From an article by Kimberly Amadeo, we get a clearer understanding about the National Debt:
The U.S. debt is more than $18 trillion. Most headlines focus on how much the U.S. owes China, which is one of the largest foreign owners. However, the biggest owner is actually the Social Security Trust Fund, aka your retirement money. How does that work, and what does it mean?
The Debt Is in Two CategoriesThe U.S. Treasury manages the U.S. debt through its Bureau of the Public Debt. It’s broken out the main categories:
- Intragovernmental Holdings, at $5.117 trillion, and
- Debt Held by the Public, at $13.024 trillion (as of December 31, 2014)
Intragovernmental Holdings - Nearly 30% of the Federal debt is owed to about 230 other Federal agencies. Why would the government owe money to itself? Some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need right now. Rather than stick this cash under a giant mattress, they buy U.S. Treasuries with it.This effectively transfers their excess cash to the general fund, where it can be spent. Of course, one day they will redeem their Treasury notes for cash. The Federal government will either need to raise taxes, or issue more debt, to give the agencies the cash they will need.
To expand on this: Social Security has lots of money,... on paper. From this explanation it is clear to me how Social Security gets funneled into the General Fund and can be used for whatever. So far, Social Security is receiving more money than it needs to pay out. The question is, for how long? As thousands of Americans are added to the retirement list, more money will be needed to pay out. So, when will the government pay itself back? And from where does the money come, to do that? As in the last sentence of the quote: The Fed either needs to raise taxes or issue more debt! In other words, it is not money (liquid, like cash) that is available to pay out, because it is already spent! So new taxes will have to be levied or more money created "out of thin air." So the problem is not that Social Security is broke, but that Social Security funds have been re-allocated, used elsewhere, and ultimately cannot meet its obligation to pay it out. Let's look again at the article:
Why Does the Federal Reserve Own Treasury Debt?
As the nation's central bank, the Federal Reserve is in charge of the country's credit, so it really doesn't have a financial reason to own Treasury notes. So why did it double its holdings between 2007 and 2014?
That's when it ramped up its open market operations, purchases of Treasuries. This Quantitative Easing stimulated the economy by keeping interest rates low, escaping the grips of the recession.
The Fed's been criticized for simply monetizing the debt. The Fed purchases Treasuries from its member banks, using credit it created out of thin air. This has the same effect as printing money. By keeping interest rates low, the Fed helps the government avoid the high-interest rate penalty it would usually incur for excessive debt.
The Fed ended QE in October 2014. As a result, interest rates on the benchmark 10-year Treasury note rose from a 200-year low of 1.442% in June 2012 to around 2.17% by the end of 2014
By monetizing the debt, interest rates can be held low. Since the credit is created out of thin air, the low interest rates being the consequence, are also created out of thin air. The low interest rates, form then the incentive for people to buy bigger houses than they can afford in the first place, in order to "get the economy going." So, is the government trying to get the economy going out of thin air, the logical conclusion?
Is the GDP increasing for the right reasons?
