’s foreign reserves which are placed at $587 billion.

What happened to the Asian giants-China and Japan?

Asian stocks wilted on June 1, a Wednesday as a slide in crude oil prices dulled investors’ desire for riskier assets, while the recently upbeat dollar stalled against the Euro and Yen as it followed a mixed bag of US economic data. Investors are cautious ahead of official and private surveys on China’s manufacturing , which will dip more in cold water on hopes that the world’s second-largest economy is growing- up. Crude oil prices pulled back from the eight-month highs, reaching last week amid expectations that a global glut was easing and fell overnight to profit taking. US crude was last down 0.4% at US$ 48.92 a barrel. “The political will of the Opec countries to enact a production freeze is clearly waning. A production freeze is unlikely to come up as an agenda at the June meeting,” wrote Yoshimasa Maruyama, chief market economist in Tokyo.

“A sense of crisis among the oil producing countries seems to have withdrawn following the spike in crude oil prices. Among currencies, the dollar traded at 110.650 yen, having come off a one-month high of 111.455 struck on Monday after Federal Reserve Chair Janet Yellen’s remarks improved prospects for a US rate hike. The euro was at US$1.1134, placing further distance between a two and a half month low of US$1.1097 touched on Monday.US data overnight saw personal income such as housing indicators come in extremely strong. The Australian dollar was steady at US$0.7236 after gaining 0.7% overnight on the local data, moving  away from the three-month low  US$ 0.7145 it touched last week. Sterling was defensive, in its last trading little changed as US$1.4477 after dropping more than 1% on Tuesday after polls showed that those supporting “Brexit” may increase.

On Tuesday, Tokyo’s “Nikkei” ended up 1% for a monthly gain of 3.4%. The MSCI world equity index, which tracks shares of 45 nations, fell 0.1% to 402.57. As stocks slid into the negative region, U.S. Treasuries cut initial losses. The winning is to benchmark US 10-year Treasury notes edged up 1 root point at 1.844% after rising as much as 5.5 root points on Friday. In commodities trade, U.S. crude settled down at 23 cents/ 0.47%, that is at $49.10 a barrel, while Brent crude settled down at 7 cents/ 0.24% that is at $49.69. Gold prices rose $11.71/ 0.97%, to $1,216.91 an ounce.

Image: Flickr