What is the US public debt and why is it constantly growing

US, WASHINGTON (ORDO NEWS) — The size of US government debt set a new record, reaching $ 24.5 trillion. Since the beginning of Donald Trump’s presidency, he has grown by $ 4.5 trillion, and over the eight years of the reign of his predecessor, Barack Obama, has almost doubled from $ 10.63 trillion.

What is a public debt?

This is the debt of the US federal government to its creditors. Washington lends money to cover the budget deficit and pay all the necessary expenses – for health, infrastructure, defense and so on. It’s like taking a loan to pay for a rented apartment.

The US government debt consists of two parts: internal and public – now their size is approximately $ 5.9 trillion and $ 18.6 trillion, respectively. The first is formed by the debt of the US budget to government agencies, for example, state pension funds. They have the right to invest available funds in government securities – non-market bonds of the state loan. The beneficiary of such securities is, for example, the Social Security Trust Fund, an organization that receives tax deductions and distributes pensions and other compensations. This fund now accounts for about $ 2.9 trillion of US government debt.

The public part of the public debt is treasury securities owned by private individuals, corporations, the Federal Reserve System (FRS) of the United States, as well as state and foreign governments. United States bonds are the most popular securities among investors around the world. China, which owns $ 1.09 trillion of treasury securities, is most willingly investing in the US public debt. The most common US bonds are ten-year bonds. Their yield is small, but they are reliable securities with a low probability of default, which can always be sold on the open market at current prices without serious losses.

Why is public debt constantly growing?

Because the budget deficit is constantly growing, which has to be closed by issuing public debt. The budget hole could also be patched up by raising taxes or cutting costs, but both of these options would adversely affect economic growth and cause dissatisfaction among citizens. The US does not experience such a choice: the US government debt is denominated in the currency that Washington has direct control over the issue, and if necessary, the Fed is always ready to turn on the printing press to redeem debt obligations. No other country in the world has such an opportunity.

For the same reason, high external debt will not cause default in the country. Default, that is, non-payment of interest or principal on debt obligations, is possible only when the state is not able to take new loans to cover old ones. In the United States, this situation can happen only in one case – if Congress prohibits the federal government from raising the limit of public debt. In the summer of 2011, during the presidency of Barack Obama, the United States was on the verge of a technical default, but avoided it by simply raising the bar by $ 2.1 trillion.

The only thing that really excites Americans is the ratio of public debt to GDP. According to World Bank estimates , a country’s national debt is considered problematic when it is 77% of the state’s annual GDP. However, many countries have been living with great debt for decades, for example, in France, Italy and Japan, this figure exceeds 100%. The United States is no exception – in recent years, the country’s public debt is several percent higher than GDP (in 2019, this indicator was at 108.3%).

What is the position of the current administration?

The current US debt problems are the result of the acute financial and economic crisis of 2007-2008. Since then, the country has had to raise the ceiling of public debt several times, which led to political battles between the previous Democratic administration of Barack Obama and the Republican opposition in Congress.

Trump, during the 2016 election campaign, claimed that he would solve the country’s huge national debt problem in two presidential terms or “in eight years.” He expressed confidence that after his tax reforms and the revision of trade agreements there would be economic growth that would allow the United States to pay the debt in cash. Already at the head of state, the Republican said that the money received from the US-imposed trade duties will go to pay off the country’s national debt.

The 45th president and his Republican comrades-in-arms were considered “hawks” on the public debt issue, while Democrats traditionally took his growth more calmly. But since 2017, the parties seemed to have switched roles – now Trump not only supports raising the ceiling, but also advocates the complete abolition of the procedure for periodic consideration of this issue by Congress, which would allow the federal government to borrow money without restrictions. Democrats, in turn, insist that Trump’s ideas (for example, the same tax reform) will lead to a strong inflation of the public debt.

Since January 1, 2020, US government debt has increased by $ 1.5 trillion. President Donald Trump said he is not worried about raising debt in connection with the allocation of trillions of dollars to overcome the consequences of the coronavirus pandemic.

According to experts of the International Monetary Fund, released last week, the US national debt due to measures taken to counter the spread of coronavirus will grow in 2020 to 131.1% of GDP. According to the Bureau of Economic Analysis under the US Department of Commerce, the country’s GDP at the end of last year was $ 21.73 trillion.

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