The one inescapable drag on the economy and every American taxpayer or government dependant is the interest obligation paid on the national debt. Indebtedness is nothing new to this country, but the inability to service the public debt stretches over the last half century. This trend is so disturbing that politicians spend every waking hour avoiding the consequences of the ultimate outcome, the demise of the currency. The reserve currency status that has allowed for effortless deficit spending has a day of reckoning. The final collapse of the global empire and superpower will smell more of financial evaporation than of a military defeat.
A brief review of The National Debt: How Did We Get Here?, provides a valuable background.
“Historically, the debt generally increased because of wars and economic depressions. The debt was then reduced after the war or during more prosperous times. This trend was broken beginning about 1918, and definitely so by the end of WW2. The last time the debt was actually reduced was in 1957 when it declined by 0.82%.”
What power on earth can reverse this ominous pattern of refusal to balance the books of federal spending? Do not look to the voodoo economics propagated by the free traders over at Redstates. “If the government stops accumulating debt today and dedicates oil from shale to paying off that existing debt, and if we produce just 8% of that oil and sell it on the global market, we can completely pay off our national debt with the proceeds.” Stop and evaluate such hooey.
Putting the federal government into the oil fracking business and selling domestic resources on the world market is an obscene economic model. Also, the notion that Congress would go cold turkey and ban any budget that is not in balance is about as probable as closing all foreign military bases because of funding shortfalls. However, the rudimentary reason that the growth in federal debt continues to rise is directed by who owns the obligations.
In Who Owns the U.S. National Debt?, an outline of entities that provide the money that finances the debt is informative.
The largest part (40%) of the Debt Held by the Public is owed to foreign governments and investors. The next largest part (20%) is not really the public, but other government entities, like the Federal Reserve and state and local governments. Another $2.6 trillion (20%) is held by the public through mutual funds, private pension funds, savings bonds or individual Treasury notes. A wee bit is held by businesses, like banks and insurance companies. Here’s the breakout:
Foreign – $4.5 trillion
Federal Reserve – $1.4 trillion
State and Local Government, including their Pension Funds – $708 billion
Mutual Funds – $636 billion
Private Pension Funds – $616 billion
Banks – $316 billion
Insurance Companies – $253 billion
Savings Bonds – $188 billion
Even under near zero interest rate returns, the trillions needed to satisfy the hungry appetite of spending continue to flow, even if the Federal Reserve needs to be a buyer of last resort. In a prosperous “main street” domestic economy, tax revenues would increase because the velocity on money expands. Yet taxation alone can never retire the national debt as long as the debt created money of central banking exists.
Source: Growth in the National Debt