- Last Updated on Wednesday, 02 September 2009 05:00
- Published on Wednesday, 02 September 2009 05:00
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In 1791, during George Washington’s first term in office, our nation’s debt totaled $77 million. In contrast to the numbers that are thrown around so casually today, which are in the billions and trillions, this number seems almost trivial. But in 1791, the debt, most of which was incurred during the American Revolution was no small matter.
For a nation of only 4 million, the amount we owed our creditors was the equivalent of approximately 40 percent of our young nation’s gross domestic product. Fortunately, thanks to the foresight of men like Alexander Hamilton, our first secretary of the treasury, and yes, a few new taxes, the size of the national debt was brought back to more reasonable proportions.
Today, we’re at a similar crossroads. We’re facing a massive debt, and no matter where you stand politically, before long it’s an issue we’re going to have to confront. The numbers are staggering. Starting in the early part of the decade, oddly enough, during a period of Republican dominance in both the Congress and the White House, the federal government nearly doubled the size of the debt.
In 2000, the national debt was $5.6 trillion. However, by late 2007, it was $9 trillion. Since then it’s kept growing.
President Obama, fearing an economic meltdown, called for an economic stimulus package. He got it, but over the next few years, it’s going to cost more than $700 billion. Other spending, without much worry about where the money is coming from, has increased dramatically as well. Future plans are likely to make it even worse.
The 2010 budget for the United States will have a projected deficit of over $1.6 trillion dollars. What’s more, this level of deficit spending is expected to continue for at least the next five years. Of course, there are some factors that could trim this back. Additional taxes could yield additional revenue that could reduce the deficit. Also, as was the case in the 1990s, an expansion in the economy could also increase revenue and trim the deficit. Ten years ago, additional revenue brought in by an expanding economy all but eliminated the annual debt.
One measure of the debt and what it means is its percentage of the gross domestic product. This, at least, puts these big numbers in some perspective. The projected annual debt incurred by the United States for 2009 is $1.6 trillion. That translates into a little over 8 percent of the nation’s GDP. That’s substantial, and, when compared to 2007’s 3.4 percent, represents a massive increase.
The federal debt is made up of a range of different borrowing instruments. However, the ones we’re most familiar with — the publicly traded debt — include treasury bills, notes, and bonds. While most of the sales are domestic, nearly 30 percent of our debt is held by other countries. The largest holder of U.S. debt is China with approximately $770 billion and growing. Japan is the next largest holder, followed by the United Kingdom.
One fear the Treasury has about issuing debt is the ability to sell it. U.S debt has consistently been popular, and for the most part, with only some occasional and very rare exceptions, hasn’t been that hard to sell. However, as confidence in the U.S. economy ebbs and the amount of debt grows, moving this mountain of debt, at least at a manageable interest rate, could get more difficult.
While the debt may seem like a remote figure for many of us — imagining what $11 trillion looks like is beyond my imagination (a trillion is a thousand billion) — it has a very real impact on our yearly budget. Paying the interest on the debt, referred to as debt service, is a major government expense. Last year interest on the debt reached $249 billion, or roughly 8 percent of our annual budget. Currently, the cost of servicing the debt is the equivalent of about half what we spend on national defense. In the next few years it’s likely to grow substantially larger.
What seems to have happened, and this has afflicted both Democrats and Republicans, is that we have lost the connection between spending money and raising revenue. What this means is that both sides are going to have to face the unpleasant reality that they simply don’t have enough money to do everything they want. Budget reductions, and perhaps big ones, are in our future. We have to face this. Even if it means the sacrifice of some programs and spending that are near and dear to many of us.