What Is the Debt of the United States?

The U.S. debt is the sum of all outstanding debt owed by the Federal Government. It's greater than $18 trillion, and is tracked by the national debt clock. 

America's debt is the largest in the world for a single country. It runs neck and neck with that of the European Union, which is an economic union of 28 countries. For more, see Sovereign Debt Rankings.

Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds.

The rest is owed by the government to itself, and is held as Government Account securities. Most of this is owed to Social Security and other trust funds, which were running surpluses. These securities are a promise to repay these funds when Baby Boomers retire over the next 20 years. For more, see Who Owns U.S. Debt?  (Source: U.S. Treasury, Debt to the Penny; Debt FAQ)

The debt is nearly as much as the country produces in a whole year. That normally tells investors that the country might have problems repaying the loans. This is a new and worrying occurrence for the U.S. In 1988, the debt was only half of America's economic output. For more, see Debt-to-GDP Ratio.

How Did the Debt Get So Large?

First, the debt is an accumulation of Federal budget deficits. Therefore, the best way to look at how the debt got so large is to compare the budget deficits by President. President Obama added the economic stimulus package, the Obama tax cuts and roughly $800 billion a year in military spending.

For more, see National Debt Under Obama.

The national debt grew rapidly even before the 2008 financial crisis. Between 2000-2007, it ballooned from $6-$9 trillion, a 50% increase. The $700 billion bailout expanded it to $10.5 trillion by December 2008. President Bush also added the EGTRRA and JGTRRA tax cuts and the War on Terror.  

President Reagan cut taxes, increased defense spending and expanded Medicare. All of these Presidents also suffered from lower tax receipts resulting from recessions. For more, see U.S. Debt by President.

Second, the Federal government couldn't keep running up deficits if interest rates skyrocketed, like they did with Greece. Why have interest rates remained low? Purchasers of Treasury bills still reasonably expect that the U.S. will pay them back. For foreign investors like China and Japan, the U.S. is such a large customer it's allowed to run a huge tab so it will keep buying exports. 

Countries like China and Japan maintain large holdings of Treasuries to keep their currencies low relative to the dollar. Even though China warns the U.S. to lower its debt, it keeps buying more Treasuries. During the recession, foreign countries increased their holdings of Treasury Bondsas a safe haven, which kept U.S. interest rates low. These holdings went from 13% in 1988 to 31% in 2011. 

Many of the foreign holders of U.S. debt are investing more in their own economies. Over time, diminished demand for U.S. Treasuries could increase interest rates, thus slowing the economy. Furthermore, anticipation of this lower demand puts downward pressure on the dollar. That's because dollars, and dollar-denominated Treasury Securities, may become less desirable, so their value declines. As the dollar declines, foreign holders get paid back in currency that is worth less, which further decreases demand. For more, see What Is the U.S. Debt to China?

Third, the U.S. has been able to borrow from the Social Security Trust Fund. It took in more revenue through payroll taxes leveraged on Baby Boomers than it needed. Ideally, this money should have been invested to be available when the Boomers retire. In reality, the Fund was "loaned" to the government to finance increased deficit spending. This interest-free loan helped keep Treasury Bond interest rates low, allowing more debt financing. However, it's not really a loan, since it can only be repaid by increased taxes when the Boomers do retire.

The debt ceiling is supposed to limit the debt to $16.394 trillion. However, Congress usually raises the ceiling to prevent the negative consequences of a debt default.

How The Large Debt Affects the Economy

In the short run, the economy and voters benefit from deficit spending. In the long run, a growing Federal debt is like driving with the emergency brake on, further slowing the U.S. economy. At any point, debt holders could demand larger interest payments to compensate for what they perceive as an increasing risk they won't be repaid. When this happens, the United States will have to pay exorbitant amounts just for the interest. To current interest payments, see Federal Spending.

Congress realizes it is facing a debt crisis. Over the next 20 years, the Social Security Trust Fund won't have enough to cover the retirement benefits promised to Baby Boomers. That means higher taxes, since the high U.S. debt rules out further loans from other countries. Unfortunately, it's most likely that these benefits will be curtailed, either to retirees younger than 70, or to those who are high income and therefore aren't as dependent on Social Security payments to fund their retirement.  Article updated January 3, 2015