What is the National Debt?

What is the National Debt?

That was the response that I received the other day when I did a little “survey” of the average American’s knowledge of what is becoming a major issue in the United States.  This is sad, as this “quote” National Debt, could affect the way we live in the years to come.  Our purchasing power, the value of the dollar, our standard of living, our international competitiveness, and even the potential threat of bankruptcy is very real.  As we read about Ireland and Greece, I hope that discussions are started at all levels in our government as to what the United States has to do to avoid the same situation.  But the American taxpayer needs to understand what is happening and why we need to take action now to avoid a Federal collapse.

I like to think of the National Debt as a United States MasterCard that we have “maxed out.”  The numbers are hard to imagine.  Most people understand dollars in thousands.  A car costs so many thousand dollars, a house is so many thousand dollars, but billions and trillions are a little beyond our normal comprehension.

There was an article written about 25 years ago entitled, What’s the Problem?  It stated the following:

“John Doe received $25,000 last year in wages.  He has no other source of income. During this year he spent $30,000 for food, clothing, shelter, recreation, and a small boat.  To cover his deficit – the difference between what he received and what he spent – he borrowed $5,000.

The federal government, like John Doe, receives and spends money each year.  The money the government receives comes mostly from taxes.  When the amount the government spends in any given year is greater than the amount it takes in, it incurs a deficit.”

Today, our debt is nearing $14 trillion dollars.  Now, I have heard several people, economists and politicians included, say that “we are passing this debt onto our grandchildren.”  Unfortunately, this creates the impression that the problem exists only in years to come.  This is very wrong.  Let me explain.

First, over 25% of our National Debt is now held by foreign countries.  At any given time, these countries could “cash out” their holdings and the United States would have to raise trillions of dollars to pay them off.  Or, these countries could stop buying our securities.  You may say so what.  The problem is that we have to continue to sell new securities to replace the securities that are maturing.  We do not have the money to “retire” this debt as a corporation might have.

Second, the third highest and growing number in the annual budget prepared by Congress each year is the interest on the National Debt.  You have heard the saying that “there is no free lunch.”  Statistics from the Congressional Budget Office as of October 2010 indicate that the monthly interest on the Public Debt is $24,142,491,931.22.  As I mentioned, if you think of the National Debt or Public Debt as a Master Card, this $24 billion dollars is the minimum payment that we must make to keep from defaulting on our debt.  Keep in mind that this $24 billion dollars is at today’s low interest rates.  If rates go up, the cost of this interest will also go up.  So we are not passing all the debt onto our grandchildren as the politicians would have you believe.

Third, the interest that has to be paid is reducing the amount of money that the Federal Government can spend to address current issues.  It is slowly moving up to exceed the amount we spend on defense and our entitlement programs like Medicare and Social Security.  If you think in terms of disposable income for a family, after the major expense items are paid by the government, the rest of the budget is like the amount of money left over after the rent, food, utilities and other expenses have been paid.

Lastly, as a country, we have not been able to control our spending.  And it appears that we have no plan.  As long as our current spending exceeds our incoming revenue, we will keep adding to the National Debt.  I will get excited when the Republican Party addresses the problem that currently exists.  Our new Congress will have to address the issue of the National Debt but neither party has a track record of fiscal accountability.  Time is running out.  What is the National Debt?  In a very short time, every American is going to find out.

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Written by
Donald Wittmer