The Budget and the Debt

There’s A Deal

The House of Representatives is threatening to impeach the President.  The Senate continues to appoint Federalist Society members to the Federal Courts.  Former Special Counsel Robert Mueller will appear today in the House, FBI Director Wray spent hours in the Senate yesterday morning.  

But despite all of the controversy, the President and Congressional leaderships reached a deal yesterday.  They have all agreed:  raise the deficit ceiling by $320 billion and allow the government to keep borrowing money until after the 2020 elections. This will avoid a government shutdown, and allows increases in both the domestic spending programs the Democrats want, and defense programs for the President.

Almost everyone seems happy with the deal.  The only downside:  the United States will spend a trillion dollars more than it brings in this year. The US government debt is the total amount US government has spent more than it has brought in. It stands at $22.5 trillion  (here’s a website with a continually running total.)

No Good Guys

It’s not a story of good guys and bad guys.  The old saw; “Democrats spend and Republicans save” really doesn’t mean much anymore.  No one, on either side of the political aisle, seems to be interested in the debt. That is, with the exception of Senators Rand Paul and Mike Lee, who decided to make their “stand” on the deficit by opposing legislation to provide for first responders injured or sickened by 9-11.  

It’s great the Paul and Lee are “worried” now about the impact of the deficit.  But it’s too bad that both weren’t worried when the “Trump Tax Cut” lost $1.2 Trillion in government revenues by giving tax cuts to corporations and the wealthy.  Paul and Lee fell right in line with the Republican majorities on that one.  

It makes the “tax and spend” Democrats look a little more realistic.  At least they want to try to cover the costs, rather than just spend money that doesn’t exist yet.  So where does the “debt” go, who is the great “creditor” to the United States?

Who Owns the Debt

Part of the $22 trillion (27%) is intra-governmental debt.  Put simply, the Treasury Department borrows money from other funds already held by the government, intending to pay it back.  The most familiar fund involved is Social Security funds.  Social Security has almost $3 Trillion in reserves to back its obligations to retirees. That money isn’t “gone” and as many suggest, it wasn’t “stolen” by Congress.  The Treasury Department has invested that money, in part by buying US Government Bonds.  Those bonds are some of the safest investments available.

What do those bonds do? They help finance the US Debt, so to say that Social Security Funds are used to finance the debt is a true statement.  But those bonds are on a regular payoff schedule, just like the US Bonds many Americans hold.  So the Social Security money isn’t “gone,” it’s invested.  Should the US Government default on those Bonds, Social Security will be a relatively small part of the huge crisis the world would confront.

Another part of the US Debt is held by Federal Retirement Funds, invested in the same way.

The remaining 73%, or $15.6 trillion, is owed to “the public”.  A little less than half of that is owed to foreign countries, with China holding around $2 trillion and Japan a little over a trillion.  They are holding various types of bonds, just like the retirement and social security investments do.  By “investing in America,” China gains some control over the American economy.  But it also links China to America’s success.  If the US Government were to fail to pay it’s debt, China would be left holding bad investments.

That would have a dramatic negative impact on their economy as well.

So What

So, with all of this debt held by varying individuals, banks, governments and the US government itself, what’s the down side of more debt?

Just like an individual owning a lot of credit card debt, the US government has to pay interest on the debt to all of those bondholders.  Currently the government has to budget $319 billion annually to pay for interest.  This is out of a $4.4 trillion budget, or about 7% of the budget. As the debt increases, so will the interest.  Projections indicate that the interest owed will increase to over $900 billion per year in the next ten years.

So increasing amounts of money that the government could spend for all sorts of other programs, from defense to healthcare, will be spent to pay for interest.   Just like an individual owing lots of credit card debt, more and more of US income becomes payment on the debt, rather than for buying products.  

We are spending now to pay later.