You say Debt, I say Deficit; Let’s Pay the Whole Thing Off
Debt & Deficit
Sometimes we hear how huge the federal debt is, sometimes it’s the federal deficit. If there’s a difference, nobody seems all that anxious to tell us what – if anything – the difference is.
Therefore, as a public service. I’ll step into the ring.
If you spend more than you bring in, the difference is a deficit. It’s the opposite of “surplus”.
A debt is what you owe somebody. Your mortgage. Your credit cards. What you owe Big Louie’s boss.
In terms of the country, deficit has the same meaning. We take in $2 billion, and we spend $3 billion, that makes for a $1 billion deficit. Pretty soon, it adds up to serious money.
The debt is how much the government owes other people and institutions. Just like your mortgage and your credit cards, standard practice is that you pay it back with interest – otherwise, why would anybody lend money? (except maybe to Uncle Fred, who isn’t doing all that well these days). (It’s better not to think about what Big Louie’s boss expects to get paid back.)
You can keep track of the federal debt at the U. S. Treasury website. Right now, it’s $15,438,518,062,690.37. That’s fifteen trillion and change. Or fifteen thousand billion and change. See what it is when you read this. Last year on this date, it was $14,194,764,339,462.64. That’s an additional $1,243,753,723,227.73, or $3,407,544,447.20 each and every day since then.
(It’s a bit awesome that they can keep track of that “to the penny” – especially when it changes every second.)
But anyway, when numbers get that big, who cares anymore?
The two are connected: If the government wants to decrease the deficit, it either needs to borrow money – and incur more interest payments – or bring in more. It can do that in two ways – neither very appealing.
The careful reader might ask, “who do we borrow money from?”. Let’s look first at the other side of the equation: who do we owe it to?
One group of people they owe it to is us. Treasury bonds, bills, and notes are a promise to pay the holder at a later date. In the Old Days, we bought $100 Bonds for $75, and you’d get $100 after 20 years. They made great graduation presents: they were clearly marked “$100”. Thoughtful parents bought them for their newborn children.
Another group is foreign governments and investors, who buy Treasury securities. The holder of the biggest share of the debt (that’s who we owe the money to) is China.
Other foreign holdings:
Brazil, about $206 billion.
The oil exporting countries: Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Algeria, Gabon, Libya and Nigeria – together, about $232 billion.
The United Kingdom, about $429 billion.
Japan, about $1.038 trillion.
Finally, China, #1, about $1.132 trillion
Even tiny Switzerland – once a haven for people who wanted anonymity for their holdings – has about $114 billion of that debt.
Back to the borrowing question: the government borrows money from us and from foreign governments and investors. They borrow money by selling Treasury bills, bonds, and notes, and the new TIPS (Treasury Inflation-Protected Securities).
The other way government can bring in more money is by raising taxes. This has proved somewhat unpopular in recent years, so we won’t consider that method here.
The Treasury produces a Monthly Treasury Statement showing receipts and outlays. The government’s fiscal year ends October 31. For FY 2011, we took in about $2,302 billion, and spent about $3,600 billion. That left a deficit of only $1,296 billion.
So far this year, we’re a bit ahead of last year: $419 billion for 2011, $349 billion for 2012 (through January – the latest figures).
That’s a high-level overview of the debt/deficit problem. Now on to the scary part. Let’s say we just want to pay off the debt and start with a clean bankbook.
The Money Supply
There’s a lot of money in the country. That includes the money in your wallet or purse, in the cookie jar, in savings accounts, in IRAs and 401(k) plans, and in the U.S. Mail, going from here to there for things like graduation presents, birthdays, and subscriptions to obscure economic journals.
The Treasury keeps track of all that, too. They divide it up into categories. First, all the money in circulation and in checking accounts. This is called M1.
To that, they add savings accounts, time deposits in banks, and money market funds. This is called M2.
To that, they used to add large and long-term deposits. This was called M3, but they stopped counting those in 2006.
The Money Supply, M2, accounts for all the money in circulation, in banks and savings accounts, Basically, it’s all the money there is. Currently, all the money there is amounts to about $9.8 trillion.
The depressing lesson here is that we could take all the money there is – all the coins, all the bills, all the checking and savings accounts, apply that to the debt, and we’d still be about $5 trillion short.