What does the giant compounding number, known as the "National Debt" represent?

Government debt

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Government debt (also known as public debt or national debt) is money owed by any level of government; either central government, federal government, municipal government or local government.

As the government represents the people, government debt can be seen as an indirect debt of the tax payers.

Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities such as government bonds and bills. Less credit worthy countries sometimes borrow directly from commercial banks or supranational institutions. Some people consider all government liabilities, including future pension payments and payments for goods and services the government has contracted for but not yet paid, as government debt.

Another common division of government debt is by duration. Short term debt is generally considered to be one year or less, long term is more than ten years. Medium term debt falls in the middle.

Contents

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* 1 Government and sovereign bonds

* 2 Municipal, provincial or state bonds

* 3 Denominated in reserve currencies

* 4 Risk

* 5 Clearing and defaults

* 6 Structure

* 7 Scale

* 8 Problems

* 9 Implicit debt

* 10 See also

* 11 References

* 12 External links

o 12.1 United States

o 12.2 Global

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Government and sovereign bonds

Main articles: government bond and sovereign bond

A government bond is a bond issued by a national government denominated in the country's domestic currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Government bonds are usually considered risk-free bonds, because the government can raise taxes, reduce spending, or simply print more money to redeem the bond at maturity. Investors in sovereign bonds have the additional risk that the issuer is unable to obtain foreign currency to redeem the bonds.

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Municipal, provincial or state bonds

Further information: Municipal bond

Municipal bonds or "munis" in the United States are debt securities issued by local governments (municipalities).

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Denominated in reserve currencies

Governments borrow money in a currency for which the demand is strongest. The advantage of issuing bonds in a currency such as the euro or the US dollar, is that the universe of investors for the bonds is very large. Countries such as the United States, France and Germany have only issued in their domestic currency. Relatively few investors are willing to invest in currencies that do not have a long track-record of stability. The disadvantage for a government issuing bonds in a foreign currency, is that there is a risk that they will not be able to obtain the foreign currency to pay the interest or redeem the bonds. In 1997/1998, during the Asian financial crisis this became a serious problem when many countries were unable to keep their exchange rate fixed due to speculative attacks.

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Risk

Main article: Credit risk

Lendings to a national government in the country's own sovereign currency are often considered "risk free" and are made at a so-called "risk-free interest rate". This is because the debt and interest can be repaid by raising taxes, a reduction in spending, or failing that by simply printing more money. Naturally, this would increase inflation and reduce the value of the invested capital. An extreme example of this is provided by Weimar Germany of 1920s which suffered from hyperinflation due to its government's inability to pay the national debt.

A politically unstable state is anything but risk-free as it may, being sovereign, cease its payments with impunity. Famous examples of this phenomenon are the Spain of 18th century which nullified its government debt seven times during a century and revolutionary Russia of 1917 which refused to accept the responsibility for Imperial Russian debt. Another political risk is caused by external threats. It is most uncommon for invaders to accept responsibility for the national debt of the annexed state. For example, all debts taken by Confederate States of America were left unpaid after the American Civil War.

US Treasury bonds denominated in US dollars are often considered "risk free" but this ignores the risk to foreign purchasers of currency exchange rate movements. In addition, this implicitly accepts the stability of the US government and its ability to continue repayments in a difficult financial crisis.

Lendings to a national government in a currency other than its own does not allow for the same confidence in the ability to repay but this is offset somewhat by reducing the exchange rate risk to foreign lenders. On the other hand, national debt in foreign currency cannot be disposed of by starting a hyperinflation, which increases the credibility of the debtor. Usually small states with volatile economies have most of their national debt in foreign currency. For countries in the Eurozone, the Euro is the local currency, although no single state can trigger inflation by printing more money.

Lendings to a local or municipal government can be just as risky as a loan to a private company, unless the local or municipal government has the power to tax. In this case, the local government can escape its debts by increasing the taxes, or reduce spending, just as a national one. Local government loans are sometimes guaranteed by the national governernment and this reduces the risk. In some jurisdictions, interest earned on local or municipal bonds is tax-exempt income, which can be an important consideration for the wealthy.

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Clearing and defaults

Main article: clearing and defaults, clearing (finance), default (finance)

Public debt clearing standards are set by the Bank for International Settlements, but defaults are governed by extremely complex laws which vary from jurisdiction to jurisdiction. Globally, the International Monetary Fund has the power to intervene to prevent anticipated defaults. It has been very heavily criticized for the measures it advises nations take, which often involve cutting back essential services as part of an economic austerity regime. In triple bottom line analysis, this can be seen as degrading capital on which the nation's economy ultimately depends.

Private debt, by contrast, has a relatively simple and far less controversial model: credit risk (or the consumer credit rating) determines interest rate, more or less, and entities go bankrupt if they fail to repay. Governments cannot really go bankrupt (and suddenly stop providing services to citizens), thus a far more complex way of managing defaults is required.

Smaller jurisdictions, such as cities, are usually guaranteed by their regional or national levels of government. When New York City over the 1960s declined into what would have been a bankrupt status (had it been a private entity) by the early 1970s, a "bailout" was required from New York State and the United States. In general such measures amount to merging the smaller entity's debt into that of the larger entity and thereby gaining it access to the lower interest rates the large one enjoys. The larger entity may then assume some agreed-upon oversight in order to prevent recurrence of the problem.

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Structure

In the dominant economic policy generally ascribed to theories of John Maynard Keynes, sometimes called Keynesian economics, there is tolerance for fairly high levels of public debt to pay for public investment in lean times, which can be paid back with tax revenues that rise in the boom times.

As this theory gained popularity in the 1930s globally, many nations took on public debt to finance large infrastructural capital projects — such as highways or large hydroelectric dams. It was thought that this could start a virtuous cycle and a rising business confidence since there would be more workers with money to spend. However, it was only the military spending of World War II that really ended the Great Depression. (There is however, much debate as to what exactly ended the Great Depression, in particular from Austrian Economics.)

Nonetheless, the Keynesian scheme remained dominant, thanks in part to Keynes' own pamphlet How to Pay for the War, published in his native United Kingdom in 1940. Since the war was being paid for, and being won, Keynes and Harry D. White, Assistant Secretary of the United States Department of the Treasury, were, according to John Kenneth Galbraith, the dominating influences on the Bretton Woods agreements. These agreements set the policies for the BIS, IMF, and World Bank, the so-called Bretton Woods Institutions, launched in the late 1940s.

These are the dominant economic entities setting policies regarding public debt. Due to their role in setting policies for trade disputes, the GATT and World Trade Organization also have immense power to affect foreign exchange relations, as many nations are dependent on specific commodity markets for the balance of payments they require to repay debt.

Understanding the structure of public debt and analyzing its risk requires one to:

* Assess the expected value of any public asset being constructed, at least in future tax terms if not in direct revenues. A choice must be made about its status as a public good — some public "assets" end up as public bads, such as nuclear power plants which are extremely expensive to decommission — these costs must also be worked in to asset values.

* Determine whether any public debt is being used to finance consumption, which includes all social assistance and all military spending.

* Determine whether triple bottom line issues are likely to lead to failure or defaults of governments — say due to being overthrown

* Determine whether any of the debt being undertaken may be held to be odious debt, which permits it to be disavowed without any effect to a country's credit status. This includes any loans to purchase "assets" such as leaders' palaces, or the people's suppression or extermination. International law does not permit people to be held responsible for such debts — as they did not benefit in any way from the spending and had no control over it.

* Determine if any future entitlements are being created by expenditures — financing a public swimming pool for instance may create some right to recreation where it did not previously exist, by precedent and expectations.

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Scale

Global debt is of great concern since, very often, social capital is depleted (such as cases of pestilence or welfare services on families or friends), and natural capital is ravaged for "natural resources" to make interest payments.

This has led to calls for universal debt relief for poorer countries. A less extreme measure is to permit civil society groups in every nation to buy the debt in exchange for minority equity positions in community organizations. Even in dictatorships, the combination of banks and civil society power could force land reform and overthrow unaccountable governments, since the people and banks would be aligned against the oppressive government.

Creditary economics and Islamic economics argue that any level of debt by any party simply represents a violent and coercive relationship that must end. As the existing system of public debt finance based on Bretton Woods is critical to the financial architecture, significant monetary reform would be required to realize this.

Most analysts consider the current U.S. budget deficit of over US$500 billion per year to represent a problem that must be addressed quickly. Recently, the U.S. public debt has grown to over US$8 trillion. Meanwhile, Canada's national debt has begun to shrink (as of 2005, Canada's net debt as a fraction of GDP was half its peak, and was the lowest among the G8 nations).

Japan's national debt has increased rapidly since 1993 to more than 170% of GDP, sometimes the world's largest, depending on exchange rate, over $700 billion is added yearly to the total of over US$8 trillion, testing the world financial system. However, almost all of it is financed domestically, unlike the USA, but still manages to severely cripple the national government.

Using a debt to GDP ratio is one of the most accepted measures of assessing a nation's debt. In contrast, per capita measures are often inappropriate, particularly in developing nations, which have far more people than capital. One billion people live on under US$1/day; two billion more on under US$5/day. This is almost a third of the world's population.

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Problems

Sovereign debt problems have been a major public policy issue since World War II, including the treatment of debt related to that war, the developing country "debt crisis" in the 1980s, and the shocks of Russia's default in 1998 and Argentina's default in 2001. For a comprehensive discussion of the procedures that have evolved for resolving the problems of governments that have defaulted on their contractual debt obligations, see: Restructuring Sovereign Debt: the Case for Ad Hoc Machinery, by Lex Rieffel, Brookings Institution Press, 2003.

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Implicit debt

Government "implicit" debt is the "promise" by a government of future payments from the state. Usually long term promises of social payments such as pensions and health expenditure are what is referred to by this term; not promises of other expenditure such as education or defence (which are largely paid on a "quid pro quo" basis to government employees and contractors, rather than as "social welfare", including welfare per se, to the general population).

The problem with the implicit government insurance liabilities is that it's very hard to make any accurate assumptions about these liabilities, since the scale of future payments depends on so many factors. First of all, the social security claims are not any "open" bonds or debt papers with a stated timeframe, "time to maturity", "nominal value", or "net present value". In the United States there is no money in the governments coffers for social insurance payments, or for any payments, more than what's required to run day-to-day business. This insurance system is called PAYGO (pay-as-you-go) as opposed to save and invest. The fear is that when the "baby boomers" start to retire the working population in the United States will be a smaller percentage of the population than it is now, for a perhaps incalculable time into the future. This will make the government expenditures a "burden" on the country - larger than the 35% of GDP that it is now. Remember that the "burden" of the government is what it spends, since it can only pay its bills through taxes, debt, and inflation of the currency (government spending = tax revenues + change in government debt held by public + change in monetary base held by the public). "Government social benefits" paid by the United States government during 2003 totalled $1.3 trillion ([1]).

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See also

* Bond

* Brady Bonds

* U.S. public debt

* List of countries by public debt

* Gold as an investment

* Government investment

To answer your second question, being the richest country doesn't mean having all, or even most, of the riches. Bill Gates is the richest man, but all his fortune is irrelevant if compared to the money going around in financial markets and he could get in debt many times over his net worth.

Secondly, "the US is the richest country" does not mean that it's govt. is rich. If I recall, the Orange County (the same one you see on TVs OC) went bankrupt some years ago, even though the people living there had money. So it could be considered a rich county.

Thirdly, I read somewhere about a study that tried to use unwritten incomes and expenses on a perpetuity to estimate the US's net worth (including public and private sector) and came to the conclusion that it has a negative net worth. I don't give this kind of study too much credit because they're usually biased and the assumptions can be so off basis. But it comes to show that the "richest" concept is very questionable.

In the specific case of the US, it's national debt is being greatly financed by foreign governments (especially China) who buy US bonds.

The number represents something like a mortgage that the U.S. has taken out. The debt is secured by the land, oil & other resources owned by the government. The government borrows and makes payments on the debt on a continuous basis. When the number increases, the payments are less than what is being borrowed. The debt will never suddenly become due as the media tries to portray. Some of the current debt will not become due until several hundred years from now.

How you get your "piece of the pie," is to buy government bonds. They are often considered to be the safest investment you can make, but they also don't have much return on the investment.

"The term national debt refers to direct liabilities of the United States Government. There are several different concepts of debt that are at various times used to refer to the national debt:

Public debt is defined as public debt securities issued by the U.S. Treasury. U. S. Treasury securities primarily consist of marketable Treasury securities (i.e., bills, notes and bonds), savings bonds and special securities issued to state and local governments (State and Local Government Series securities, or SLGS). A portion is debt held by the public and a portion is debt held by government accounts.

Debt held by the public excludes the portion of the debt that is held by government accounts.

Gross federal debt is made up of public debt securities and a small amount of securities issued by government agencies.

Debt held by the public is the most meaningful of these concepts and measures the cumulative amount outstanding that the government has borrowed to finance deficits."

The current debt is $8,340,320,568,859.00

The eye-popping $8 trillion gross national debt is owed by the "General Fund." That's the part funded by our income taxes. Half of that goes for the military and to pay interest on the debt. Fortunately two huge parts of the budget, Social Security and Medicare, are running huge surpluses.

Since the largest portion (half) goes to defense, the war in Iraq, and INTEREST on the debt that is out of sight, no one should have an issue with it.

And sky miles, FLY!!!

The number of seconds until the US currency is worth nothing!

The carbon to which the functional group is attached to :)

How much money the government has stolen from you...