Putting U.S. Debt in Perspective

Tab 1

Spring 2013

U.S. government debt has received much attention of late — both inside and outside Washington — as Congress begins its deliberations over raising the federal debt ceiling. However, the charged political climate in our nation’s capital, as well as continuing coverage of certain European countries’ debt problems, make it difficult to gauge the level of U.S. debt as it relates to the nation’s economic health, according to a new paper from The Private Client Reverse titled, “Debt: A Problem in Perspective.”


“The long-term fiscal health of our country is on everyone’s mind, as well it should be,” says John De Clue, Chief Investment Officer for The Private Client Reserve. “So we thought it appropriate to provide additional information and insights on this important topic in response to our clients’ concerns.”


A Closer Look at the Debt

For perspective, the consensus among economists is that when a country's debt-to-GDP rises to a certain level, its economic growth tends to be impaired.


“The key to economic growth is robust savings andinvestment,” De Clue says. “Debt inevitably entailsthe payment of interest, and these interest payments represent funds unavailable for those activities that drive long-term growth in our economy.”

The number typically touted in the media is the United States’ “gross debt,” which is about $16.5 trillion or about 104 percent of GDP. That’s higher than Spain’s debt in relation to its economy (90 percent), and in the range considered to be a risk to future economic growth.


Another major concern is the amount of U.S. debt held by China — about $1.2 trillion, which is less than 10 percent of the nation’s total debt.

Tab 2

Spring 2013

The perception is this creates an additional risk for the country’s financial stability should China decide to cut back its financial commitment to U.S. debt securities.


“Gross debt and debt held outside the United States certainly are valid concerns, but taken in isolation, they can be somewhat misleading,” De Clue says.


To help clarify some of the misinformation circulating:

  • Of the $16.5 trillion in gross U.S. government debt, the largest holder is not China but the United States. The Social Security trust fund has more than $5 trillion invested in U.S. government securities. This $5 trillion of the nation’s debt can be categorized as intergovernmental holdings, and therefore a relatively reliable source of ongoing investment in our nation’s debt.
  • The largest holder of our public debt is the Federal Reserve, which holds about $1.7 trillion of U.S. government debt or 42 percent more than China. For all practical purposes, this also can be categorized as intergovernmental holdings.
  • If we assume that the total debt “held by the public”—in other words, all federal debt other than intergovernmental holdings—amounts to $11.5 trillion, this results in a debt-to-GDP ratio of about 73 percent, a much more manageable number than the 104 percent top-line number associated with the “gross debt.”
  • After all intergovernmental holdings, the total value of publicly held debt is $9.8 trillion, or a debt-to-GDP ratio of 60 percent, approaching the 50 percent ratio of Germany, which is widely considered to be the most financially stable government in Europe.

“Let’s be clear: Although U.S. Treasury securities continue to be viewed as some of the safest investments in the world, it’s important to look over the horizon and acknowledge the looming issue of rising obligations stemming from our entitlement programs such as Medicaid, Medicare and Social Security,” De Clue says. “Ultimately, we’ll have to ‘raise the bridge or lower the water’ in terms of managing our future obligations.”


For more insights into the U.S. debt situation, download “Debt: A Problem in Perspective,” a paper from The Private Client Reserve of U.S. Bank.


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