The graph illustrates the Average Interest Rate for marketable and non-marketable securities (United State Treasury Bills, Notes and Bonds) over a two-year period for comparative purposes. The interest rate is weigthed by the amount of unmatured securities outstanding in each category.

One can draw a couple of conclusions from this graph. First, the United States finances much of the national debt with relatively short term debt because the average interest rate paid is highly correlated with short term interest rates. We will illlustrate this more clearly in a following chart which shows the national debt broken down by time to maturity.

For the moment, the use of short term debt is not a bad thing because we pay less in interest during a period of historically low rates. But, if the U. S. continues to prefer a mix weighted toward short term notes, we will pay much more when interest rates rise. In effect, the National Debt is a gigantic Adjustable Rate Mortgage, except the collateral is the good faith of the United States rather than a home or piece of property.

Note: Average Interest Rates are calculated on the total unmatured interest-bearing debt. The average interest rates for total marketable, total non-marketable and total interest-bearing debt do not include the U.S. Treasury Inflation-Protected Securities.

Between September and October 2008, the Total U.S. National Debt increased by nearly one trillion dollars, or about 10% of the outstanding debt. Most of this increase is due to public borrowing to finance the Wall Street Bailout plan. The additional borrowing on top of the mandatory increases in programs such as Social Security (which will increase payout by 5.8% in January of 2009) represents a significant loss in financial flexibility which makes the problem of persistent deficit spending even more difficult to solve.

At the current rate, the national debt is increasing by nearly 4 billion dollars every day! See our National Debt Clock.

On July 31, 2008, the total federal debt stood at $9.586 trillion. Of that amount, $4.182 trillion was owed to the various “trust funds” (e.g., Social Security, Medicare, federal employees retirement funds, etc.) because the government “borrowed” that money from them. That leaves $5.404 trillion of debt “held by the public.” Of that amount, $2.728 trillion is held domestically by banks, mutual funds, and other U.S. investors. This leaves $2.676 held by foreign countries, institutions and individuals.

Notes:

¹ Oil Exporters includes: Ecuador, Venezuela, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the UAE, Algeria, Gabon, Libya and Nigeria.

² Caribbean Banking Centers includes: Bahamas, Bermuda, the Cayman Islands, Netherland Antilles, Panama, and British Virgin Islands.

This chart illustrates the magnitude of the debt that is typically quoted in the media. It is far too time-consuming (as illustrated in the preceding explanation) for a reporter to explain the distinction between the two components, and it makes for better headlines to say that the national debt is almost $10 trillion. The $4 trillion number is useful, however, in that it serves as a reminder that the United States has made a huge commitment to Social Security recipients, Medicare recipients and other beneficiaries in the future. But as shown later, this commitment is far larger than $4 trillion.

Intragovernmental Holdings is the name given to a method that is used to keep track of money that the government has borrowed from several government agencies—the primary one of which is the Social Security Administration. This gets somewhat complicated, so for the moment just think in terms of a married couple where the wife (the Social Security Administration in this case) has a job that provides a steady source of income (Social Security and Medicare payments from individuals and employers). The husband (the remaining parts of the federal government) borrows every cent that the wife makes, and gives her an IOU each time. He also promises to pay interest on the money that he has borrowed. And he agrees to pay for all of the things that she “buys” (payments to Social Security beneficiaries, in this example), which gets counted as an offset to the amount that he owes her.

In most years, the husband and wife spend more than both of them together make, so the husband borrows money from friends. So far, his friends continue to loan him enough money to keep him and his wife afloat. Both the debt to his wife (call it Intraspousal Holdings) and the debt he owes his friends (the Public) are growing. However, to include Intraspousal Holdings in a list of the husband’s liabilities is artificial in one sense, because when the husband and wife are considered as one entity, they only owe the amount that is payable to the outside friends. Nevertheless, in the interest of full disclosure, the husband makes it known that he owes both his friends and his wife a lot of money ($5 trillion to his friends and $4 trillion to his wife).

The Intragovernmental Holdings account is also equivalent to the so-called “trust funds” for Social Security, Medicare and several other programs that are handled in a similar manner. However, the only assets held by these “trust funds” consist of the IOUs given by the U.S. government as it “borrows” money from them. For practical purposes, the federal government treats Social Security and Medicare receipts as another source of taxes—second only in size to individual income taxes—that get spent each year.

This is the cumulative amount of money that the government has borrowed from outside sources to meet its obligations during the years that it runs deficits. Debt Held by the Public includes domestic buyers, such as mutual funds, state and local governments, Federal Reserve banks, commercial banks, insurance companies, and individuals, as well as private foreign entities and central banks of foreign countries. Of the $5.1 trillion in outstanding public debt at the end of 2007, domestic investors owned 55 percent ($2.8 trillion) and foreign investors held 45 percent ($2.2 trillion). When the government runs surpluses, the debt gets paid down as can be seen from the trough in the late 1990s.

But wait a minute! All of the so-called “debt clocks” show that the national debt is now in excess of $9 trillion. Where is the $4 trillion discrepancy? Answer: See the next two charts (Growing National Debt: Intragovernmental Holdings and The Growing National Debt: Combined).