A Million a Minute

Story Highlights:

• Many investors fear America's federal debt, believing demanding foreign creditors hold sway over our economy.
• In reality, America's federal government debt is held mostly by Americans.
• Interest rates remain benign, telling us there's not much risk in lending to the US.

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America's federal government is indebting itself at $1 million a minute. Cripes! According to this article, that's $30,000 for every man, woman, and child!

National Debt Grows $1 Million a Minute
By the Associated Press, MSNBC.com

How can we pay it back? Repeal child labor laws? Sell Alaska? It's doing us no good since we're "not allowed" to drill it for oil. What about the common concern we're indebted to foreigners?

Economy Moves to Fore as Issue for 2008 Voters
By Jackie Calmes and Michael M. Phillips
https://www.wsj.com/articles/SB119673283200712636

The preceding article ponders, "Who's going to own us? We are going to give ourselves to another country because of debt." Not really—we're well assured Japan (our government's largest foreign creditor—not China) won't knock on your door and say, "Pack it up. All this is ours now."

So, who does own our government's debt—$9 trillion and counting—and can they foreclose on our nation? About $4 trillion is held by other US government agencies—if anyone can foreclose on us, Social Security might be first in line. (We don't imagine that happening.) Another $5.15 trillion is held by the public, with $2.9 trillion held by Americans. American individuals, corporations, or government agencies hold about 76% of our federal government's debt. Only 24% is held by foreigners—and a big chunk of that being private citizens and corporations, not foreign governments themselves. And even if they held more . . . so what? Foreign investment in America allows us to buy more income-producing assets—which is just fine.

But wouldn't it be better if our government had no debt? For starters, no debt means no Treasuries. People like Treasuries. The return is guaranteed by the US government, which isn't about to be seized by creditors any time soon. While we don't necessarily recommend a portfolio of 100% Treasuries for all time since equities have superior long-term averages, folks seem to like them.

Consider this: If our level of debt were truly problematic, would long-term US Treasury rates remain so benign? The 10-year US Treasury yield is below 3.9% today, and has spent most of 2007 around 5% or lower—historically low. If investors truly saw risk in lending to the US Government, they'd be demanding a much higher rate. (The US Treasury rate is known as the "risk-free" rate for a reason.) Further, America has her debt well covered. Interest payments for financial year 2007 were $430 billion. Yikes! Big scary number. But total tax receipts were $2.6 trillion—giving us a very healthy debt service ratio of 6 to 1.

America could have too much debt one day—but that day's not now. And should that happen, the nation of Japan still won't evict you. China neither.

For more on America's debt, read:

• "Mind the Gap," 09/28/2007

Source: US Treasury Department (https://home.treasury.gov/)