The US National Debt is the sum of all outstanding debt
owed by the US Federal Government. The debt is an accumulation of federal
budget deficits. Congress usually raises the national debt ceiling to prevent
the negative consequences of a debt default. In the short run, the economy
and voters benefit from deficit spending. America’s debt is the largest in
the world for a single country.
As of December 17th, 2015, the US national
debt is $18,796 billion, equal to 105% of GDP. So, the debt is more than the
US produces in a whole year. That normally tells investors that the country
might have problems repaying the debt. Furthermore, a study of Reinhart and
Rogoff (1) shows that high public debt (> 90% GDP) stifle economic growth.
This is a new and worrying occurrence for the US.
N.B.:
US Debt per capita 2015: $ 58,940.
US Debt per full-time employee 2015: $ 154,192.
The Federal Reserve Camouflage
Normally at any point, debt owners could demand larger
interest payments to compensate for what they perceive as an increasing risk
they won’t be repaid. The Federal Government can’t keep running up deficits
if interest rates skyrocket, like they did with Greece. Why have interest
rates become so low? This is where the Federal Reserve (Fed) runs in to keep
the interest rate artificial low.
With this ZIRP (Zero Rate Interest Policy) from 2008 till
now the Fed brought down the interest burden on the US National Debt, as show
in the graph below.
So even though there was an increasing risk for not being
repaid, the owners of the US National Debt received less interest from 2008
till 2016 and probably at least seven years further. This ZIRP from the Fed
benefited the budget deficit from the Federal Government during 2008 – 2015
in total for $ 2,838 billion as follows.
The presented (or better polished) budget deficit from
the Federal Government during 2008 – 2015 is very misleading. Without the
ZIRP from the Fed the budget deficit is still 6 – 8% of GDP (based upon the
5% average Fed key rate since 1954).
By keeping the interest rates artificial low, the Fed
helps the government avoid the high-interest penalty it would usually incur
for excessive debt (like Greece did). The Fed Camouflage: ZIRP.
Reducing the US budget deficit and balancing the federal
budget, but not at the expense of cutting vital government functions, such as
defence, education, transportation, social security and medicare, require
making tough, unpopular choices. The revenues (taxes) have to be raised, and
raised dramatically. The average revenues from 1974 to 2013 are 17.4% of GDP.
Without the Fed camouflage the budget deficit 2015 is 7% of GDP.
So the taxes have to be raised by 7% / 17.4% * 100% =
40%.
Is it possible to put the US on a strong fiscal path and
turn federal budget deficits into a balanced federal budget? And who is going
to tell the investors that the US might have problems repaying the US
National Debt?
Who owns the US National Debt?
72% Of the US National Debt is held by the public
(including foreign governments and Fed) and 28% are intergovernmental
holdings (Social Security Funds and other trust funds).
We know already that the Fed draw-up a camouflage round
the federal budget deficit by keeping the interest rates artificial low. But
there is a second camouflage. If China no longer wants to increase their holdings
in US treasuries and intra governmental holdings are exhausted or not willing
who is the Federal Government gone call? Again this is where the Fed ran in
with another camouflage as of 2010; otherwise the US Federal Government would
have defaulted.
Why does the Fed own treasury debt? The Fed acts as
lender of the last resort. The Fed tripled its holdings between 2007 and
2014. That’s when it ramped up its open market operations (Quantitative
Easing). As America’s Central Bank, the Fed is in charge of the country’s
credit, so it really doesn’t have a financial reason to own treasury notes.
The Fed’s been criticized for simply monetizing the national debt. The Fed
purchases treasuries from its member banks, using credit it created out of
thin air. This has the same effect as printing money.
Facing a debt crisis
It’s a dead end street. America is obviously facing a
national debt crisis, or already in a national debt crisis, if it wasn’t for
the camouflages of the Fed. The US Federal Government is keeping up the
appearances of being on a strong fiscal path for the majority of the
population, but the federal budget deficit is not really under
control. The Fed won some time through their camouflages (ZIRP and printing
money). The higher US debt and low interest rules out (further) loans from
other countries and probably intra governmental holdings. A default of the
Federal Government would dramatically affect the economy.
(1) Reinhart and Rogoff, Growth in a time of debt, 2010
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Nico Simons is a Dutch investigative journalist on financial issues,
especially monetary issues. His articles are regularly published on
MoneyInsights.org.
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The author is not affiliated with, endorsed or sponsored by Sprott Money
Ltd. The views and opinions expressed in this material are those of the
author or guest speaker, are subject to change and may not necessarily
reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the
accuracy, completeness, timeliness and reliability of the information or any
results from its use.
