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Raising the debt ceiling: What US debt is really comprised of

  • October 12, 2021
  • Front

Odds are you’ve heard news circulating that Capitol Hill is under pressure to make amendments to or raise the nation’s debt ceiling sometime this year, or risk a government shutdown. Members of congress have recently reached a temporary reconciliation to delay a ceiling raise to late November, but the problem still looms. 

This is a common occurrence, actually. The debt ceiling has been raised or revised at least 78 times since 1960, and we think that it’s not likely to stop happening any time soon.   

To those on the outside though, this can just seem like a vague proposition without having any understanding of what’s actually going on behind the scenes, and digging deep into the numbers. Today, we can clear up a bit of that confusion, and cast a quality overview of what the government is actually doing here. 

The debt ceiling: a brief overview

The debt ceiling is exactly what it sounds like: a limit on the amount of money the treasury can add to its balance sheet. But it wasn’t always a problem. The debt ceiling was enacted in 1917 by way of the Second Liberty Bond Act during World War 1, with a starting amount capped at $1 billion dollars, which is the equivalent of over 21 times that much today. 

Since then, the ceiling has been amended notably and continuously, essentially amounting to an annual affair at this point. The debt ceiling doesn’t have to exist, but since this legislation is here, the entire government operation is subject to it, and risks being shut down otherwise as they lose funding for important expenses. 

So, who do we owe?

As of late September, the US is approximately $28.8 trillion dollars in the hole and counting. That sounds like a lot, and historically speaking, it is. Our debt to GDP ratio is about 125%, well above the nominally appointed 77% line that economists consider concerning. 

Federal Debt: Total Public Debt as Percent of Gross Domestic Product  [Via Fred]

As we can see, this ratio has increased exponentially since around 2008, and did so again in 2020. 

  • Debt is issued in multiple forms: Although Treasury bills are one of the most popular US debt vehicles, debt is also issued through notes, bonds, and TIPS
  • The US government owes $6 trillion of these dollars to itself: The treasury borrows money from departments with excess revenue, most prominently the Social Security Trust. Social Security has been running on a surplus for almost 30 years now, but in 2021, that will come to an end. 
  • Another $21 trillion dollars of this debt is public (no, it’s not all owned by China): Foreign governments hold only about one third of this, amounting to around $7 trillion. Japan and China are the top holders at just over one trillion each, but are far from the majority. 
  • As for the rest? The Federal Reserve owns over $10 trillion of the public debt by virtue of open market operations, which the last 18 months have added onto even more. Mutual funds, individual citizens, states and municipalities, banks, brokerages, and businesses own another $7 odd trillion combined. Pension funds, insurance companies, and savings bonds bring up the rear, with a little over a trillion too.

Major Foreign Holders of U.S. Public Debt [Via The Balance]

Debt ceiling is at all times high. Does it matter?

When the number is so high and has been maintained for so long, it’s natural to question whether or not it really even matters at this point. There’s probably no right answer to the question, but there are some things to be mindful of. 

  • As long as you can make the payment: The nightmare scenario would be if the nation ever defaulted on an interest payment, which it has never done. A reputation like this would certainly take a hit if even one payment was missed. 
  • It does matter, it’s just hard to see sometimes: Not all ratios and numbers paint the picture well enough. Let’s try this; the US debt equates to over $85,000 per capita in 2021. The interest payments in 2021 just to service the outstanding debt has totaled over $500 billion dollars. 
  • As debt increases: As the numbers pile up, if investors ever start to view the US as anything less than a guaranteed ROI, they will be forced to raise yields. In effect, this will inevitably have a ripple effect on the entire economy, from the appeal of equities to the affordability of a mortgage. 

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