The public debt of the United States of America exceeds 38 trillion dollars, a huge number that may seem complex. This article simply explains what this debt is, how it is financed through the sale of bonds, and what it all means for the American and global economy.
๐ฐ What is the American public debt?
The public debt is the total amount that the U.S. federal government has borrowed throughout its history. This debt arises when the government spends (on the military, health, education, and others) more than it collects in revenues (taxes and fees).
The household analogy: Imagine that a family's annual budget is based on a fixed salary, which is the revenue. If expenses (rent, bills, education) exceed this salary, the family must borrow via a credit card or bank loan. U.S. public debt is the 'accumulated balance' on this national credit card over the years.
๐๏ธ How does the government borrow? The concept of Treasury bonds
Instead of going to the bank, the U.S. government borrows by issuing U.S. Treasury bonds. These bonds are more like 'IOUs' or formal promises delivered by the government to investors in exchange for money.
How does it work? When you buy a bond worth $1000:
ยท You: You pay $1000 to the government now.
ยท The government: Promises to return your money after a specified period (the bond's term), while paying you periodic interest for using your money.
Main types of bonds:
ยท Treasury Bills (T-Bills): Short-term bonds (from one month to one year).
ยท Treasury Notes (T-Notes): Medium-term (from 2 to 10 years).
ยท Treasury Bonds (T-Bonds): Long-term (30 years).
These bonds are sold through weekly public auctions organized by the U.S. Treasury Department.
๐ฅ Who buys America's debt?
Treasury bond buyers come from both within and outside America. Hereโs the main distribution of owners:
1. Foreign investors (about one-third)
Japan is the largest foreign owner, followed by Britain, then China, which has recently reduced its holdings. European countries collectively hold about $3.5 trillion of these bonds.
2. American entities (about two-thirds)
ยท The Federal Reserve (the U.S. central bank).
ยท American banks, investment funds, and pension plans.
ยท State governments and local authorities.
ยท Individuals and regular investors.
โ๏ธ Implications and issues of high debt
The amount of debt and its financing mechanism affects everyone, and its main impacts can be summarized as follows:
1. Rising cost of servicing debt
As the amount of debt and interest rates rise, the government allocates a larger portion of its budget to pay interest to investors. Today, about 1 in every 5 dollars of federal revenue goes to pay interest on the debt.
2. Rising borrowing costs for everyone
Interest rates on U.S. bonds set a benchmark for interest rates in the entire economy. When they rise, the cost of mortgages for families and loans for businesses also rises, which could slow economic growth.
3. Political risks: Debt ceiling
The U.S. Congress sets a maximum limit on the amount of debt allowed. When the debt approaches this 'ceiling,' Congress must raise it, or the government will be unable to pay its bills, potentially leading to a default with unknown but 'catastrophic' global consequences.
๐ค Frequently Asked Questions about American Debt
ยท Why doesn't America print money to pay off its debt?
Because that would lead to runaway inflation that destroys the value of the dollar. The safe way is to borrow from the markets through bonds, which is what is currently being done.
ยท Can Europe or China use their bonds as a weapon against America?
Theoretically yes, but practically very unlikely. Any sudden large sale would cause:
ยท Severe losses for the selling countries themselves.
ยท Disruption in global financial markets.
ยท A sharp rise in the value of their currencies harms their economies. Thus, the threat of this weapon is akin to 'mutually assured economic destruction.'
ยท Is American debt a risk to the global economy?
High debt creates long-term risks, the most important of which are: weakening investor confidence, straining the U.S. budget, and raising global borrowing costs. But the market still sees U.S. bonds as a relatively safe investment due to the strength of the U.S. economy. The key to future stability lies in a politically acceptable plan to contain the budget deficit and stop the rapid growth of debt.
4. The relationship between America's debt and crypto is a tense but often positive one:
ยท High debt โก๏ธ Doubts about the traditional financial system โก๏ธ Opportunity for Bitcoin and digital currencies.
ยท The more debt crises and money printing increase, the more attractive the philosophy of decentralization becomes.
Conclusion: America's debt may be the hidden fuel for the spread of crypto in the long term. ๐
In short, U.S. public debt and the sale of bonds function as the heart of the global financial system. Understanding this mechanism helps us grasp how interconnected the world economies are, and how financial decisions in Washington can resonate in financial markets and consumer households everywhere.