Category Archives: Debt

National Debt and Fiscal Deficits are Dire and Critical

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The current U.S. National Debt is over $35 trillion and growing.

To pay for annual fiscal budget deficit, the federal government borrows money by selling Treasury bonds, bills, and other securities. The national debt is the accumulation of this borrowing along with associated interest owed to the investors who purchased these securities.

U.S. Annual Federal Tax revenue or receipts are approximately $5 trillion. 

U.S. federal tax revenue is made up of the total tax receipts received by the government each year. Most of it is paid either through income taxes or payroll taxes. The rest is made up of estate taxes, excise and customs duties, and interest on the Federal Reserve’s holdings of U.S. Treasuries.

The U.S. government estimates its total revenue to be $5.49 trillion for fiscal year 2025.

Per the White House’s projections, income taxes are slated to contribute $2.6 trillion. Another $2.2 trillion should come from payroll taxes. This includes $1.3 trillion for Social Security, $399 billion for Medicare, and $56 billion for unemployment insurance. Corporate taxes would add another $467 billion.

U.S. Annual Fiscal Deficit is running approximately $2 trillion. 

A fiscal deficit occurs when the federal government’s spending exceeds its revenues. The federal government has spent $1.83 trillion more than it has collected in fiscal year (FY) 2024.

To pay for government programs while operating under a deficit, the federal government borrows money by selling U.S. Treasury bonds, bills, and other securities. The national debt is the accumulation of this borrowing along with associated interest owed to investors who purchased these securities.

National Debt to Gross Domestic Product (GDP) is currently 120%, according to St. Louis Federal Reserve. 

The debt-to-GDP ratio compares a country’s sovereign debt to its total economic output for the year. Its output is measured by gross domestic product (GDP).

U.S. Government Revenue (or Tax receipts) per GDP is 29%.

How much national debt is too much and is there a tipping point at which it becomes a big problem for a country?

One way to gauge the size of a country’s national debt is to compare it with the size of its economy—the ratio of debt to GDP. (GDP serves as a measure of an economy’s overall size and health, measuring the total market value of all of a country’s goods and services produced in a given year.)

National Debt

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The U.S.National Debt grows because the Federal government consistently spends more than it collects in revenue. This persistent gap between spending and revenue has existed for over two decades.

As of 8:40 am on August 19, 2024 (https://www.usdebtclock.org/)

Excessive fiscal spending and changes in tax policy play a significant role. Policies like the Inflation Reduction Act, the Chips Act and Obama Care, impact government spending, extensions of tax cuts and new tax legislation, like the Tax Cuts and Jobs Act of 2017, impact government revenues.

Essentially, new federal spending without offset taxes to pay for it and tax cut without correlated cuts in spending are the root causes of increasing deficit spending and skyrocketing National Debt

Lawmakers must focus on long-term fiscal sustainability. Delaying action will make addressing the debt even harder. A gradual, spending-focused approach is essential, including reforms to mandatory programs like Social Security and Medicare.

Tax increases must be part of the solution, and policymakers should prioritize less distortionary taxes (such as consumption taxes) or tax reforms that broaden the tax base. For instance, returning to Clinton-era policies could bring more working families back onto the tax rolls.

In summary, addressing the debt requires a balanced approach, thoughtful policies, and a commitment to fiscal responsibility.

References:

  1. https://econofact.org/addressing-rising-us-debt

Ballooning National Debt

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After years of steadily increasing deficits and debt, federal spending has skyrocketed, taking U.S. debt to levels not seen since World War II.

According to the U.S. Treasury, the national debt is approaching $35 trillion.

What does that mean for the country, its citizens and the future?

Many economists warn that a rapidly growing debt load could diminish U.S. economic growth, restrict government spending on vital programs (e.g., military, Medicare, Social Security, etc.) and increase the likelihood of financial crises.

Currently, interest payments on the National debt consumes a quarter of the annual fiscal budget.

High debt-to-GDP ratios can slow down economic growth, leading to lower wages, increased inflation, and higher taxes.

While the National debt of $34 trillion figure seems daunting, it’s essential to consider inflation. As the economy grows, the debt naturally increases. However, addressing the fiscal budget deficit remains crucial.

The national debt indirectly affects citizens through policies, taxes, and government spending. It influences interest rates, inflation, and overall economic stability.

Over the long-term, managing the debt sustainably is vital for future generations. Balancing spending, revenue, and economic growth will determine the country’s financial health.

References:

  1. https://www.cfr.org/backgrounder/us-national-debt-dilemma

Chinese Communist Government Economic Strategies Baffle Economists

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In the capital city of Beijing, the Chinese Communist authoritarian regime is grappling with the harsh reality of self-inflicted economic struggles.

The ongoing real estate crisis in China presents a significant challenge to the Communist Party, with industry giants like Evergrande and Country Garden facing liquidation orders. Chinese citizens heavily were invested in real estate, with approximately 70 percent of their investments allocated to this sector, twice the amount seen in the United States.

The long-term real estate fundamentals have changed — China’s population has likely peaked, urbanization is slowing and home ownership is already very high.

Moreover, official economic figures released by the People’s Republic are often met with skepticism from experts, who believe gross domestic product (GDP) numbers are fantasy. For example, Foreign Policy reported that China’s economic growth in 2023 may have been significantly lower than the stated 5.2 percent, possibly around 1.5 percent.

China’s overall debt-to-GDP ratio is about 300% and rising, which is the highest among emerging markets and higher than most advanced economies. While China’s central government debt is relatively small at just above 20% of GDP, debt at the local government level is estimated to be more than 70% of GDP.

A debt crisis is typically a liquidity crisis  

Additionally, China’s government has substantial assets that can help pay debt. More importantly, a debt crisis is typically a liquidity crisis, and in the case of China, high domestic saving kept by capital controls at domestic banks means that more than 95% of China’s debt is domestic debt, financed by relatively stable domestic deposits and not subject to sentiment change of international investors.

Despite the Chinese Communist regime’s message of China being “open for business” to the global business community and financial elites, the reality paints a different picture. Beijing’s autocratic government enacted a draconian law that requires domestic and international companies operating in China to share business secrets and intellectual property with the Communist Party. This policy has raised concerns about the country’s investment and business environment. While the intention behind such measures may be national security and autocratic control related, it also poses challenges for companies operating in China.

Bottomline, the Chinese economy is plagued by a litany of challenges.

Local governments are struggling with financial difficulties after three years of pandemic spending and declining land sales. Some cities in China can’t repay their debts and have hadto cut basic services or reduce medical benefits for seniors.

The real estate crisis has deepened. Plunging home sales have pushed developers like Country Garden to the brink of collapse. The crisis has spilled over to the massive shadow banking sector, causing defaults and sparking protests across the country.

Youth unemployment has become so bad that the government stopped publishing the data.

Foreign companies have grown wary of Beijing’s rising scrutiny and are pulling out of the country. In the third quarter, a measure of foreign direct investment (FDI) into China turned negative for the first time since 1998.

Foreign investors beware when investing capital in an communist and autocratic country.

References:

  1. https://www.msn.com/en-us/news/world/xi-s-economic-strategies-baffle-even-chinese-economists/ar-BB1jpZa9
  2. https://www.npr.org/2023/08/16/1193711035/china-economy-tao-wang-interview
  3. https://www.cnn.com/2023/12/27/economy/china-economy-challenges-2024-intl-hnk/index.html

U.S. Gross National Debt

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U.S. Gross National Debt exceeds $34 trillion.  

The federal government’s gross national debt has surpassed $34 trillion, a record high that foreshadows the coming political and economic challenges to improve America’s financial balance sheet in the coming years and decades.

The U.S. Gross National Debt is on an unsustainable path of growth, interest costs are exploding, and the Social Security and Medicare trust funds are approaching insolvency.

Source:  Committee for a Responsible Federal Budget

U.S. Credit Card Debt

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  1. Total U.S. credit card debt reached an all-time high in the first quarter of calendar year 2023, reaching $1.03 trillion, according to data released Tuesday by the Federal Reserve Bank of New York.

Rising credit card debt and auto loan balances helped to drive overall household debt levels up 1%, to $17.06 trillion for the quarter, the report showed. Overall household debt has spiked by $2.9 trillion since the end of 2019, before the pandemic.

Key facts:

  • The average American credit card debt balance is $5,910, as of the third quarter of 2022, according to Experian.
  • Americans have an average credit utilization rate of 28%.
  • Credit card interest rates have reached an average of 20.92%.
  • White Americans have the highest average credit card debt of any racial group at $6,940.
  • Higher earned income corresponds to larger credit card balances, but consumers in the middle income brackets are the most likely to have credit card debt.

References:

  1. https://www.fool.com/the-ascent/research/credit-card-debt-statistics/
  2. https://www.cnn.com/2023/08/08/economy/us-household-credit-card-debt/index.html

U.S. Federal Public Debt

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As of September 30, 2020, 64 percent of the outstanding amount of marketable Treasury securities held by the public (about $13.1 trillion) was scheduled to mature in the next 4 years. Current coupon rate is around 2,5 percent

During the past decade, the federal government’s debt increased at a faster rate than at any time since the end of World War II, outstripping economic growth over that period. At the end of 2019, federal debt was higher than at any other time since just after the war.

When the federal government runs an annual budget deficit, the Department of the Treasury borrows money to make up the difference between spending and revenue. Then, if special funds like the Medicare trust fund have surpluses, the “extra” revenue is lent to the rest of the federal government.

The federal debt is the total amount of money that the federal government owes, either to its investors or to itself. Total federal debt rose to $26.9 trillion at the end of fiscal year 2020, equal to about 79 percent of GDP, a higher percentage than at any other time since just after World War II.

To finance the government’s activities, the Treasury issues securities—collectively labeled debt held by the public—that differ in time to maturity, the ways they are sold to investors, and the structure of their interest payments. Marketable securities make up the lion’s share of that debt, and nontradable securities, such as savings bonds, make up the rest.

The Treasury sells securities in the capital markets—often through a primary dealer intermediary­—to various U.S. buyers (such as the Federal Reserve System, mutual funds, financial institutions, and individual people), to private investors overseas, and to the central banks of other countries. Domestic investors currently own about three-fifths of outstanding debt held by the public.

Federal Fiscal Deficit vs. National Debt

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Democrats spend money when they don’t raise taxes; and, Republicans cut taxes when they don’t decrease spending. Tax and spending reforms are needed desperately.

“The government has basically three gigantic programs and it’s the US military, Social Security, and Medicare,” Marc Goldwein, a senior policy director at Committee for a Responsible Federal Budget (CRFB) said. As Nobel-Prize-winning economist Paul Krugman once wrote, the US government is “best thought of as a giant insurance company with an army,” and increasing interest payments.

If the government wants to get serious about its fiscal spending and reducing the national debt, all government spending would have to be reduced by 27% to get budgets balanced in the next decade — and, if tax increases, defense spending, Social Security, and Medicare are all off the table, 78% of federal spending would have to be cut, according to CRFB.

The federal deficit vs. Debt — they’re two separate concepts.

  • The deficit is the difference between the money that the government makes and the money it spends during a fiscal year. If the government spends more than it collects in revenues, then it’s running a deficit.
  • The federal debt is the running total of the accumulated deficits.

The combination of spending increases, tax cutsc, and increasing interest expenses on the debt inflates deficits. While the rise in spending tends to be bi-partisan, tax cuts tend to be enacted by Republicans.

Reference:

  1. https://news.yahoo.com/want-balance-budget-without-raising-100000676.html
  2. https://www.politifact.com/factchecks/2019/jul/29/tweets/republican-presidents-democrats-contribute-deficit/

Federal Student Loan Forgiveness and Taxpayers Burden

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In truth, the federal student loan debt forgiveness plan does not forgive any debts. Instead, it transfers the debt obligations from borrowers to U.S. taxpayers.

U.S. President Joe Biden’s plan to forgive federal student loan debts is a misnomer. The plan does not “forgive” or eliminate the student loan liabilities, it only transfers the obligations and enormous burden from the millions of individual borrowers to the U.S. taxpayers at an projected cost of $400 billion or more. And, you can be almost certain that $400 billion projected figure is a low balled amount.

Student loans are one of the biggest areas of consumer debt in the United States.

As of the fourth quarter of calendar year 2022, there were $1.60 trillion in outstanding federal student loans, versus $1.55 trillion in outstanding auto loans and  $986 billion in credit-card debt, according to the Federal Reserve Bank of New York, reports Barron’s.

About 26 million Americans have applied for student loan forgiveness since August 2022, and the U.S. Department of Education has already approved requests from 16 million borrowers.

The program forgives $10,000 of debt held by the federal government for individuals who make less than $125,000. It also forgives $10,000 of debt for couples that make less than $250,000, and it forgives up to $20,000 of debt held by Pell Grant holders, who are mostly lower-income borrowers.

References:

  1. https://www.reuters.com/world/us/whats-latest-bidens-us-student-loan-forgiveness-2023-02-28/

Federal Spending and U.S. National Debt

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In response to the COVID-19 pandemic, more than 50% of increased federal government spending between 2019 and 2021 was for assistance to individuals, which more than tripled to $1.1 trillion in 2020 and increased by another $300 billion in 2021, according to USAFacts.

In fiscal year 2021, the federal government spent 68% more than it collected, resulting in a $2.8 trillion deficit. The deficit decreased from fiscal year 2020 when the federal government spent 91% more than it collected.

Most federal government spending happens in two ways:

  • Direct spending on federal programs (such as for the military and social security) and
  • Indirect spending through transfers to state and local governments in the form of grants (such as for infrastructure) that those governments then spend. State and local governments raise money both through federal grants and revenue raised through state and local revenue sources.

Source:  USAFacts