National Debt: Macroeconomic Perspective
For years, the issue of the Government's national debt (and its payment) has been a major political issue. As of July 1st, 2004 the Federal Debt has reached an all time high of 7.252 trillion dollars (that means that each person in the United States is be over 24,000 dollars in debt). According to economists, the debt will increase by 1.6 billion dollars per day!
In economical terms, a debt occurs when an individual or group borrows money and is charged interest on that loan. The Federal Government through deficits (spending more than what is collected in taxes) in budget spending created this debt of over seven trillion dollars. In the Revised Circular Flow Model in the appendix, we can see that there is a leakage of government spending into interest paid on its debt. The dollar amount in interest that the borrower (the government in this case) must pay to simply maintain the debt is called the debt service. Currently the debt service of the federal treasury is 576 billion dollars annually; approximately 32% of the Government's total receipts (similar to and individual's income).
With every borrower there must be a loaner, and this is true with the Federal Government's loan. Currently, the debt is distributed in several areas: (See Revised Circular Flow Model in Appendix)
Debt from all governmental trust funds totals over 3.05 trillion dollars.
Included is the 1.59 trillion dollars that has been taken from the Social Security Trust (this amount is equal to approximately 90% of the total Federal Budget).
Over 4.2 trillion is owed to the General Public in the form of U.S. Securities.
In the first part of the debt, the government has taken money from various
trust funds (accounts that hold money that is designated for a set purpose) and spent it without replacing the cash borrowed, thus creating debt. The two major funds represented within this area are Medicare and Social Security (there are several others included as well). This presents a very disturbing fact for several reasons. First, the money in these trusts was to only be spent for particular purposes. For example, the funds in social security should only be used for those who need social security. It should also be known that the limitations on the usage of these funds were protected by law (preventing the government from spending the funds differently). However, Congress reversed its actions soon after by allowing the federal government to use the funds on loan. This becomes a great problem when people go to legally use these trusts, for the government has taken all the money from them. Therefore, the government must then borrow more money from other areas (namely the public) to pay for the money that they have already borrowed; exponentially increasing the debt and the interest service (See Borrowing Chart in Appendix). This is major problem for the Social Security Trust, which has 1.59 trillion dollars worth the IOU's in it.