Who Do We Owe?

During the recent debate the National Debt has become the Monster that ate the Bronx. People are predicting fiscal Armageddon, the Dark Abyss and perhaps, even war with our creditors. This is far from the truth. The National Debt simply put is an accounting concept put into place to keep America on the straight-and-narrow path of fiscal sanity. Unfortunately, it hasn’t worked. Unlike the states, the Federal Government can print money when there’s a crisis in spending.

Here’s a brief explanation of the Federal Reserve’s QE2 policy that you can understand without an economics. A central bank implements quantitative easing by purchasing financial assets from banks and other private sector businesses with new money that it creates electronically. This action increases the excess reserves of the banks, and also raises the prices of the financial assets bought, which lowers their yield. In the United States the Federal Reserve has emphasized that their quantitative easing policy is targeting a credit easing in the business and household sector, so that the increase in reserves is a by-product rather than an objective of monetary policy. Quantitative easing can be used to help ensure inflation does not fall below a specific target.

The National Debt (also known as the public debt or government debt) is created when the United States Treasury Department issues bonds known as Treasuries to get money for future expenses. These bonds are guaranteed by the full faith and credit of the United States and carry a fixed rate of interest for a specific time period. Typically, bonds are offered for sale at periodic Treasury Auctions.

The National Debt as of December 2010 amounted to $14 trillion. We know that we’re up to $14.4 trillion now. These numbers are predicated at the lower figure. The National Debt is a problem for politicians to explain. They typically want the debt ceiling raised so that the Treasury can borrow more so that Congress can spend more. John McCain told this story during the 2008 campaign. “Ronald Reagan used to say, and I’ve quoted him a lot over the years, and it’s a good line: ‘Congress spends money like a drunken sailor, but I never met a sailor with the imagination of Congress.’ Well, that’s a pretty good line, but true story: About six months ago I got an e-mail from a guy who wrote: ‘As a former drunken sailor, I resent being compared to Congress.’ You can’t blame him. The plain fact is that without some legislative brake like a balanced budget amendment or a cap of some kind, Congress will figure a way to spend money.

So who do we owe? Here’s the real shocker: 40.3% of of our debt is owed to ourselves. This is money that is “borrowed” from various trust funds and replaced with IOU’s. What, are we going to default on ourselves? Foreign Investors are into us to the tune of $4.4 million with China being the big investor at $1.2 trillion. In total foreign investors account for 31.6%. Domestic investors are owed $3.9 trillion, or 28.1% of our National Debt.

The most worrisome growth in our National Debt has come since Barack Obama was inaugurated Jan 2009. In less than two years our National Debt to foreign investors has grown dramatically due to the huge spending bills passed by the Democrat-controlled Congress and signed by Barack Obama.

The next time you hear the dire consequences about defaulting on our National Debt understand one thing. If it does happen it will be because the President wanted it to happen.