The National Debt, The Deficit, And The Interest On The Debt

The National Debt, The Deficit, And The Interest On The Debt
Rilsonav / Pixabay

Let us begin with this article on the National Debt with a segment of  the transcript of a Washington Post interview of Donald Trump conducted by Bob Woodward on March 31, 2016.

Trump: We’ve got to get rid of the $19 trillion in debt.

Woodward: How long would that take?

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Trump: I think I could do it fairly quickly…

Woodward: What’s fairly quickly?”

Trump: Well, I would say over a period of eight years.

Like many other Americans, Mr. Trump evidently confused the national debt with the federal budget deficit (the amount by which expenditures exceed tax revenues). Our deficits averaged about $500 billion during fiscal years 2014 through 2016. It’s certainly within the realm of possibility to eliminate the deficit and balance the budget by the mid-2020s. But getting rid of the national debt is not a realistic goal.

One reason for confusing the national debt and the federal budget deficit is that they are very closely related. Since the 1830s, our nation has been accumulating a national debt — the money it owes to the holders of U.S government bonds, Treasury notes, and other U.S. government- issued securities.

Every year we run a deficit, that amount is added to our national debt. And every year we run a surplus, we pay off that amount from the debt. During depressions and recessions, we usually run substantial deficits because tax receipts fall and government spending on public assistance, unemployment insurance benefits, and food stamps rises.

Our deficits also rise during major wars, such as the Civil War, World War I, and World War II because of our huge defense expenditures.

Until the 1970s, we often ran federal budget surpluses during relatively prosperous years.  But since 1969, we’ve had surpluses in just four years, 1998, 1999, 2000, and 2001. There were deficits every other year, and they are expected to continue well into the next decade.

Our national debt is just over $19.9 trillion, and should reach the $20-trillion mark as soon as  September.

Although the national debt has been considered much too large for many decades, it was not until 1981 that it actually reached the alarming level of $1 trillion. It took until just 2009 for the national debt pass the $10-trillion mark, and will take eight more years to reach $20 trillion.

Because we will continue running deficits, our debt will keep growing. To make matters worse, the Federal Reserve has begun pushing up interest rates. This, in turn, will raise the borrowing costs of the U.S. Treasury.

During the last three years, the Treasury was paying holders of the national debt an average of $422 billion in interest. Not only does the Treasury need to issue new bonds, notes, and certificates to finance the deficit, but it must also roll over about one quarter of the debt that falls due each year.

The interest rates that the Treasury has had to pay has been rising in recent months, and the Fed has indicated that those rates will continue to rise. So what will be happening to the interest payments that the Treasury will need to pay?

You guessed it! They will go up. Indeed, they may even double by 2020. But wait! It gets still worse.

We know that the national debt will keep rising through the middle of the next decade. So the Treasury will need to pay interest on that additional debt. We also know that rising interest rates will drive up how much the Treasury has to pay holders of the debt as it is rolled over

We can look forward to deficits driven up by a rising national debt and rising interest rates. We shall also see the national debt driven up by rising deficits and interest rates. In sum, we may well be in the beginning stages of a vicious circle of rising interest rates, deficits, and the national debt.

The Congressional Budget Office is projecting much larger deficits over the next ten years, resulting in a $10 trillion increase in the national debt.

To add a little drama to these dire predictions, later this summer Congress will begin debate on  raising the current national debt legal ceiling from $20 trillion. But that’s another story.

Steve Slavin has a PhD in economics from NYU, and has written sixteen math and economics books, including a widely used introductory economics textbook now in its eleventh edition (McGraw Hill) and The Great American Economy (Prometheus Books) due out in August 2017.

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