National debt of the United States: Difference between revisions

===Negative real interest rates===▼

Since 2010, the U.S. Treasury has been obtaining [[Real interest rate#Negative real interest rates|negative real interest rates]] on government debt, meaning the inflation rate is greater than the interest rate paid on the debt.<ref>Saint Louis Federal Reserve (2012) [http://research.stlouisfed.org/fred2/series/DFII5 "5-Year Treasury Inflation-Indexed Security, Constant Maturity"] FRED Economic Data chart from government debt auctions (the x-axis at y=0 represents the inflation rate over the life of the security)</ref> Such low rates, outpaced by the [[Inflation|inflation rate]], occur when the market believes that there are no alternatives with sufficiently low risk, or when popular institutional investments such as insurance companies, [[pension]]s, or bond, money market, and balanced [[mutual fund]]s are required or choose to invest sufficiently large sums in Treasury securities to hedge against risk.<ref name="liquidation" /><ref>David Wessel (August 8, 2012) [https://www.wsj.com/articles/SB10000872396390444900304577577192417116440 "When Interest Rates Turn Upside Down"] ''[[The Wall Street Journal]]'' ([http://www.htisec.com/en/research/shownews.jsp?newsType=DJ&newsid=c-20120808DN019794 full text] {{webarchive|url=https://web.archive.org/web/20130120020448/http://www.htisec.com/en/research/shownews.jsp?newsType=DJ&newsid=c-20120808DN019794 |date=January 20, 2013 }})</ref> Economist [[Lawrence Summers]] states that at such low interest rates, government borrowing actually saves taxpayer money and improves creditworthiness.<ref>Lawrence Summers (June 3, 2012) [https://web.archive.org/web/20120605042224/http://blogs.reuters.com/lawrencesummers/2012/06/03/breaking-the-negative-feedback-loop/ "Breaking the negative feedback loop"] ''Reuters''</ref>▼

In the late 1940s through the early 1970s, the U.S. and UK both reduced their debt burden by about 30% to 40% of GDP per decade by taking advantage of negative real interest rates, but there is no guarantee that government debt rates will continue to stay this low.<ref name="liquidation">Carmen M. Reinhart and M. Belen Sbrancia (March 2011) [http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf "The Liquidation of Government Debt"] National Bureau of Economic Research working paper No. 16893</ref><ref>William H. Gross (May 2, 2011) [http://www.pimco.com/EN/insights/pages/the-caine-mutiny-part-2.aspx "The Caine Mutiny (Part 2)"] ''PIMCO Investment Outlook''</ref> Between 1946 and 1974, the U.S. debt-to-GDP ratio fell from 121% to 32% even though there were surpluses in only eight of those years which were much smaller than the deficits.<ref>[https://www.theatlantic.com/business/archive/2013/02/why-the-us-government-never-ever-has-to-pay-back-all-its-debt/272747 "Why the U.S. Government Never, Ever Has to Pay Back All Its Debt"], ''[[The Atlantic]]'', February 1, 2013.</ref>▼

=== Raising reserve requirements and full reserve banking ===▼

Two economists, Jaromir Benes and Michael Kumhof, working for the [[International Monetary Fund]], published a working paper called ''[[Chicago plan|The Chicago Plan Revisited]]'' suggesting that the debt could be eliminated by raising bank [[reserve requirement]]s and converting from [[fractional-reserve banking]] to [[full-reserve banking]].<ref>Ambrose Evans-Pritchard (October 21, 2012) [https://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html "IMF's epic plan to conjure away debt and dethrone bankers"] ''[[The Daily Telegraph|The Telegraph]]''</ref><ref>Jaromir Benes and Michael Kumhof (August 2012) [http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf "The Chicago Plan Revisited"], International Monetary Fund working paper WP/12/202; accessed November 6, 2016.</ref> Economists at the [[Paris School of Economics]] have commented on the plan, stating that it is already the ''status quo'' for coinage currency,<ref>[http://hal.cirad.fr/docs/00/74/79/04/PDF/12064.pdf "Debt-Deflation versus the Liquidity Trap: the Dilemma of Nonconventional Monetary Policy"] ''CNRS, CES, Paris School of Economics, ESCP-Europe'', October 23, 2012</ref> and a [[Norges Bank]] economist has examined the proposal in the context of considering the [[Financial services|finance industry]] as part of the [[real economy]].<ref>{{Cite web|url=http://works.bepress.com/cgi/viewcontent.cgi?article=1009&context=thorvaldgrung_moe|title="Credit and debt in Economic Theory: Which Way forward?" ''Economics of Credit and Debt workshop'', November 2012}}</ref> A [[Centre for Economic Policy Research]] paper agrees with the conclusion that "no real liability is created by new [[fiat money]] creation and therefore public debt does not rise as a result."<ref>[http://www.cepr.org/pubs/PolicyInsights/PolicyInsight62.pdf "The economic crisis: How to stimulate economies without increasing public debt"] {{webarchive |url=https://web.archive.org/web/20120916093844/http://www.cepr.org/pubs/PolicyInsights/PolicyInsight62.pdf |date=September 16, 2012 }}, Centre for Economic Policy Research, August 2012.</ref>▼

==Debt ceiling==▼

{{Main|United States debt ceiling}}▼

The United States debt ceiling is a legislative constraint on the amount of national debt that can be incurred by the [[U.S. Treasury]]. It limits how much money the federal government may pay on the debt it already has by borrowing even more money. The debt ceiling applies to almost all federal debt, including accounts owned by the public and intra-government funds for [[Medicare (United States)|Medicare]] and [[Social Security (United States)|Social Security]].<ref name="fpc">[http://www.fas.org/sgp/crs/misc/RL31967.pdf The Debt Limit: History and Recent Increases, October 2013], p 4.</ref><ref>{{Cite web |date=2023-05-05 |title=Q&A: Everything You Should Know About the Debt Ceiling {{!}} Committee for a Responsible Federal Budget |url=https://www.crfb.org/papers/qa-everything-you-should-know-about-debt-ceiling |access-date=2023-06-01 |website=www.crfb.org |language=en}}</ref>▼

===Concerns over Chinese holdings of U.S. debt===▼

According to a 2013 [[Forbes]] article, many American and other [[Financial analyst|economic analysts]] have expressed concerns on the amount of United States government debt the People's Republic of China is holding.<ref>[https://www.forbes.com/sites/kenrapoza/2013/01/23/is-chinas-ownership-of-u-s-debt-a-national-security-threat/#41479958afa3 "Is China's Ownership Of U.S. Debt A National Security Threat?"] by Kenneth Rapoza, ''[[Forbes]]'', 23 January 2013</ref><ref name=cnn>"... Should Americans be concerned that China has started dumping some of its Treasury holdings? After all, it raises serious questions about whether China will keep lending Washington money to help finance the federal deficit in the future.": From [https://money.cnn.com/2015/09/10/investing/china-dumping-us-debt "China is dumping U.S. debt"], CNN.com, September 11, 2015.</ref> as part of their reserves. The [[National Defense Authorization Act]] of FY2012 included a provision requiring the [[United States Secretary of Defense|Secretary of Defense]] to conduct a "national security risk assessment of U.S. federal debt held by China." The department issued its report in July 2012, stating that "attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States. An August 19, 2013 [[Congressional Research Service]] report said that the threat is not credible and the effect would be limited even if carried out. The report said that the threat would not offer "China deterrence options, whether in the diplomatic, military, or economic realms, and this would remain true both in peacetime and in scenarios of crisis or war."<ref name="labonte">[https://www.fas.org/sgp/crs/row/RL34314.pdf Report] on "China's Holdings of U.S. Securities: Implications for the U.S. Economy" by Wayne M. Morrison & Marc Labonte, [[Congressional Research Service]], 19 August 2013</ref>▼

A 2010 article by [[James K. Galbraith]] in ''[[The Nation]]'', defends deficits and dismisses concerns over foreign holdings of United States government debt denominated in U.S. dollars, including China's holdings.<ref name="james">:"...&nbsp;What about indebtedness to foreigners?&nbsp;... To acquire [U.S. gov't bonds], China must export goods to us, not offset by equivalent imports. That is a cost to China. It's a cost [[Government of China|Beijing]] is prepared to pay, for its own reasons: export industries promote learning, technology transfer and product quality improvement, and they provide jobs to migrants from the countryside. But that's China's business. For China, the bonds themselves are a sterile [[hoard]]. There is almost nothing that Beijing can do with them;&nbsp;... its stock of T-bonds will just go on growing. And we will pay interest on it, not with real effort but by typing numbers into computers. There is no burden associated with this; not now and not later." From [http://www.thenation.com/article/defense-deficits/ "In Defense of Deficits"] by [[James K. Galbraith]], ''[[The Nation]]'', March 4, 2010.</ref> In 2010, [[Warren Mosler]], wrote that "When[ever] the Chinese redeem those T-securities, the money is transferred back to China's checking account at the Fed. During the entire purchase and redemption process, the dollars never leave the Fed."<ref name="mosler">"...&nbsp;The Chinese buy U.S. T-securities by transferring U.S. dollars (not yuan) from their checking account at the Federal Reserve Bank to China's T-security account, also at the Federal Reserve Bank. When[ever] the Chinese redeem those T-securities, the money is transferred back to China's checking account at the Fed. During the entire purchase and redemption process, the dollars never leave the Fed." [http://moslereconomics.com/2010/09/23/what-policies-for-global-prosperity/ "What Policies for Global Prosperity?"] by [[Warren Mosler]], September 23, 2010.</ref> Australian economist [[Bill Mitchell (economist)|Bill Mitchell]] argued that the United States government had a "nearly infinite capacity...to spend."<ref name="mitchell">[[Bill Mitchell (economist)|Mitchell, Bill]], [[University of Newcastle (Australia)]]. [http://bilbo.economicoutlook.net/blog/?p=18813 "The nearly infinite capacity of the US government to spend"] (March 28, 2012); [http://bilbo.economicoutlook.net/blog/?p=25161 "The US government can buy as much of its own debt as it chooses"] (August 27, 2013)</ref> Against the backdrop of escalating Sino-U.S. tensions in 2020, Yuzo Sakai, a manager at Ueda Totan Forex Ltd., said that if China undertakes a massive sales of U.S. bonds, investors may flock to the [[Japanese yen]] as a safe-heaven currency. Since 2018, China had been gradually decreasing its holdings of U.S. federal debt, bringing the total to $1.07 trillion in June 2020, behind Japan who became the biggest foreign creditor of the United States. Stephen Nagy, a professor at the [[International Christian University]], said a sell-off by China "might damage the United States in the short term" but also cause "critical economic instability" in the Chinese and global economy. [[Jeff Kingston]], a professor and director of Asian Studies at [[Temple University, Japan Campus|Temple University, Japan]], echoed the view, adding that dumping would lower the price of U.S. bonds, making it more attractive to other countries. According to an [[institutional investor]], however, it may be difficult for Japan to boost its already large holdings of U.S. government debt, as such a move could be seen as "currency manipulation".<ref>{{Cite web |last=Tachikawa |first=Tomoyuki |date=Aug 20, 2020 |title=Fears grow over China's possible massive sales of U.S. debt as weapon |url=https://english.kyodonews.net/news/2020/08/fb165250518a-focus-fears-grow-over-chinas-possible-massive-sales-of-us-debt-as-weapon.html |website=Kyodo News+}}</ref>▼