There are two basic ways to measure this debt. One is to measure the actual amount of money the US has already borrowed. The other way is to measure that amount plus the amount the US is committed to borrow because of future mandated entitlements.
As of today the US in hock for $16.7 trillion dollars. That’s money we owe. But if you project US mandated entitlements over the next 75 years and subtract the projected tax revenues for that period, you come up with an $87 trillion dollar shortfall. In other words, if we continue the way we are going for the next 75 years the US will be over $100 trillion in debt, not counting interest.
Of course, that’s not going to happen--if only because the US will be crushed by bankruptcy long before that point. But the important thing to remember is we are running larger and larger deficits every year. It took us 20 years to go from $1 trillion to $6 trillion in debt. It took us 12 years to add another $10 trillion. Now we are adding more than $1 trillion a year, and there is no projected end to it.
What is going on? Several factors are contributing. Baby boomers are aging and producing less, but consuming more, particularly healthcare, which they expect to be world class. US citizens are demanding more and more benefits from government, but seem to think these things can be bought on the cheap, or for nothing. The US cannot compete with overseas manufacturing, where workers can be paid a fraction of what they would demand here. So we don’t export much anymore. Cargo ships from overseas come to US ports loaded with imports, then leave empty. So instead of exporting products, we export dollars, which we’ve borrowed. All of these together are a prescription for unsustainable debt.
So who do we owe the almost $17 trillion we’ve already borrowed? The answer may surprise you.
One third of US debt is owned by foreign governments and investors. China is our largest creditor, owning about $1.16 trillion. Japan is second with $1.13 trillion. Oil exporting countries own about $250 billion. Brazil, Taiwan, Switzerland, Russia, Hong Kong and the United Kingdom round out the largest holders. This is a big change from the past when we owed the vast majority our debt "to ourselves." Now foreigners have us over a barrel for a third of our debt.
Another third of our debt is held by domestic government entities and domestic investors. The Federal Reserve owns $1.66 trillion (and growing). Mutual funds and private pension funds own $1.4 trillion. State and local governments own $710 billion. Banks own $300 billion. Insurance companies own $260 billion. US saving bonds account for another $185 billion. Another trillion is held by various domestic investors--individuals, brokers and dealers, trusts, and businesses.
The last third of our debt is owned by US federal government agencies. Does that sound strange? US agencies that run a surplus, like Social Security (which owns $2.7 trillion of our debt), buy US Treasuries and basically loan their surpluses to other parts of the government. The good news is we loan the money to ourselves. The bad news is money that was meant for the future gets spent immediately. So taxpayers now owe money plus interest--over and above future contributions--to Social Security and other agency programs, such as the Federal Employees Retirement Fund and Federal Supplementary Medical Insurance Trust Fund. In essence we've raided our federal trust funds to pay for things we want now.
So, roughly speaking, one-third of our debt is owned by foreigners, and one-third by domestic governments and investors (including the Federal Reserve Bank) and one-third by US federal agencies.
The portion owed to foreigners means that we are that much more at the whim of foreigners who might not want to finance our debt anymore, and could throw our economy into a tailspin by refusing to buy it or demanding higher interest rates.
The portion owed to domestic entities means that if the US defaults, we will be shafting ourselves. The portion of this third owed to the Federal Reserve means that more and more the Fed is simply printing money with which to buy our debt, a practice known as “monetizing the debt,” a potentially highly inflationary course of action.
The portion owed to government agencies means that going forward taxpayers have to pay not only for future entitlements, but also for ones that have already been consumed.
No wonder Shakespeare wrote:
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.*
* Hamlet, Act I, Scene 3
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