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The National Debt

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Many people are mis-informed about the national debt.  The debt is often used in political campaigns as something that is promised to be "Paid Off" etc..., and this only wins votes with those that have no clue what the federal debt really is. 
 
 

A very good site to refer to regarding the public debt is http://www.publicdebt.treas.gov/bpd/bpdhome.htm .     Basically, the debt is Treasury securities (i.e. gov bonds etc).  The government is not the ownder of this debt...and this is the main misunderstanding I come across with people.  Owners of government securities such as the public, federal reserve banks, foreign investors and corporations are actually the owners of the national debt!  The debt grows if the govenment sells securities to a buyer (or bonds to a citizen for example).  Every time you buy a bond, you increase the national debt!  The total public debt, according to the treasury department, decreases when there are more redemptions of Treasury securities than there are issues.  This is quite simple math as anyone can see....but if you really want the govenment to "pay off the debt"...they would come to your door DEMANDING to buy your bonds and treasuries back right away...and you would have no choice but to give them back. 
 
Even though the public debt will grow so long as more treasuries are sold than redeemed, the bureau of the Public Debt is more than willing to take "donations" to put towards the debt.  So all of you folks who think that you shouldn't get a tax break because you think the debt is too big, you can send checks to:
 
ATTN DEPT G
BUREAU OF THE PUBLIC DEBT
PO BOX 2188
PARKERSBURG, WV 26106-2188
 
The Bureau of the Public Debt explains quite basically how the system works: "You can think of the total debt as accumulated deficits plus accumulated off-budget surpluses. The on-budget deficits require the Treasury to borrow money to raise cash needed to keep the Government operating. We borrow the money by selling Treasury securities like T-bills, notes, bonds and savings bonds to the public. Additionally, the Government Trust Funds are required by law to invest accumulated surpluses in Treasury securities. The Treasury securities issued to the public and to the Government Trust Funds (Intragovernmental Holdings) then become part of the total debt."

The following was taken from http://www.oswego.edu/~edunne/debtmyths.html (Oswego State University of NY) and may answer many questions about the debt:
Myths vs. Realties for the United States National Debt

Myth #1: The National Debt will cause the United States to go bankrupt

Reality: The U.S. is not like you or me. The U.S. government has the power to tax the largest economy in the world, the power to print money and has an infinite life expectancy. All of these factors mean the federal government can incur large amounts of debt.Myth #2: We have to pay back all of the $5.6 trillion in debt Reality: The U.S. can simply "roll over" its debt year after year. That is, the Treasury Dept. issues new bonds to pay off the old ones. This is not a problem as long as investors are willing to hold U.S. Treasury bonds. U.S. Treasury bonds are very popular due to their liquidity (they are easily converted to cash), their low risk (they have zero default risk because they are backed by "the full faith and credit" of the U.S. government), and certain tax advantages.Myth #3: The interest payments on the national debt are a burden to future generations. Reality: U.S. citizens or even agencies of the U.S. government own most of the debt. Thus we are just paying interest to ourselves.Myth #4: Foreign ownership of the debt causes money to flow out of the U.S. Reality: Foreign interests own only about 15% of the debt, and this proportion has remained virtually unchanged since 1980. They typically reinvest their interest payments in the U.S.Myth #5: The national debt is out of control. Reality: The true measure of the debt of a nation is the ratio of that debt to the size of the economy. The debt-to-GDP ratio for the U.S. is relatively modest compared (1) to other nations and (2) historically.
 
 
There are, however two potential problems with our national debt:
  1. The interest payments on the debt redistribute income from taxpayers to bondholders. This redistribution is potentially regressive since wealthier households hold Treasury bonds. So all taxpayers pay debt interest but mostly wealthier taxpayers receive that interest. However, higher income households also bear a larger tax burden than low- and middle-income households: In 1999 the top 1% of household in terms of income paid over 30% of all income taxes.
  2. Large debts may produce the crowding out effect. Large debt levels by the U.S. government increase the demand for loanable funds, which increases interest rates and reduces the amount of private borrowing for investment spending. The size of this effect is a subject of debate among economists.