Manarin Investment Counsel, Ltd.

This blog is one of a series of three pieces designed to shed light and truth on different economic issues that will be inevitably discussed during the 2012 Presidential campaign.

Outrage over the current level of the federal government’s debt actually has two facets to it: the actual size of the debt and ownership of the debt. Both are purported to be, by their critics, dangerous to the health and well-being of our economy.

“We’re saddling our grandchildren and great grandchildren with debts they can never repay,” and “we’re bankrupting our children’s futures” are two of the slogans we commonly hear from those opposed to the size of federal debt. Others fear that foreigners will eventually own our country because of all the U.S. Treasury debt they hold. But, are these truly legitimate concerns? Is the current situation actually dangerous to our economy or is it just more media-driven hysteria?

While I am opposed, in general, to the expansion of federal deficits because they represent an expansion of the overall size of government, I do not believe that either the size or the composition of the debt holders represent any real threat to our economy.

The federal government reported that at the end of 2011, our total outstanding federal government debt was approximately equal to 100% of our nation’s GDP, or about $15 trillion. That sounds like a scary and possibly untenable situation for any country. However, when you compare it to an individual’s situation (i.e. their mortgage), isn’t this actually fairly common? How many consumers actually have a mortgage that is larger than their net worth? Does that portend a disaster? No, it doesn’t, because the size of an individual’s debt is not as critical as their ability to service the debt. Here, the U.S. government is in very good shape because interest rates are so low right now. As a percentage of GDP, we are actually paying less to service our debt now than we did in the 24 years between 1979 and 2003, due to much higher interest rates at that time. No one seemed overly concerned about the size of the debt payments then and the economy actually thrived during most of that period.

There is not real agreement on what amount of debt is dangerously high. For instance, our federal debt reached nearly 120% of our GDP during the second world war, and Great Britain, when it was the world’s economic power house from 1750-1850, often incurred debt levels well in excess of 100%, with the peak reaching 250% of GDP. There just doesn’t seem to be much historical evidence of a definite level at which developed nations implode.

The size of the debt becomes even less daunting when you break down the actual ownership of the debt into its components. Thirty one percent of the federal government’s debt is owned by other branches within the government. That’s $4.7 trillion of the $15 trillion outstanding. The largest of these “intragovernmental” holdings is the trust fund known as Social Security. So, the government actually owes itself roughly a third of its outstanding debt. With this debt, what is paid out from one branch of the government simply goes into the pocket of another branch.

The amount owned by foreign governments and investors is approximately equal to the amount of debt the government holds itself - about 31%. Of these, China and Japan are the largest holders, but their share is just 7.4% and 6.8% respectively. Great Britain is the other large shareholder with just over half a percent of the outstanding debt. The largest portion of the federal debt is actually held by domestic investors. They hold just under 40% of all the outstanding debt. So, the idea that foreign holders of U.S. debt are in a position to lay claim to America likely falls into the category of hysteria.

Don’t let all of the wild and bombastic election year pronouncements by either party scare you. Economically speaking, things could be better, but by no means are we teetering on the edge of a disaster. Just remember to pay attention to the facts and stay focused on what really matters.