Tags: Myth | US | National | Debt

Myth of the US National Debt

Saturday, 07 Sep 2013 11:11 AM

By Dr. Hans D. Baumann

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Popular opinion holds that once Congress balances the budget, there will be no more increases in our national debt, which now stands at close to $17 trillion.

Unfortunately, that is not so. Besides the debt accumulated by government’s excess spending, there is an almost invisible accumulation of debt we owe to foreign governments. This is money we owe for buying goods for which we have no cash, and instead pay with government bonds and other obligations.

The official word for such debt is “the current account deficit.” It now stands at about $7 trillion to which we add yearly about $400 billion. All this gets ignored by pundits.

This deficit is composed primarily by our trade deficit that is the difference between what we import and what we export in goods and services. This difference averages about $450 billion per year, since we still import more than we export.

It is therefore apparent, that our national debt keeps growing, despite what Congress might do to curb our domestic spending. Such growth in the foreign debt cannot be stopped, unless we bring our house in order and revert from a consumer society to a producing one — as we used to be.

This predicates a revitalization of our manufacturing sector.

The bulk of U.S. obligations held by foreign countries is in the form of short-term notes, but mostly in long-term government bonds. These are basically I.O.U.’s payable by our government in five, 10, or 30 years, together with interest thereon.

Besides those, there are other financial obligations such as accounts receivable, private notes, interest due on bonds and, of course loans on capital investments of U.S. firms abroad.

The following tabulations show which country holds most of our federal obligations as of April 2013. This tabulation does not include U.S. bonds held in foreign custodial accounts (tax havens, for example).

U.S. Treasury Securities Held by Foreign Entities (U.S. Trillions)
China 1.265 22.3 percent
Japan 1.100 19.4 percent
Caribbean Banks 0. 273  4.8 percent
Oil Export Countries 0.272  4.8 percent
Brazil 0.253  4.5 percent
All others (23 countries) 2,506  44.2 percent
Total  5.670 100 percent
Source: U.S. Treasury Department

It is of interest, that the total face mount of US Treasury Bonds held by foreign countries, on January 2011, was only $4.45 trillion. Therefore, the debt increased by $1.22 trillion during the past 27 months, an average increase of $45 billion per month.

This is roughly equal to the current monthly trade deficit. Noteworthy too is the fact that China’s holding of U.S. obligations increased from 6 percent in the year 2000 to the present 22.3 percent.

According to Peking Review (20-6-13), China’s foreign exchange reserves stand at the equivalent of $3.44 trillion. It is estimated, that about 50 percent of that amount ($1.72 trillion) is in the form of U.S. denominations.

Unfortunately, there is a difference between the domestic portion of our national debt and debt we have to pay foreign countries. Domestic debt can be reduced, or eliminated, by raising taxes, creating inflation or, by devaluating one’s currency.

Foreign debt, in contrast can not be repaid with newly printed dollars. Unless forgiven, or, its value deflated, it has to be repaid with gold or, by strong exports, which have to exceed the importation of goods, thus creating a positive trade balance. Reducing the import of foreign oil and replacing it with domestic shale oil is a step in the right direction.

Dr. Hans D. Baumann is an internationally known engineer and consultant, author of business books, and a former corporate vice president.

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