The majority of the national debt is debt held by the public. The government owes it to buyers of U.S. Treasury notes including individuals, companies, and foreign governments. The remaining portion is intragovernmental debt. The Treasury owes this debt to its various departments that hold Government Account Series securities. The biggest owner is the Social Security Trust Fund. These Government Account Series securities have been running surpluses for years, and the federal government uses these surpluses to pay for other departments. They will come due as people born from 1946 to 1964 retire over the next two decades.
The U.S. National Debt Over Time
The chart below tracks U.S. debt milestones from 1989 to 2021. It has increased by more than 800% during that time. In February 2022, the national debt exceeded $30 trillion and in October . This figure includes both debt held by the public as well as intragovernmental debt.
Why Does the U.S. Have So Much Debt?
There are a few significant reasons as to why the size of the national debt is so big.
Federal Budget Deficits
The national debt is an accumulation of federal budget deficits. Each new spending program and tax cut adds to the debt. The largest deficit thus far goes to President Barack Obama. He added $8.3 trillion to the debt, a 70% increase. That’s due to the American Recovery and Reinvestment Act (ARRA) stimulus package, which helped resolve the 2008 financial crisis. He also cut taxes and increased military spending. Although the national debt under Obama grew the most dollar-wise, it wasn’t the biggest percentage increase. That honor goes to President Franklin D. Roosevelt. He only added about $236.1 billion between 1933 and 1945, but that was an increase of about 1,048%. He did this to fight the Great Depression and prepare the U.S. to enter World War II at the start of the 1940s. President Donald Trump is the second-largest contributor to the debt dollar-wise. He added $7.8 trillion to the debt. This was a 39% increase. As of Feb. 1, 2022, President Biden has added $2.26 trillion to the national debt since taking office on Jan. 20, 2021. This outpaces both President Obama and President Trump’s spending.
Social Security Trust Fund
Every president borrows from the Social Security Trust Fund. Over the years, the Fund has taken in more revenue than it needed through payroll taxes leveraged on the baby boomer generation. Ideally, this money should have been invested to be available when members of that generation retire. Instead, the Fund was “loaned” to the government to finance increased spending. This interest-free loan helps keep Treasury bond interest rates low, allowing more debt financing. But, it must be repaid by increased taxes as more individuals retire.
Investment From Other Countries
Foreign countries like China and Japan buy Treasurys to invest their export proceeds that are denominated in U.S. dollars. They are happy to lend to America—their largest customer—so that it will keep buying their exports.
Low Interest Rates
The U.S. government has benefited from low interest rates. It couldn’t keep running budget deficits if interest rates skyrocketed. Why have interest rates remained low? Purchasers of Treasury bills are confident that the U.S. has the economic power to pay them back. During recessions, foreign countries increase their holdings of Treasury bonds as a safe-haven investment.
The Debt Ceiling
Congress sets a ceiling on the debt but raises it frequently. Since 1960, Congress has modified the U.S. debt limit 78 times, with more sure to come. President Trump signed the Bipartisan Budget Act of 2019 that suspended the public debt limit through July 31, 2021. On August 1, 2021, the debt ceiling became $28.4 trillion—equal to the amount of the national debt. On December 14, 2021, the debt ceiling was raised once again, by $2.5 trillion—the new limit is around $31.4 trillion. This increase constituted the largest dollar amount increase of the national debt.
How the Large U.S. Debt Affects the Economy
In the short run, the economy and voters benefit from deficit spending because it drives economic growth and stability. The federal government pays for defense equipment, health care, building construction, and contracts with private businesses. New employees are then hired and they spend their salaries on necessities and wants, like gas, groceries, new clothes, and more. This consumer spending boosts the economy. As part of the components of GDP, federal government spending contributes around 7%. Over the long term, debt holders could demand larger interest payments, because the debt-to-GDP ratio increases, and this high ratio of debt to gross domestic product (GDP) tells investors that the country might have problems repaying them. That’s a newer—and worrying—occurrence for the U.S. Back in 1988, the national debt was only half of what the U.S. produced that year. Lower demand for Treasurys also puts downward pressure on the dollar because its value is tied to the value of Treasury securities. As the dollar value declines, foreign holders get paid back in a currency that is worth less than when they invested, which further decreases demand. Many of these foreign holders would become more likely to invest in their own countries. At that point, the U.S. would have to pay higher interest payments. Congress knows a debt crisis isn’t far away. In less than 20 years, the Social Security Trust Fund won’t have enough to cover the retirement benefits promised to people born from 1946 to 1964. That could mean higher taxes once the high U.S. debt rules out further loans from other countries.
