Our mountain of debt: The real financial crisis

The Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It’s the national debt.

The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.4 trillion — equivalent to about $37,000 for each and every American. And it’s expanding by over $1 trillion a year.

The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," Federal Reserve Chairman Ben Bernanke recently told Congress.

Higher taxes, or reduced federal benefits and services — or a combination of both — may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year — the largest federal spending category after Medicare-Medicaid, Social Security and defense. It’s quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.

The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.

Alexander Hamilton, the first treasury secretary, said, "A national debt, if not excessive, will be to us a national blessing."

Some blessing.

Since then, the nation has only been free of debt once, in 1834-1835.

The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply — except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy.

The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.

The odometer-style "debt clock" near Times Square — put in place in 1989 when the debt was a mere $2.7 trillion — ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.

The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.

The debt gap is "something that keeps me awake at night," Obama says.

He pledged to cut the budget "deficit" roughly in half by the end of his first term. But "deficit" just means the difference between government receipts and spending in a single budget year.

This year’s deficit is now estimated at about $1.85 trillion.

Deficits don’t reflect holdover indebtedness from previous years. Some spending items — such as emergency appropriations bills and receipts in the Social Security program — aren’t included, either, although they are part of the national debt.

The national debt is a broader, and more telling, way to look at the government’s balance sheets than glancing at deficits.

According to the Treasury Department, which updates the number "to the penny" every few days, the national debt was $11,518,472,742,288 on Wednesday.

The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

By historical standards, it’s not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it’s still a huge liability.

Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.

Where does the government borrow all this money from?

The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world’s safest investments.

That’s one of the rare upsides of U.S. government borrowing.

Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.

But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities.

And if major holders of U.S. debt were to flee, it would send shock waves through the global economy — and sharply force up U.S. interest rates.

As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits.

While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government’s mushrooming debt — and what it might mean for future generations.

If things can’t be turned around, including establishing a more efficient health care system, "We are on an utterly unsustainable fiscal course," said the White House budget director, Peter Orszag.

Some budget-restraint activists claim even the debt understates the nation’s true liabilities.

The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments.

That would put the nation’s full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation.


On the Net:

Treasury Department "to the penny" national debt breakdown: http://tinyurl.com/yrxrsh

Peter G. Peterson Foundation independent assessment of the national debt: http://www.pgpf.org/

"Deficits do Matter" debt clock: http://tinyurl.com/l6mvjb


  1. dtotire


    We have to enact consumption taxes–no two ways about it. We can get ourselves out of the mess we got ourselves into. The idea that cutting taxes on the rich would increase revenue and make the entire country prosperous was a crackpot idea. Instead, we neglected the infrastructure and other investments that would make the country grow.

  2. Concerned Citizen

    The deficit is a symptom, not the problem, along with so many basic infrastructure investments like bridge replacements, school repairs, high speed commuter trains that all continue to languish. Under current trade policies young and old are all fighting over the same shrinking pie. Good paying manufacturing jobs have been given away. Special interest government policies heavily favor transfer payments and war expenditures, within an economy built on low paying service jobs, cheap imported goods, and flaky investments like derivatives. What’s suddenly different is that the symptoms are now undeniably clear. Hopefully Republicans and Democrats alike will agree these are not the assets of a true superpower and that fixing trade policies and fiscal policy are the first steps.

  3. ekaton

    “The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.”

    Could become? COULD BECOME? Add in the mostly unreported in the mainstream media $9-$12 trillion, depending on your source, in guarantees to the major banks, and yes, I’d say that this $20 trillion dollar sword of damocles COULD BECOME a full-fledged economic crisis. How about COULD BECOME an ECONOMIC MELTDOWN of a proportion never seen or imagined in the history of the world.

    Could become. Oh, yeah.

    Kent Shaw

  4. griff

    I’m sure all these people that are so concerned with the national debt are the same ones clamoring for free healthcare and the myriad other forms of government largesse.

    Our tax burden is already suffocating and Obama’s about to renege on his pledge of not raising taxes on the middle class. Are there any more promises yet to be broken by Obama?

    The House just passed a massive taxation scheme in HR 2454 that will increase the costs of virtually everything associated with human existence while fueling another Wall Street binge, not to mention put another nail in the coffin of the twitching remains of American industry.

    We already pay a consumption tax on virtually everything. More taxes aren’t the answer, nor is the debate over who should shoulder the burden.

    “If we can prevent the government from wasting the labors of the people, under the pretence of taking care of them, they must become happy.” – Thomas Jefferson

    “[With the decline of society] begins, indeed, the bellum omnium in omnia [war of all against all], which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.” –Thomas Jefferson to Samuel Kercheval, 1816.

    The Founders believed not in accruing massive debt, but that the United States preserve the nation’s credit rating and ability to borrow if necessary.

    “Though much an enemy to the system of borrowing, yet I feel strongly the necessity of preserving the power to borrow. Without this, we might be overwhelmed by another nation, merely by the force of its credit.” –Thomas Jefferson to the Commissioners of the Treasury, 1788.