You may have noticed that youâ€™re hearing a lot about Americaâ€™s national debt recently. No doubt youâ€™ll be hearing a lot more about it in the future. And, along with it, youâ€™ll be hearing a lot more of the â€œTâ€ word (trillion). In fact, itâ€™s about the only time the average person will ever hear the word trillion, because there just arenâ€™t many things we deal with in life that are that big. After all, a trillion is equal to a million million.
â€¢ If you took all of the cars that exist in the entire world, old and new, the number would be under 1 billion, a number thatâ€™s a thousand times smaller than a trillion. This sounds about right when you consider the fact that the entire population of the world is under 7 billion. It would take over 140 planet earths to equal 1 trillion people.
â€¢ If you started counting right now, with one count each second, 24 hours per day, 7 days a week, you would reach 1 trillion in about 31,000 years.
â€¢ If you started walking, a trillion steps would take you around the world about 4,000 times.
So when you hear about Americaâ€™s national debt now totaling approximately $11 trillion, depending upon how itâ€™s calculated, you know that itâ€™s serious stuff. It comes out to over $35,000 for every man, woman, and child in the country.
Our National Debt is the money that is owed by the federal government to American or foreign lenders. It is necessary when the government decides to spend more money than it collects from taxes and other sources. (It should come as no surprise that politicians like to buy things, even when itâ€™s not clear how theyâ€™re going to pay for them.) The result is a budget deficit. This fiscal year, the budget deficit topped $1 trillion for the first time in history. Every year that the government runs a deficit, it has to borrow more money, increasing the national debt. And every time the debt increases, the interest on the debt increases.
The government raises/borrows money by selling debt instruments, like treasury bills, notes, bonds, and so forth, to whoever is willing to buy them, including foreign governments. Today, approximately 25% of the U.S. national debt is in the hands of foreign governments, with much of that held by the central banks of China and Japan. The U.S. owes China nearly Â¾ of a trillion dollars, and almost that much to Japan. But we also owe huge amounts of money to Brazil, the UK, Russia, and oil producing countries, along with a host of others, including even small countries like Luxembourg and Switzerland. America has gone from being the worldâ€™s largest creditor to being the worldâ€™s largest debtor.
The reason that the amount of money owed to central banks of foreign governments is growing is that these banks are holding an increasing number of U.S. dollars. Theyâ€™re holding them because the United States has, for decades, been importing more than it has been exporting, the international equivalent of a household that spends more than it earns. When we buy more from China or Japan than they buy from us, they end up holding U.S. dollars. And the easiest thing to do with those dollars is to loan them back to the U.S. government. So our high volume of imports, versus exports, is the reason so much money is owed to foreign governments.
Who are the biggest American importers? Theyâ€™re all household names. Wal-Mart (NYSE: WMT), Home Depot (NYSE: HD), Target Stores (NYSE: TGT), Sears/K-Mart (NASDAQ: SHLD), and dozens of other major companies head the import list.
Of course, running a trade deficit is not necessarily a bad thing. Trade is almost always a good thing. Trade deficits have been going back and forth between countries since trade began, and there are a lot of variables to be considered before any judgment about a given countryâ€™s trade imbalance can be reasonably made. Nevertheless, when coupled with massive budget deficits, it puts a lot of our debt, and a lot of leverage, in foreign hands. At some point, people start feeling that a line has been crossed.
Donâ€™t look for the sky to fall anytime soon. The whole system will continue to work as long as there are enough people out there willing to invest more money. On the other hand, if this scenario sounds familiar itâ€™s because it works on the same principle as a Ponzi scheme, like the one recently pulled off on a grand scale by Bernie Madoff. Itâ€™s when people start getting wary and calling in their chips that things start to unravel. And there are signs that at least some people around the world are starting to get wary. With a national debt topping $11 trillion, perhaps the question should be, what do we owe our kids.