Debtor Nation

This post was originally published in May 2022. It was updated with more recent data on September 14, 2022.

At the end of the second quarter of 2022, the $30.6 trillion debt of the United States federal government was 1.2 times larger than the annual economic output of the country. The U.S. is now reaching federal debt levels, as a share of gross domestic product (GDP), that we have not seen since the end of World War II.

Federal spending is increasingly untethered from fiscal realities. From 1965 to 2022, the federal government ran an annual budget deficit in 52 of the 57 years.

The annual federal budget deficits during and following the Great Recession of 2007-2009 were dwarfed by the recent federal deficits of 2020 and 2021, however, when annual budget deficits were $3.1 and $2.8 trillion respectively. The COVID-19 pandemic and accompanying lockdowns and policies sparked the largest spending bills in American history, including the $2.2 trillion CARES Act signed by then-President Donald Trump in March 2020. A year later, in March 2021, President Joe Biden signed the $1.9 trillion American Rescue Plan Act.

After accounting for inflation, the national debt jumped by almost $5 trillion in less than two years—rising from $25.9 trillion in the first quarter of 2020 to $30.6 trillion at the end of the second quarter of 2022. To get a sense of the magnitude of the growth of the debt, the current debt of more than $30 trillion translates to each American individual owing $91,814 based on the U.S. Bureau of Economic Analysis (BEA) estimate of 333 million Americans. This is an increase in the national debt of nearly $14,000 per person just since the first quarter of 2020.

While the increase in the national debt during the pandemic has been particularly shocking, it is consistent with a decades-long, bipartisan trend of deficit spending where government expenditures consistently exceed government receipt of money. When tax revenue is insufficient to cover government spending, the government must issue U.S. Treasury bonds, shorter-term obligations like bills and notes, or other debt instruments. 

Federal Debt Holders

The federal debt is often classified into two buckets: intragovernmental holdings and debt held by the public.

Intragovernmental Debt

Intragovernmental holdings are government debt held by government agencies. As of September 8, 2022, intragovernmental holdings totaled $6.6 trillion, which is 21.4% of the total outstanding public debt. The largest share of this intragovernmental debt is held by the Social Security Trust Fund (46%).

Debt Held by the Public

Debt held by the public can be broken down into debt held by the U.S. public, foreign entities, or the U.S. Federal Reserve. The U.S. public is a broad category that encompasses domestic non-federal investors. It includes state and local governments, private pension funds and insurance companies, banks, and other investors. Foreign entities include the governments and central banks of other countries and private international investors. 

In recent years, even relative to the first two groups of debt holders, the U.S. Federal Reserve has greatly increased its holding of government debt. The Federal Reserve buys the debt with newly created reserves, but these purchases raise the risk of inflation by monetizing the debt. Since new reserves can increase the nation’s supply of money, they can lead to higher prices as more dollars chase the same volume of goods and services. The Federal Reserve asserts, “Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit.” But Federal Reserve asset purchases are traditionally a means of circulating newly printed bills. While new tools like interest on monetary reserves can mitigate the impact of such expansion, the dramatic increase of Federal Reserve debt purchases (which include mortgage debt and corporate bonds as well as Treasurys) is a serious concern.

Given the persistence of federal deficit spending, if demand for U.S. debt does not keep pace with debt accumulation, the risk of debt monetization via Federal Reserve purchases rises further.

Foreign Holders of U.S. Debt

Demand for U.S. debt has increased because the dollar is the de facto reserve currency of the world. The Bretton Woods system, which pegged other currencies to the U.S. dollar which was redeemable for gold, effectively ended after President Richard Nixon suspended dollar-to-gold convertibility. Since that point, the nations belonging to the Organization of the Petroleum Exporting Countries (OPEC) have principally denominated oil sales in U.S. dollars, therefore boosting demand for America’s debt.

The United States heavily relies on foreign buyers for debt financing, which can potentially be a liability if or when international conflicts arise. Russia held $139 billion in U.S. debt in 2013. After the Russian annexation of Crimea in 2014, the U.S. responded with aggressive sanctions and threats to remove Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. In response, Russia’s central bank began divesting from U.S. Treasurys. Today the West is once again sanctioning Russia after its invasion of Ukraine.

Historically, many countries have relied on the safety and stability of U.S. Treasurys. Western sanctions on Russia are a reminder that this “risk-free” asset is not risk-free for those failing to align with American foreign policy. The mid-March reporting that Saudi Arabia may begin pricing Chinese oil sales in yuan is an indication that U.S. financial dominance is not completely unchallengeable. Yuan-denominated oil sales could further erode Chinese demand for our debt, which has declined in recent years.

Today, China and Japan account for nearly one-third of all foreign holdings of U.S. debt. Given America’s friction with China and the population decline experienced in Japan, it is not a certainty that these two countries will indefinitely continue to sweep up large volumes of additional U.S. debt.  

Ultimately, the United States government must understand that we do not have an unlimited capacity for financing our deficit spending. This will become even more difficult as we pay out the rapidly growing liabilities for programs like Social Security and Medicare.

Other Long-Term Federal Financial Obligations

Organizations incur long-term financial obligations in forms other than bonds and the U.S. federal government is no exception. Some common types of financial obligations include pension and retiree health care costs for veterans, civilian federal employees, and the general public (through Social Security and Medicare benefit commitments). Looking at the federal government's balance sheet as of 2021, public holdings of U.S. Treasury securities make up less than one-quarter of total federal liabilities. Unfunded entitlements, like Medicare and Social Security, account for the most at 59% of obligations.

Overall federal obligations have now surpassed $300,000 per American. While substantial in their own right, the debt obligations of state and local governments across the country are dwarfed by the various categories of federal debt.

---

Conclusion

Unfortunately, the United States does not seem positioned for economic expansion like it was the last time the debt-to-gross domestic product (GDP) ratio was this high during the post-World War II era. Following WWII, debt was reined in by brief periods of inflation and several decades of exceptional economic growth.

In the first two quarters of 2022, the U.S. economy experienced negative growth. With weak or negative economic growth expected, and no significant restriction on federal spending in sight, the debt-to-GDP ratio will continue to rise.

Jeffrey Rogers Hummel, Professor Emeritus in the Economics Department at San Jose State University, was consulted on the “Federal Reserve Assets as Percentage of Publicly Held Debt” chart.

Data & Methodology

• Federal Spending Versus Receipts: 
  • Overall data is from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) National Income and Product Accounts data, specifically Table 3.2 (Government Current Receipts and Expenditures, which is reported quarterly). 
    • Spending data is from “Current Expenditures” on lines 24 and 44. 
    • Revenue data is from “Current Receipts” on lines 1 and 41. 
    • The inflation-adjusted data series are adjusted according to Q2 2022 dollars using the U.S. GDP implicit price deflator (FRED: GDPDEF) sourced from BEA.
    • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.

• National Debt: Data are sourced from the U.S. Department of the Treasury—titled “Federal Debt: Total Public Debt” (FRED: GFDEBTN).
  • The debt data are inflation-adjusted to Q2 2022 dollars with the U.S. GDP implicit price deflator (FRED: GDPDEF) sourced from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA).
  • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0Q173SBEA) data sourced from BEA.
  • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.

• Who Holds the Federal Debt: Data is sourced from the U.S. Department of Treasury.
  • Federal Reserve Banks: Public debt securities held by Federal Reserve banks. Data are sourced from Treasury (FRED: FDHBFRBN). The data are reported and presented at the quarterly level.
  • Foreign Entities: Federal debt held by foreign investors. Data are sourced from Treasury (FRED: FDHBFIN).
  • U.S. Public: Calculated by subtracting debt held by “Federal Reserve Banks” (FRED: FDHBFRBN) and “Foreign Entities” (FRED: FDHBFIN) from a FRED data stream, from Treasury, called “Federal Debt Held by the Public” source from Treasury (FRED: FYGFDPUN).
  • Agencies & Trusts: Federal debt held by agencies and trusts. Data are sourced from Treasury (FRED: FDHBATN).
  • All data series above are inflation-adjusted to Q2 2022 dollars with the U.S. GDP implicit price deflator (FRED: GDPDEF).
  • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.

• Federal Reserve Assets
  • Total Federal Reserve Assets: The Federal Reserve has a balance sheet that contains both assets and liabilities. Notes in circulation, bank reserves, and other liabilities. On the asset side of the ledger, the Federal Reserve has securities that include things like: U.S. Treasurys, mortgage-backed securities, loans to banks or other institutions, and liquidity swaps with central banks from other countries. Total Federal Reserve assets as a percentage of publicly held debt are calculated by dividing reserve bank credit (FRED: RSBKCRNS) by total public debt outstanding (Treasury: tot_pub_debt_out_amt).
  • Total Treasury Deposits at the Federal Reserve: When the U.S. Treasury issues public debt and deposits the proceeds at the Federal Reserve this is considered a treasury deposit. This figure as a percentage of publicly held debt is calculated by taking reserve bank credit (FRED: RSBKCRNS) and backing out three other data streams (FRED: WTREGEN; FRED: WLRRAL; and FRED: WORAL) and dividing by total public debt outstanding When the Fed borrows from the private sector, it does through what is referred to as reverse repurchase agreements. That amount is calculated by backing out of reserve bank credit in two data streams (FRED: WREPODEL and FRED: WREPOFOR). The overall total of these two forms of Fed borrowing as a percentage of publicly held debt is the sum of the five data streams divided by total public debt outstanding.
    
• Biggest Foreign Holders: Data is retrieved from the US Treasury Department’s Major Foreign Holders of U.S. Treasury Securities historic tables, which due to aggregations below certain thresholds may result in missing data for certain years for some countries. Data are adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA).

• Beyond Publicly Held Debt
  • Federal: Data for these series are taken from the Financial Reports of the United States Government for the years 2000 through present published by the U.S. Treasury Department. 
    • The data is inflation-adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA). 
    • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0A052NBEA) data sourced from BEA. 
    • The percent of GDP data series are calculated using annual Gross Domestic Product data (FRED: GDPA) sourced from BEA.
  • State & Local: The bonded debt data come from the U.S. Census Bureau’s Survey of state and Local Government Finance (2020 and 2021 levels are extrapolated). 
    • Pension Debt: Data are sourced from the Board of Governors of the Federal Reserve System (FRED: BOGZ1FL223073045Q). Excluded here are state and local retiree healthcare liabilities for which time series data are not available. Reason Foundation has estimated that these liabilities totaled $1.2 billion in 2019. 
    • The data is inflation-adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA). 
    • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0A052NBEA) data sourced from BEA.
    • The percent of GDP data series are calculated using annual Gross Domestic Product data (FRED: GDPA) sourced from BEA.