The U.S. Debt and How It Got So Big

The rest is owed by the government to itself, and is held as Government Account securities. Most of this is owed to Social Security and other trust funds, which were running surpluses. These securities are a promise to repay these funds when Baby Boomers retire over the next 20 years. (Source: U.S. Treasury, Debt to the Penny; Debt FAQ)

Even before the economic crisis, the U.S. debt grew 50% between 2000-2007, ballooning from $6-$9 trillion. The $700 billion bailout helped the debt grow to $10.5 trillion by December 2008. The debt is tracked by the national debt clock.

Interest on the debt was $454 billion in Fiscal Year 2011, the highest ever. That's despite the lowest interest rates in 200 years. The interest on the debt in the FY 2103 budget is $248 billion, the sixth largest budget item. (Source: U.S. Treasury, Interest)

Next on the list is President Bush. His deficits were a result of the bank bailout, the EGTRRA and JGTRRA tax cuts and the War on Terror. The third largest contributor is President Reagan, who also cut taxes, increased defense spending and expanded Medicare. All of these Presidents also suffered from lower tax receipts resulting from recessions. For more, see U.S. Debt by President.

The U.S. also has a debt ceiling, which attempts to limit the debt. This is currently at $16.394 trillion. Not all the debt is subject to the debt limit -- right now, only $15.977 is. However, Congress usually raises the ceiling to prevent the negative consequences of a debt default.

In the short run, the economy and voters benefit from deficit spending. In the long run, however, a growing Federal debt is like driving with the emergency brake on, further slowing the U.S. economy. That's because debt holders want larger interest payments to compensate for what they perceive as an increasing risk that they won't be repaid. This added interest payment expense usually forces a government to keep debt within reasonable limits.

Second, foreign countries increased their holdings of Treasury Bonds as a safe haven, also keeping interest rates low. These holdings went from 13% in 1988 to 31% in 2011. During the recession, countries like China and Japan increased their holdings of Treasuries to keep their currencies low relative to the dollar. Even though China warns the U.S. to lower its debt, it keeps buying more Treasuries. For more, see How China Affects the U.S. Economy.

As of September 2012 (most recent data), foreigners held $5.455 trillion, or roughly one third of total U.S. debt. China holds $1.155 trillion and Japan owns $1.131 trillion. The oil exporting countries are the third largest holders, at $267 billion, with Brazil next at $251 billion. The Caribbean Banking Centers are fifth, holding $240 billion. The Bureau of International Settlements suspects that much of the holdings of the Caribbean centers, as well as Luxembourg (holding $148 billion) and Belgium ($134 billion) are fronts for the oil-exporting countries or hedge funds that do not wish to be identified. The next largest holders -- Taiwan, Switzerland, Russia, United Kingdom, and Hong Kong -- own between $135-$191 billion each. (Source: Foreign Holding of U.S. Treasury Securities, November 16, 2012; U.S. Treasury report ”Petrodollars and Global Imbalances”, February 2006)

Many of the foreign holders of U.S. debt are investing more in their own economies. Over time, diminished demand for U.S. Treasuries could increase interest rates, thus slowing the economy. Furthermore, anticipation of this lower demand puts downward pressure on the dollar. That's because dollars, and dollar-denominated Treasury Securities, may become less desirable, so their value declines. As the dollar declines, foreign holders get paid back in currency that is worth less, which further decreases demand. For more, see Who Owns the U.S. Debt?