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The National Debt – 101

There’s often confusion about the definition of the national debt and what it actually is. In the simplest terms, it is the debt the nation has accumulated over many years of spending more money than it collects through taxes and other sources.

Our founding fathers believed it was immoral to spend more than the government collected during one generation. Any excess spending would pass a debt along to the next generation, and therein lied their perception of immorality. The founders believed the government should be self-sustaining from year to year, generation to generation.

According to the Congressional Budget Office our elected officials managed to avoid accumulating new debt only between about 1830 and the years just prior to the Civil War. Today the national debt stands at about $16.4 trillion, and is increasing at the rate of nearly $4 billion each day. While long-term forecasts are uncertain and vary based upon which organization is analyzing various tax and spending scenarios, the general consensus predicts reaching $20 trillion in national debt during the decade of the 2020’s.

The national debt is actually composed of two major components. The public debt is the money owed to those who buy Treasury Bills, U.S. Savings Bonds, Notes and other interest-paying instruments sold by the Federal government. The public debt is held by individuals, foreign governments, corporations and all others who invest their money in the government with the promise that the principal will be returned with interest at some future time. At present about one-third of the public debt is held by foreign governments with China and Japan leading the pack. The second and much smaller component is known as intragovernmental holdings. The government borrows from various special trust and revolving funds (such as the Social Security Trust Fund) to pay for its current operation and must re-pay those debts.

The national debt is often compared to the Gross Domestic Product (GDP) of the nation. The GDP is the actual market value of all goods and services produced in the U.S. in one year. It includes the value of automobiles sold, movie tickets, groceries and every other product or service one can imagine. It’s a bit like the “Total Revenue” line near the top of your income statement. The ratio between the national debt and the GDP measures the overall health of a nation’s economy. As of January, 2013 the ratio stood at 109 percent, that is, $16.4 trillion in debt divided by $15.09 trillion of GDP.

There’s little any one of us can do to eliminate the national debt, which would require a contribution of about $53,000 from every American man, woman and child to retire it completely. Yet, surprisingly, the Department of the Treasury, ever hopeful, gives each of us exactly that opportunity. By visiting www.Pay.gov you can simply enter your checking or credit card information and contribute as much as you wish toward retiring the national debt!

B2B CFO®

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