What happens if the U.S. debt gets too big?
“Governments should borrow and spend carefully during wars, recessions, crises.” But if the debt gets too big, Cochrane cautioned, the government might not be able to respond so decisively next time. The money might be slower to come, and the government might not be able to raise as much.
A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth. It also increases expectations of higher rates of inflation and erosion of confidence in the U.S. dollar.
It began rising at a fast rate in the 1980's and was accelerated through events like the Iraq Wars and the 2008 Great Recession. Most recently, the debt made another big jump thanks to the pandemic with the federal government spending significantly more than it took in to keep the country running.
Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).
The nation is on an unsustainable fiscal path, driven by the mismatch between the government's commitments and its revenues. Furthermore, the accumulation of federal debt and relatively high interest rates will push the government's borrowing costs increasingly higher — crowding out investments in other priorities.
| Country/territory | US foreign-owned debt (January 2023) |
|---|---|
| Japan | $1,104,400,000,000 |
| China | $859,400,000,000 |
| United Kingdom | $668,300,000,000 |
| Belgium | $331,100,000,000 |
- Japan. Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP. ...
- United States. ...
- China. ...
- Russia.
| Characteristic | National debt in relation to GDP |
|---|---|
| Macao SAR | 0% |
| Brunei Darussalam | 2.06% |
| Kuwait | 3.08% |
| Hong Kong SAR | 4.27% |
Tax hikes alone are rarely enough to stimulate the economy and pay down debt. Governments often issue debt in the form of bonds to raise money. Spending cuts and tax hikes combined have helped lower the deficit. Bailouts and debt defaults have disadvantages but can help a government solve a debt problem.
Why Is the U.S. Debt So High? Essentially, because the government repeatedly spends more money than it receives in tax revenue. Many point to tax cuts passed by Congress as the major culprit for decreasing this income. Others point to out-of-control, politically-driven spending as the reason.
How much does the US owe China?
China is one of the United States's largest creditors, owning about $859.4 billion in U.S. debt. 1 However, it does not own the most U.S. debt of any foreign country.
By January of 1835, for the first and only time, all of the government's interest-bearing debt was paid off. Congress distributed the surplus to the states (many of which were heavily in debt). The Jackson administration ended with the country almost completely out of debt!
The U.S. government issues debt in the form of Treasury bonds, bills and notes. These government securities provide a safe place for investors to park their money while earning interest. Some economists warn the U.S. debt-to-GDP ratio is too high, which serves as an indicator for whether a country can pay off its debt.
The financial position of the United States includes assets of at least $269 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP).
Unless current revenue and spending policies change, by 2028 debt will reach its historical high of 106 percent of GDP, according to our simulation. If unaddressed, it will grow more than twice as fast as the economy and reach 200 percent of GDP by 2050.
What percentage of America is debt-free? According to that same Experian study, less than 25% of American households are debt-free. This figure may be small for a variety of reasons, particularly because of the high number of home mortgages and auto loans many Americans have.
With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt. Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years.
Among other countries, Japan and China have continued to be the top owners of US debt during the last two decades. Since the dollar is a strong currency that is accepted globally, holding a substantial amount of US debt can be beneficial.
The $34 trillion gross federal debt includes debt held by the public as well as debt held by federal trust funds and other government accounts. In very basic terms, this can be thought of as debt that the government owes to others plus debt that it owes to itself.
Former financial arbitrage trader Jerome Kerviel is the most indebted man on the planet, owing his former employer $6.3 billion. The amount Kerviel owes to French bank Societe Generale for fraudulent trades made in 2007 and 2008 would make Kerviel one of the 50 richest people in America if those debts were assets.
Who is the largest holder of the U.S. debt?
Domestic Holders of Federal Debt
The Federal Reserve, which purchases and sells Treasury securities as a means to influence federal interest rates and the nation's money supply, is the largest holder of such debt.
- Brunei. 3.2%
- Afghanistan. 7.8%
- Kuwait. 11.5%
- Democratic Republic of Congo. 15.2%
- Eswatini. 15.5%
- Palestine. 16.4%
- Russia. 17.8%
- Somalia.
- South Sudan.
- Sudan.
- Tanzania.
- The Gambia.
- Togo.
- Uganda.
- Zambia.
The organizations that make up the World Bank Group are owned by the governments of member nations, which have the ultimate decision-making power within the organizations on all matters, including policy, financial or membership issues.
Public debt in Russia averaged 15.4% of GDP in the decade to 2022, below the average of 32.5% of GDP for Eastern Europe. Public debt in Russia was 18.9% of GDP in 2022.
