The US federal government’s debt has reached another milestone this month: it is currently a record high of USD 22 trillion in nominal value. Can we pay off the national debt?
What is debt repayment?
Public debt is financed from the sale of bonds. These may be short maturities (from 3 months to 30 years, and in the case of the First World War – unlimited). To pay off the debt, the government could obtain a budget surplus with tax revenues greater than expenses. With this surplus, the government would buy back existing bonds. Nevertheless, in order to buy back the current level of debt (May 2019, UK public sector net debt was GBP 1,806.1 billion), it would take many years to complete.
National debt and budget deficit
First, it is important to understand the difference between the federal government’s annual budget deficit – also known as fiscal deficit – and outstanding federal debt – known in official accounting terminology as national public debt. Simply put: the federal government generates a budget deficit whenever it spends more money than it generates as a result of income-generating activities. These activities include individual, corporate or excise taxes.
To operate in this way, spending more than it earns, the US Treasury Department must issue treasury bills, banknotes and bonds. These treasury products finance the deficit by borrowing from investors – both domestic and foreign. They also sell these treasury securities to corporations, financial institutions and other governments around the world.
By issuing these types of securities, the federal government can obtain the cash it needs to provide government services. Government debt is simply the net accumulation of the federal government’s annual budget deficit – the total amount of money that the US federal government owes to creditors. For comparison, the budget or budget deficit is trees, and public debt is a forest.
Why do we have to pay back public debt slowly?
To prevent disruptions in financial markets (which would hurt pensioners more than anyone else), we must gradually pay back public debt over time. While it would be tempting to suggest that we should pay back the public debt as soon as possible, there are several important reasons why we should not:
- Too fast repayment can harm pensioners.
- Most of these bonds are not owned by banks. About 40% is owned by foreign investors. However, our biggest concern is 40% of government bonds, which are owned by pension funds and insurance companies.
- To see why it is so important for us not to pay our debt too quickly, you need to play the role of a pension fund manager.