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Forever Indebted

With the holidays upon us and with that temptation to whip out the credit cards mounting, go right ahead and use that plastic. Compared to the federal government, you have a lot of room before you reach their debt levels. Americans have created billions of dollars worth of debt over the past 45 years, and credit card debt has been a significant part of that. Credit card debt dropped along with consumer spending during the 2008 financial crisis and slow growth has kept total revolving debt at pre-crisis levels, though it is creeping up. According to figures from the Federal Reserve, total U.S. outstanding consumer debt was $3.62 trillion as of May 2016. That figure includes car loans, student loans and revolving debt, but not mortgages. Total U.S. outstanding revolving debt, which is chiefly made up of credit card balances, was $953.3 billion as of May 2016. Those figures may not be surprising knowing that there are nearly 1.9 billion credit cards in use by nearly 200 million card holders.

In contrast, as of July 31 of this year, the federal government’s total debt stands at $19.845 trillion, according to the Treasury Department. Nearly all of it is subject to the statutory debt ceiling, which is currently set at just under $19.809 trillion. As a result, as of the end of July there was just $25 million in unused debt capacity remaining. This debt level equates to $170,000 per tax payer or $63,000 per citizen.
The nation’s debt has become larger than its gross domestic product, which was an estimated $19.23 trillion in the second quarter of 2017. Debt as a share of GDP rose steeply during and after the 2008 financial crisis. Since 2013 the debt load has equaled or exceeded GDP, which had not been seen since the end of World War II. That comparison is mind boggling.

Though U.S. government debt is perhaps the most widely held class of security in the world as of the end of July, 27.6% of the debt (about $5.48 trillion) is owed to another arm of the federal government itself. The single biggest creditors, in fact, are Social Security’s two trust funds, which together held more than $2.9 trillion in special non-traded Treasury securities, or 14.7% of the total debt. (Social Security revenues exceeded benefit payments for many years; the surplus was required by law to be invested in Treasuries.) Another big holder: The Federal Reserve System, which as of early August collectively held nearly $2.5 trillion worth of Treasuries, or 12.4% of the total debt.

Net interest payments on the debt are estimated to total $276.2 billion this fiscal year, or 6.8% of all federal outlays. (The government projects it will pay out about $474.5 billion in interest in fiscal 2017, which ended Sept. 30, but that includes interest credited to Social Security and other government trust funds, as well as a relatively small amount of offsetting investment income.) By comparison, debt service was more than 15% of federal outlays in the mid-1990s; the share has fallen partly because lower rates have held down interest payments, but also because outlays (spending) have risen substantially; up about 27% over the past decade.

Largely because of the Federal Reserve’s previous efforts to keep interest rates low during and after the Great Recession, the U.S. government is paying historically low rates on its debt. In fiscal 2016, according to the Treasury Department, the average interest rate on the public debt was 2.232%; while the Fed has begun nudging rates higher, the average interest rate in July was still just 2.279%. Though you might think such low rates would put off investors, U.S. government debt is considered to carry very little risk, and historically demand for it has remained strong. But the ever-looming debt-ceiling crisis may be changing that dynamic.

So, go ahead and enjoy the holidays. Use those cards. Your grandchildren can pay the bills; someday.
For a review of your business banking needs, contact Tim Freese, Senior Vice President and Temecula Regional Manager, at (951) 719-1212, or at