The US Debt Crisis

In 2000, the Clinton administration handed over a debt free economy which has grown to a $15 trillion debt during the George W Bush era.

What caused the debt crisis?

Tax cuts and two simultaneous wars in Iraq and Afghanistan have caused major blowouts in the US budget over the past 11 years.  It is hard to find an estimate of the cost of the tax cuts, but it would be fairly substantial over the past 10 years and it is estimated by the Center for Defense Information that the cost of the two wars up until the end of 2011 will have cost the US tax payer US$1.291 Trillion.  

Over $5.5-trillion of the debt is the US government owing its own treasury. This would be money used for stimulus packages, the Quantitative Easing and money owed to social security payments to pensions etc. The rest of the debt, estimated to be around US$9.5 trillion is called public debt.

Public debt is where US Treasury Bills are auctioned to pay for the day to day running of the country and either institutions or individuals buy the bonds. In the past the bonds were bought for their triple A rating and they were deemed to be the safest investment on the planet.

Raising the ceiling

The recent agreement by the Democrats and Republicans to raise the debt ceiling might temporarily maintain the US Government’s triple A rating, but it means the debt bubble continues to grow as the interest due on the bonds has to be serviced.

The agreement will lift the debt ceiling enough to last beyond the November 2012 elections and there have been calls for $2.1 trillion in spending cuts spread over the next 10 years. The bill also creates a bipartisan joint House and Senate committee to recommend a deficit-reduction package by late November. It does not include any tax increases.

Who owns the debt?

Many think that the Chinese hold most of the debt, but in essence the Chinese only own about 8% of the total debt and around 14% of the public debt, estimated to be around US1.25 trillion. The other nation that owns a chunk of the public debt is the savings crazy country of Japan, with the UK in third place.

Australia’s exposure to US debt is very small and we don’t show in the top ten creditors.