National debt in the United States has the potential to impact every citizen and resident of the nation because of the cascading nature of the financial impact on nearly all aspects of everyday life. This could be from increased taxes on a federal level to downstream impacts on programs provided by the government, like social security. National debt accumulates when the government spends more than it has in tax revenue and takes on loans at the federal level. These loans have interest, which increases the amount of money owed by the government. The more money owed through loans, the more interest, and the further in the red the nation becomes financially. A somewhat partisan political issue, the national debt is frequently in the news cycle, especially in periods when the national debt ceiling, or maximum debt allowed, is reached or close to being reached.
Some of this debt is held internally—meaning by entities within the United States, such as the Social Security Administration or other governmental organizations. Foreign or external debt, on the other hand, is debt held by an entity, like a nation, that is outside the United States. Debts held internally by the Treasury or other domestic institutions have significantly different impacts than debts held externally, largely because of varying interest rates dictated by the nation or entity holding the debt.
Through a capstone-level political science course, International Political Economy, I was able to research the impacts of externally versus internally held debt on the United States’ overall indebtedness. I used the time period of approximately 2008–2018 as a case study. The cost of debt was amplified during this time because of the recovery from the 2008 recession, the effects of which the government aimed to mitigate through additional stimulus spending. Using this period as a case study illustrates a time when the United States was heavily reliant on external foreign debts and was spending more than it was taking in, leading to significant financial deficits for the nation (ECLAC, 2023). The total US debt rose by about $12 trillion during the period of 2008–2018, almost doubling the national debt held in 2008 (Fiscal Data Explains the National Debt, 2023) ).
Research Methods
I began my research by analyzing the types of national debt held by the United States, and its impact on US society. I completed a comprehensive analysis using both qualitative and quantitative data, largely through a literature review of a variety of sources, including US Treasury and government files, scholarly journals, and think tank reports. I also identified trends of US debt and changes in how other nations perceived US foreign debt over time.
A major part of the national debt structure for the United States during the time period of my case study was the impact of high-interest foreign debts, which are held in the form of securities and used to allow for governmental discretionary spending. Many such debts were acquired during the post–World War II era, also known as the Bretton Woods era, from 1944 to 1973. During this time, the United States was lending money to rebuilding and developing nations through the Bretton Woods accords, with the purpose of establishing the US dollar as an international currency. This was achieved through the exchanging of other nations’ gold into US dollars at a fixed rate. This lending was structured to help foster relations between the United States and other countries but put the United States at risk as it took on debt. While gold is a tangible asset, the process of exchange meant there was a negative impact on the US debt. The willingness to trade dollars for gold led to US hegemony, or international dominance, through the formation of an international trade system. Much of this dominance was structured around the ability to provide a central currency for trade through using the US dollar (U.S. Department of State, 2019).
By using sources such as “The Economic Consequences of Rising U.S. Government Debt,” as well as data derived from the Economic Commission for Latin America and the Caribbean, I was able to analyze potential correlations and causality between national debt and foreign debt levels in the 2010s.
The “Economic Consequences of Rising U.S. Government Debt” article was published in a German financial journal, FinanzArchiv, which focuses on the impacts of public finance on Germany. Consulting this source allowed for an interesting outside perspective on the perils of US debt on the rest of the world. The data from the Economic Commission for Latin America and the Caribbean (ECLAC), released in 2023, was effectively a report done on the economic conditions of the world, focusing on the fiscal impacts of economic factors on Latin America and the Caribbean. This report was important because it had financial data that showed how the high-interest foreign debts held externally had a negative impact on the United States. The report contained debt information pertaining to the United States and all the countries that held US external debts during the time period of my case study.
From this data, I looked for trends of who was holding the US external debt, what the cost of the debt was, and how much debt was held over time. With the information from these sources, I looked at the impacts of external debts on the overall amount of US national debt over time. These sources were used to determine the potential for reducing overall US national debt through a means of foreign debt reduction during this period of time and whether that approach would have been viable.
Results
This research project deepened my understanding of how debt works and why debt is relevant to the US and international economy. One key finding was that foreign debts, and external debts in general, are typically held at higher interest rates than debts held internally by a nation, such as the United States. My research revealed that in the 2010s, the national debt of the United States was largely held by two nations, Japan and China. However, these nations decreased their holdings of US debts by approximately 35% of what the two had held together, a reduction of approximately 7% of the United States’ total national debt at the time (ECLAC, 2023). This period of decreased holdings occurred just after the 2008 financial crisis, and continued through the end of the study period, 2018.
Japan and China did this to avoid the risk of potential financial pitfalls, such as the United States defaulting on a loan since it was in a recession. This divestment was accomplished through decreased further financial investment, which led to these securities being held internally by the U.S. My research showed that a reduction in continued investment by nations such as Japan or China did not inherently correlate to a reduction in national debt, something I was surprised to learn. This was because of the fact that the nations were not eliminating the debts altogether, but instead were reducing the amount of debt they held. This means that the US debt shifted elsewhere, primarily to internal holdings. Internal debt is not subject to the same interest rates as external debts because of the obligations being owed to the government itself and not an outside entity. Additionally, internally held debt is more often focused on money being lent only to maintain the government’s own operations.
However, holding a greater percentage of debt internally is a smart move for the United States, because between 2013 and 2018, there was approximately $103 billion of interest on the US external debt (ECLAC, 2023). This 103bn figure is effectively the cost of debt held externally and is more expensive than if the same amount of debt had been held internally. This gradual move from external to internal debts during the study period should have a positive impact on overall indebtedness because of the often-lower interest rates on debts that are held internally by the government itself. As is true of most debts, reduction of higher-interest debt is a potential solution to decreasing the overall cost of the debt itself, that cost being the economic burden that the debt carries.
Although the United States’ national debt was not reduced from decreasing external debts during the time period of my case study, long term, the larger degree of control US entities have over debt held within US borders will have a positive impact on our overall indebtedness. The United States in its current state is reliant on debt to function, in part to retain its status as a global hegemon. Programs such as social security and Medicare/Medicaid take on much of this burden of the debt, because they are the programs lending the government funds so that necessary government functions can occur. This causes burdens on these programs, as they are lending money to the government instead of investing in the taxpayer.
Conclusion
Reduction of the US national debt is a hot topic in many circles, and the answer of how or whether the debt should be reduced is up for debate. My research revealed that the United States in the 2010s did not have a particular goal of reducing external debts and/or the overall national debt. This was evidenced by a rapidly increasing national debt during this period to blunt the recession. While foreign debt was reduced during this time, it did not have a significant impact on the overall US national debt in the 2010s. This was where an inconclusive answer to the research question came in.
It is important to note that as inflation occurs, the relative cost of foreign debt increases. In the time period of my case study, this was not a significant issue, but in the post-pandemic era, there is a much greater potential for this to become problematic with significant international economic inflation. The big-picture ramifications were that the US economy is working its way toward being less dependent on foreign debts and is attempting to not be overcome by high-interest external debts. The national debt is currently escalating at a record pace, and internal discretionary spending may be the culprit. Coming into the election cycle post-Covid, it is very important to recognize the potential ramifications the massive US debt has on the public. From this research, I have gained knowledge on political questions, and the way that the economy, especially national debt, does not follow as linear of a path as I originally expected.
I would like to thank my mentor, Dr. Reardon, for helping to guide me through this project and helping me come up with a viable research plan. I would also like to thank my friend Dylan Cordle, who kept me on track, reviewed my work, and aided me when I needed it during the research process.
References
Economic Commission for Latin America and the Caribbean. “Trends and Major Holders of U.S. Federal Debt.” Publication | Economic Commission for Latin America and the Caribbean. CEPAL, January 23, 2023. https://www.cepal.org/en/publications/44595-trends-and-major-holders-us….
“Fiscal Data Explains the National Debt.” 2023. Fiscaldata.treasury.gov. 2023. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/#:~:text=Over%20the%20past%20100%20years.
US Department of State. 2019. “The Bretton Woods Conference, 1944.” State.gov. 2019. https://2001-2009.state.gov/r/pa/ho/time/wwii/98681.htm.
Author and Mentor Bios
Drew Dickinson, from Portsmouth, New Hampshire, graduated in May 2023 with a political science degree from the University of New Hampshire. His research was completed for a political science capstone course, International Political Economy, with Lawrence C. Reardon. Drew was interested in this subject because of the political nature of national debt and his own questions about the importance of foreign debt. While the results of his research were different from his original hypothesis, Drew found the research process rewarding. He decided to submit the piece to Inquiry after his mentor showed so much confidence in the research he had conducted. Drew plans to continue his education with a master’s degree in political science and to continue asking questions, especially if the answers are different from what he expected.
Dr. Lawrence C. Reardon is a professor of political science and has taught at the University of New Hampshire since 1991. He specializes in international relations with a focus on greater China. This research brief came from Drew’s capstone project for Dr. Reardon’s seminar course on international political economy. He considers mentoring undergraduate researchers one of his most important tasks and has worked with at least one other Inquiry author, Susannah Pratt. What he especially appreciated about working with Drew was his understanding of the importance of the scientific approach. Drew’s capstone paper tested a hypothesis that in the end could not be proved. His argument that the US internal debts are a more important factor than external debts is a relevant finding. This is an issue that the Chinese are currently facing with a very large internal debt, especially at the local levels, while the US $1 trillion+ lent to foreigners under the Belt and Road Initiative scheme could also become problematic domestically.
Copyright 2024 © Drew Dickinson
