Why the US's national debt overwhelmingly benefits Americans - and the US can never default on its debt - only needs to control it in the 2030s - with many solutions

The US can easily service its debt. The servicing is only 23% of total government income, and what most people don't realize is 70% of the interest on the debt actually goes to Americans or back to the US government itself. The national debt is a source of wealth for them. So the US is supporting its own economy by servicing the National Debt.

From those figures, only 6.9% of its income is spent servicing foreign debt and it actually needs a significant amount of foreign debt to keep the US dollar as a strong currency.

.TEXT ON GRAPHIC:

Foreign debt (arrow) in dark blue

Interest on the rest of the debt is paid to US citizens or the government and is an investment and source of wealth to the US.

Why the US debt doesn’t work like business debt
- as the US treasury will surely try to explain to Elon Musk.

By some time in the 2030s US needs to control its debt.

It can increase income:
1. increase immigation
2,. a national sales tax.
3. increase taxation.

Or reduce expenses
4. increase retirement age
[also increases income]
5. cut down on other expenses.

Trump focuses on 5. but if he fails it is okay. US doesn’t need to solve its debt problem yet

Graphic from: Who Owns the US National Debt?

Right now the US benefits hugely from any debt increase that is used to boost its economy and its economic recovery.

AS for its foreign debt, the highest amount is owed to Japan.

. Who Owns the US National Debt?

The total foreign debt as of 2022 was $7.43 trillion.

Servicing national debt does take up 46% of US income tax - but 70% of this goes to private investors in the US and other parts of the government

The US national debt is fine at least to the 2030s when it may be necessary to do something about it with many solutions.

As of 2024 servicing the US national debt costs $0.868 trillion a year.

. Fiscal Data Explains the National Debt

Income tax raises $1.89 trillion a year, again as of 2024.

That income is 50% of the total revenue of $3.75 T.

. Fiscal Data Explains Federal Revenue

So the interest on the debt is 100*0.868/3.75 = 23% of the total income and it is 100*0.868/1.89 = 46% of income tax.

However an important thing to realize is that 70% of the US debt is lent out to private investors in the US and also to other parts of the government.

This makes it a source of income for them. So, 70% of that $0.868 trillion is being paid to American holders of the US debt and so is supporting the US economy. They are getting interest on their holdings of US debt.

. The Federal Government Has Borrowed Trillions. Who Owns All that Debt?

That means that only 30% of the $0.868 trillion interest payments, or $0.26 trillion actually goes to foreign investors every year.

Why “printing money” - quantitative easing - was the best way out of a recession - because it encourages investment in the economy and prevents deflation

Actually by economic theory you need to spend a lot to get out of a recession to stimulate the economy. Quantitative easing is now established as the best way to get out of a recession. It was used globally by many countries including the US under both Trump and Biden to prevent deflation which could have lead us to a new depression.

This is a short summary from the UK government from the last crisis in 2008–9 explains why they do it.

Here’s an example. Say we buy £1 million of government bonds from a pension fund. In place of those bonds, the pension fund now has £1 million in cash.

Rather than hold on to that cash, it will normally invest it in other financial assets, such as shares, that give it a higher return.

In turn, that tends to push up on the value of shares, making households and businesses holding those shares wealthier. That makes them likely to spend more, boosting economic activity.

covid policies qe uk

Normally printing money causes hyperinflation. But not during a recession. There is a huge risk of deflation during a recession. This is one of the measures used to prevent deflation.

Both Trump and Biden took on extra debt during the pandemic to support the economy.

Here is a comparision by the Committe for a responsible Federal Government.

. Trump and Biden: The National Debt | Committee for a Responsible Federal Budget

Trump spent a great deal in 2020, a total of $1.9 trillion. He added $8.4 trillion in total to the national debt in his 4 years in office according to one careful calculation here:

. How Much Did President Trump Add to the Debt? | Committee for a Responsible Federal Budget

But that is okay. National debt doesn't work like household debt. It is actually a source of wealth in the economy for ordinary Americans.

The aim is to help increase the velocity of money through the economy because people aren't buying enough goods. It's called "quantitative easing" and is one of many tools to stop deflation - but it has to be used carefully of course. However we have a much better understanding of how economies work now and countries have used unusual and large scale measures successfully without triggering major issues.

. The problem with printing money - Economics Help

The main thing is they have avoided permanent harm to the economy and have made recovery easier. We should have a massive increase in employment as we recover from the pandemic and the aim is to make sure that we rebuild better by stimulating things of lasting value to our economy - that will lead to a more robust lasting recovery.

. COVID-19 recession - protecting damage to economy and livelihoods worldwide - many countries will use recovery period to rebuild industry favouring green / renewables / sustainability / nature services / biodiversity

It is only if it is very large that it causes problems. Most countries have a national debt.

When extra debt is used to protect and rebuild the economy - this increases GDP - so increases the government’s future income - and reduces future debt as a fraction of the GDP

Also if you take on debt to protect your economy and to rebuild it, and for things like better infrastructure and the growth in renewables and so on - this builds in more income for the future.

That extra income will give the government more income tax and more GDP.

That's why they talk about the debt as % of GDP because if increasing the debt increases the GDP that leads to more income for the country to pay off the interest on the debt. In this way the interest on the debt is still low as a percentage of the total income for government.

So it is very different from e.g. running a business.

In short,

• the US owes most of its debt to US citizens

• it is a form of wealth for them

So it functions very differently from personal or business debts.

Debt crisis are due to an artificial ceiling - the US debt is good

The US debt is good, the occasional debt crises are because of an artificial ceiling the US sets which it has to lift from time to time nothing to do with any difficulty servicing the debt or honoring its commitments.

The US does have to do something about the debt in the 2030s to 2040s, with various possible solutions but despite all the politicising of it, there isn't any debt crisis this decade.

The US actually has a nearly $3 trillion social security fund which could be used during those debt crises where they hit this artificial debt ceiling. If neither side is willing to give way and it becomes a prolonged debt crisis, they could in principle support the US economy through a long period of a debt crisis until it's resolved using those $3 trillion - there are several ways they might be able to use some of it - not permanently of course top it up once the crisis is over.

It's never actually been needed but it's there as a contingency plan if the politicians get at compete loggerheads at some point, with Congress not willing to raise the debt ceiling enough for the government to pay its bills.

I go into some ways the US can resolve its debt crisis if Congress doesn’t lift the debt limit here from a past US debt crisis under Biden:

BLOG: US likely resolves its debt crisis in final hours as usual - on remote chance not - Treasury has Congressional authority to pay Social Security payments from their $2.8 trillion Social Security trust fund - and Biden might use 14th amendment

But this has never been needed to date, always the debt crisis is resolved eventually, sometimes just in time by an agreement to raise the debt ceiling again.

This is about how increasing debt is okay in a recession and about how the bipartisan infrastructure bill may save the average American $3,400 a year by one estimate.

BLOG: Drama of US national debt issue will surely be resolved - Democrats have two ways of doing it without Republican support - - another of these nail-biting Congress dramas

Long term outlook - US debt needs to be controlled at some point in the 2030s with at least 5 main ways to fix the problem

This is very technical but the broad picture is clear that the US debt is okay through to the 2030s then if nothing changes in current laws then by 2053 it would have a signfiicant effect on the US economy The 2023 Long-Term Budget Outlook

This is about various solutions. The main ones:

To incrase income:

1. Increase immigration
   - immigrants startup twice as many businesses as native-born US citizens which then pay tax [ironically Elon Musk himself is such an immigrant]
   - extra population increases demand which increases income from taxes on goods
   - wage earners finance social security and other such programs
   (seems like a perfect solution solves the problems, but there's a lot of political opposition to it in the USA)

2. a national sales tax such as many countries have (including Canada and indeed the UK where I live

3. increase income by increasing taxation

Or to reduce expenses

4. increase retirement age [decreases expenses paid out and increases income from taxation of the working elderly].

5. reduce expenses by decreasing any items in the government budget

For details see: Ways The United States Can Get Out of Debt

The US may need to do some of those things in the 2030s and 2040s.

Trump is trying to do it now through 5. There is some leeway there but not as much as he thinks.

But the US doesn't have to do that yet. If he fails it is no big deal.

US can never default on its debt as it manages the currency - it can just print more money to cover any debt default

As for defaulting on the debt, the difference is the USA actually manages its currency, it doesn't have a debt in anyone else's currency - so it can just print more money if needs be. That's different from a debt in a currency controlled by someone else.

“If you print bonds in your own currency, what happens to the currency will be the question.

But you don’t default. The U.S. has been smart to issue its debt in its own currency.

It is very painful to owe money in somebody else’s currency. If I could issue a currency Buffett bucks, and I had a printing press and I could borrow money, I would never default.

What you end up getting in terms of purchasing power can be in doubt,

. Warren Buffett explains the simple reason why the US will never default on its debt

The main risk would be inflation but not of defaulting on the debt to other countries.

US actually needs a foreign debt to keep the dollar strong

The US has $6.88 trillion in its Federal Reserve banks.

This is not far off the total of $7.43 trillion of foreign debt as of 2022

. Who Owns the US National Debt?

So the US could pay off most of its foreign debt if it was possible to use the Federal Reserve to pay off this debt.

But it won't, because the other countries want the US to be in debt with them and the US wants to be in debt to them, to keep the US currency strong.

A strong currency needs debts to the weaker currencies [I’m not an economist but economists assure us that it works like this].

Keeping the US dollar strong:

• benefits the US because one dollar can buy a lot more by way of goods from other countries if the US stays a strong currency

• benefits other countries as their own goods cost less than US goods in their own local currencies if their currency is weak compared to the US.

This makes China more competitive in the US, and the US wants that so it can have low cost imports from China. And China wants it so that it can sell more to the US and protect its own businesses from US competition.

The main problem with just printing money to cover debt is that it leads to inflation - but it was okay in the recession since the problem was deflation not inflation. Then once the recession was over the Treasury bought back the bonds gradually, essentially it “unprinted” the money.

Why currencies are no longer on the gold standard - not controllable enough to protect against a recession in the twentieth century world

Money used to be based on the gold standard but this wasn't controllable enough to meet the challenges of the twentieth century. For instance if you had a recession with massive unemployment there were limits to what you could do with the money based on physical gold.

You could only control it by physically digging up gold and storing it / releasing physical gold from gold reserves - much like the way the diamond cartels still control the prices of diamonds and keep them artificially high.

Then depending on the loan and financial policy physical gold would move around the world again in an uncontrollable way and e.g. a nation might decide it wants to convert its money into gold and push up the prices, or the other way around, convert gold into currency lowering prices of gold. It was quite chaotic at times.

Gold though long term stable is also very volatile on the short term, e.g. if someone suddenly discovers a lot of gold or releases it on the market.

. Gold standard - Wikipedia

That's why countries switched to "fiat currency" where the government can decide how much supply of money to inject into the economy and they can easily supply as much or as little as is needed responding to issues as they arise.

If it weren't for quantitative easing combined with the stimulus checks, we would almost certainly have had a great depression in 2020 or at least a much worse recession. . There would have been no way to control it if the world was still on the gold standard.

Elon Musk doesn’t have a clue about this - his experience is of running businesses not working in government - but his DOGE has no power to do anything - only Congress can change either discretionary or mandatory budgets

Musk has no idea how the US government debt works and the US treasury will surely try to explain this to him. His DOGE will have no power over either mandatory or discretionary funding so even if the Treasury doesn't manage to explain this to him he has no power to cut spending himself.

In more detail:

From his various statements on X, and previous interviews, Elon Musk has no idea how the US government debt works.

He sees the US government as a monopoly coorporation. The only example he gives of something that a government can do a better job of allocating the funding from taxes than private companies in this interview at about 13 minutes onwards is to send a probe to Mars.

. Elon Musk on EV Subsidies, Corporate Titles and China: The Full Transcript

Imagine him telling the US department of the Treasury say or Federal Reserve etc, about his theory that the US government is a corporation. It will be a serious case of amateur hour yet he has to head a task force to look at the entirety of the US government and how it works and to recommend how to change it.

I am sure the US Treasury will try to explain how the US National Debt works to him. It’s about how he responds, if he listens to them and learns from them and what he does once he realizes it doens’t work like business debt.

I don’t think he will be able to devote the time needed to understand the basics of monetary policy and how government works.

He doesn’t seem to be a good listener. Will see.

I don't think he will last long. As a contrarian he'd be arguing with the people he's supposed to be auditing and would be very confident but do bizarre things - but without the power of a CEO to fire anyone or to order them to do things and Trump wouldn't either.

What's more he just won't have the time to try to begin to understand how it all works.

He is way out of his comfort zone here.

Anyway his job is voluntary, no payment, it lasts until July 4th and is advisory only.

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