Episode 81: What is U.S. national debt?

The best way to understand the U.S. national debt is through a pawn shop example.

Hello, I am Bobb Rousseau, and this is Apostrophe Podcast. Today’s episode explains how the federal government incurs debt. It also discusses the logic behind the debates regarding raising the debt ceiling. Without further ado, let’s begin.

The best way I know how to explain the U.S. National debt is through a Pawn Shop example. When you have bills to pay and groceries to purchase, but do not have money to meet such financial obligations, you pawn your assets. You incur a debt when you do so because, if you want your asset back, you must pay down monthly until you pay off the entire debt. This is the same thing the federal government does when it does not have enough money to pay its employees and fund social services. 

But first, let’s talk about fund appropriations. 

Congress has the power of the purse, meaning it decides on how much money agencies receive and what the agencies must do with the funds they receive. Congress also decides on how much money is to fund federal programs. Fund appropriations lead to the U.S. national debt because once the money is allocated, agencies do not have to wait for the actual money to begin spending them. 

So, if I were to define the U.S. national debt, I would say that it is the sum of money that the government forecasts to give to its various agencies to improve the well being of the American people. 

Since now, I get the definition out of the way, let me explain to you how the United States ends up owing money to Americans, national banks, ad foreign countries. 
When you hear that the United States owes money, that does not mean it borrows actual money from foreign countries. When you hear the government will default on its loan, that does not mean that it will be unable to pay back its borrowers. It simply means, it will not be able to pay its employees or fund federal programs such as social security, health, income security, national defense, Medicare to name just a few. 

The U.S. national debt occurs when taxes collected by the government are not enough to cover its expenses. To have money to fulfill its financial obligations, The government sells its assets to Americans, national banks, and foreign countries respectively. These assets are called marketable securities. Americans hold 70% of the outstanding debt while foreign creditors hold the remaiming 30%.

Japan, China, the United Kingdom, Belgium, Luxembourg, Cayman Islands, Switzerland, Ireland, Canada, and Brazil are the major foreign holders of U.S. public debt. 
See, I say holders, not owners. It is because, same as the assets you pawn that remain your properties unless you decide to not pay anymore, American marketable securities, although they can be sold or transferred to other entities, remain the properties of the federal government as holders can only sell them for cash back to the government. 

The more funds the government injects in federal programs, the higher the debt and thus come the debates regarding increasing the debt limit. Congress sets the debt limit or how much assets the government can sell to cover expenses. For the Republicans, spending cuts are the way to decrease the debt limit whereas for the democrats it is through tax increases. Neither side is wrong or right but both of them must depoliticize the debt ceiling debates to further the economic well-being of the American people. 

In summary, the U.S. National Debt is a sum of money that the federal government gives to agencies to provide social services to the American people. It is not actual money the government owes foreign countries. The debt starts when Congress, which has the power of the purse, allocates funds to agencies and social services. It accumulates when the country sells its assets to cover the expense that taxes it collects are not enough to fulfill its financial obligations. Although asset holders can transfer or sell these securities to other entities, the assets remain the property of the federal government. 

Bobb Rousseau, PhD
Apostrophe Podcast