Department of Power Finance

The US government debt recently broke the 13 trillion $ barrier. This may be shocking or puzzling, but also interesting for people who normally are not interested in government economics. It is time to look at how it got so big and where the money does come from.

First what exactly is the ‘government debt’?

The debt comes from the need of the government to borrow money to cover its expanses, when these are greater then the income. The government lends money in a way that it emits US treasury securities, also called bonds. Now these treasury securities make up the government debt, basically they are written promises to be paid back plus interest. These securities have a certain live time like 10 or 30 years in which interest gets paid on them to the holder, and at the end the original amount gets paid back.

Who lends so much money to the US?

These treasury securities are sold on the stock exchange or directly to other nations, companies or individuals. Because you get a constant interest from them and the payback is seen as relatively secure, they are a preferred choice for institutes which have much money and want to invest it somewhere without big risk. Such institutes are banks or insurances, which receive much money from their clients. Also big funds which handle money for social security or retirement programs of nations or companies invest their money in such treasuries. Also there are individuals which save their money for retirement by investing in such treasuries.

How did the debt got so big and why does it get bigger?

The reason that the US government debt got so big, is that the US has had a budget deficit for almost 40 years. And the bad news is that this deficit is also growing bigger since the recent crisis, it went from 400 billion $ in 2003 to over 1.4 trillion $ in 2009. And with the deficit the debt grows of course. And as there has been nearly no surplus years, the debt was not reduced, it just gets prolonged by emitting new securities. If you think of a 10 billion $ security that was released in the 70s and paid back after 30 years, the government had to release a new 10 billion $ security in 2000 to pay the old one back. That is the reason the debt grows so big, just the interest rates are paid, and then the deb is prolonged and even increased because there is an ongoing budget deficit.

By C. Schumann