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Originally Published: 3/27/2006


By The Issue Wonk


Budget deficits are funded with borrowed money. The borrowed money is our national debt. As of Federal Fiscal Year (FFY) 2018 (September 30, 2018) the federal government owed $21,488,300,000,000. That’s 21 trillion, 488 billion dollars. You can get a daily update of the national debt, down to the penny, at the U.S. Bureau of Public Debt.


How does the government borrow the money? Who do they borrow it from? How much debt is too much debt? These are very good questions.




The government borrows money from two (2) sources: itself (Intragovernmental Holdings) and the public (Public Debt).

Intragovernmental Holdings.  These are securities held by government trust funds, revolving funds, and special funds, and the Federal Financing Bank securities. (Bureau of Public Debt) Borrowing is primarily from the Social Security Trust Fund, but there is also borrowing from other funds, such as the highway trust fund, unemployment insurance, and federal employee pensions. A relatively small amount is held by selected federal agencies. According to the Government Accountability Office:1


“Intragovernmental holdings represent balances of Treasury securities held by individual funds, primarily trust funds, that typically have an obligation to invest their excess annual receipts over disbursements in federal securities. Most federal trust funds invest in special U.S. Treasury securities that are guaranteed for principal and interest by the full faith and credit of the U.S. government. These securities are nonmarketable, however, they represent a priority call on future budgetary resources. Certain of these trust funds such as the Social Security and federal civilian employee and military retirement trust funds, have been running annual surpluses, which are loaned to the Treasury and reduce the current need for the government to borrow from the public. Primarily as a result of such trust fund surpluses, intragovernmental holdings have increased by approximately $637 billion since September 30, 1997, with about $247 billion of this increase occurring in fiscal year 2000.”


So, when you hear things like “The Social Security Fund has a surplus,” just remember that the money is not sitting in a savings account. It’s been loaned to the U.S. government to pay the bills. At the end of FFY 2018 intragovernmental holdings were $5,737,300,000,000. (The Issue Wonk)


Public Debt.  This is debt that has been sold in credit markets. The Bureau of Public Debt is responsible for borrowing the money needed to operate the federal government. It does this by issuing U.S. Treasury marketable, savings, and special securities.


          Treasury Bills:  Better known as T-Bills, they are short-term securities that are purchased either directly from the Department of the Treasury or through a bank or broker. To buy a Treasury bill from the U.S. Treasury you place a competitive or noncompetitive bid in an auction. You can hold the bill until it matures or sell it prior to maturity at the current market rate. A bill held until maturity can be reinvested in another bill or it can be redeemed for its value.


          Treasury Notes:  Sometimes called T-Notes, they earn and pay a fixed rate of interest every 6 months until maturity. Fixed-principal notes are issued for terms of 2, 3, 5, and 10 years. They can be purchased directly from the U.S. Treasury or through a bank or broker. As with T-Bills, you can place a competitive or noncompetitive bid in an auction. You can hold a note until maturity or sell it prior to maturity at the current market rate.


          Treasury Bonds:  These are fixed-principal bonds that pay interest every 6 months until they mature. The U.S. Treasury has not sold these types of bonds since 2001 but began selling them again, twice a year, in November 2005.


          I Bonds:  These are low-risk, liquid savings bonds. They are purchased either directly from the U.S. Treasury, most financial institutions, or through payroll deduction.


          Series EE Bonds:  These are low-risk savings bonds that pay interest which is based on the current market rates for up to 30 years for bonds purchased May 1997 through April 2005. Bonds purchased after May 2005 earn a fixed rate of interest. They are purchased either directly from the U.S. Treasury, most financial institutions, or through payroll deduction.


          HH Bonds:  Unlike EE Bonds, these are current income securities. You pay face value and receive interest payments every 6 months until they mature or you redeem them.


          TIPS:  Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.


Borrowing from the public is the most important measure of federal debt because it is what the government has borrowed in the private markets. At the end of FFY 2018, public debt was $15,751,000,000, 000. (The Issue Wonk)


Total Debt.  Thus, at the end of FFY 2018, the total debt of the U.S. government was $21,488,300,000,000.2




The importance of the debt is measured by its size relative to the size of the economy – the Gross Domestic Product (GDP) So, the most common way of describing the debt is as a percentage of the GDP. There is no consensus on how large the debt, as a percentage of the GDP, can be without putting the U.S. in fiscal jeopardy. However you will find some writings that imply that 60% of the GDP is maximum. This is debatable. For example, during World War II, the debt, as a portion of the GDP, was as high as 110%. As stated above, in FFY 2018 the total debt was $21,488,300,000,000. Also, in that year, the GDP was $20,236,000,000,000. This means that the total debt, at the end of FFY 2018, was 106.19% of the GDP. Broken down by types of debt we have: Intergovernmental holdings were 28% of the GDP and the Public Debt was 77.84% of the GDP.3


When assessing the debt it is more important to look at trends, the change over time. What has been the trend with the U.S. debt? In FFY 2000 it was 58.50% of the GDP and it has climbed steadily to a high in FFY 2018 level of 106.19%.


What are the risks associated with federal debt? There doesn’t seem to be a consensus on this. Debt held by the public can influence interest rates and private investment decisions. Too much debt can cause interest rates to rise and private investment to decline. Most agree that perpetual debt growth in excess of economic growth (as reflected in the GDP) is an “inherently unstable situation.”4 


What is the relationship among all these things? According to the Congressional Research Service: 4


“What matters most, as far as financial stability is concerned, is what investors believe to be the long-run trend in the debt-to-GDP ratio. If large deficits are expected to persist, or if the interest rate on the debt is expected to exceed the growth rate indefinitely, then at some point the federal government may begin to find it more difficult to sell new securities. The federal government, however, has a source of credit not available to individual business, the Federal Reserve Bank.


“Should the federal government be unable to find private sector buyers, the Federal Reserve might buy the securities that otherwise the government would be unable to sell. Should it decide to do so, then the threat is no longer one of government insolvency, but rather of inflation.”




1  Financial Audit: Bureau of the Public Debt’s Fiscal Years 2000 and 1999 Schedules of Federal Debt. Government Accountability Office (formerly General Accounting Office), March, 2001. (GAO-01-389)


2  These numbers are slightly different from those reported by the Congressional Budget Office. See Revenues and Expenditures, Federal Fiscal Years 2012 - 2016, footnote 9.


3 See Revenues and Expenditures, Federal Fiscal Years 2012 - 2016.


4  See The Federal Government Debt: Its Size and Economic Significance, Updated March 1, 2005. Congressional Research Service.



© The Issue Wonk, 2019


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