Republicans and conservative Democrats have done a very good job over the years beating the 'debt is bad drum.' We've been told many falsehoods, and many have drunk the cool-aid.
One tune is how the government needs to balance it's budget just like we balance our home budget. If in any month your spending exceeds your income, you run a deficit that month. This is just like how the government runs a deficit. When we as consumers and workers run a deficit, we then need a way to make up the shortfall. We do that by some combination of borrowing or taking money out of savings. When we borrow to finance our monthly deficit, we incur debt. This is just like how it works for the government.
When we incur more and more personal debt, and have no increase in income, we do find it more and more difficult to carry that debt. We pay more of our income in interest payments and we have less flexibility in our budgets.
When the government incurs debt, that debt also is income to the economy! Yes, the interest payments on the debt is simultaneously income to the bond holders. This is one difference between government debt and personal debt. With personal debt we experience the interest payment as money leaving. With interest on government debt, the interest payments leave when they go to people and institutions (like other governments) outside the U.S. This raises the question of who holds the bonds that the government issues to finance the deficit?
It quickly gets tricky addressing questions about who owns the debt and what amount of debt we have. I am limiting myself here to debt of the U.S. Federal government. This excludes debt we as private citizens and businesses owe, and it also excludes the debt of other levels of government. An interesting overview of federal debt, deficits, and economic activity is contained in a report by the Government Accountability Office. A quick snapshot on the issue is available here. While these studies are a few years old now, they still provide a good overview of the issues. Whereas, the MSNBC article identifies Japan as the largest foreign owner of U.S. federal debt, China has now surpassed Japan as the largest foreign owner of U.S. Federal government debt.
Keep in mind when someone compares debt to GDP, they are comparing a cumulative amount (debt) to an annual amount (GDP). This would be like you adding up your mortgage and installment principal balances and comparing it to your annual income. It's unclear what such a comparison indicates. Whereas, comparing deficit or surplus to GDP compares annual amounts for both. By analogy, this is comparable to you adding up your mortgage and installment monthly payments and dividing that by your monthly income. As we know, this comparison is made when buying a home.
The largest single holder of U.S. Treasury bonds (how we finance deficits) is the U.S. Government itself! Yup, it's not China. China is the single largest foreign owner of U.S. government debt. About 25-30 percent of all U.S. government debt is owned by foreigners. That means that about 70 percent of the bonds are held in the U.S. Cut the debt, cut the income to holders of the debt.
From a political perspective, I find it striking that the total U.S. Federal debt increased from about $6 trillion in 2000 to about $9 trillion in 2009, a 50 percent increase. The causes of this rise is no mystery - two wars and two tax cut.
There are geo-political implications to foreign owners of U. S. debt. This is especially true as more and more of the foreign ownership resides in one country. Also, just as in our personal budgets, as debt grows, our ability to respond to emergencies declines, so to with increases in government debt.
This short overview has not discussed the value of the dollar and debt and it has simplified the discussion by not considering how those receiving interest from government debt sped it in the U.S. versus overseas.
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