This year’s shortfall would register at 4 percent of the economy, far less than the 10.1 percent experienced in 2009 when the government ran a record $1.4 trillion deficit. Often, people think that China is absorbing all this U.S. sovereign debt. but that is incorrect. Indeed, as of July 3013, China held more than $1.2 trillion in U.S. Treasuries, buying new Treasuries even as other foreign investors have increasingly been net sellers. In recent years, China has purchased new U.S. debt at about the same rate that the existing bonds come due and are paying off. The U.S. Federal Reserve is by far the largest purchaser of U.S. sovereign debt, buying up the bulk of new issues. The U.S. is buying its own debt.
As of early 2013, total U.S. sovereign debt has risen to $16.8 trillion—$148,000 per taxpayer, of which $12 trillion—75 percent of GDP—is held by the public and the rest is intra-governmental debt such as debts owed to the Social Security Trust Fund and the Medicare Trust Fund. All the money collected from payroll taxes for these trust funds is quickly spent by the government and substituted with unmarketable U.S. Treasury obligations. These intra-governmental obligations will have to be repaid in the future if Medicare and Social Security benefits are to be continued as promised to the public, so essentially, the debt is owed to the public. Total U.S. sovereign debt is now about 105 percent of GDP. And the creditors will want their money paid back with interest.
Could the tipping point come from rising interest rates? Many analysts think that there is a “point of no return” when an economy enters a downward spiral from which it cannot recover. Recently, interest rates on U.S. debt heave been at historic lows, but yields on long-term U.S. Treasury Notes have increased dramatically in the last twelve months. A return to a normal rate environment will mean a huge increase in debt service costs. If rates should spike upward, the deficit could increase dramatically, further increasing the nation’s debt burden. And rates are now rising.
Economist and commentator Bill Mauldin calls the tipping point “the Bang! moment” and advises “…debt is not a problem until it becomes one. And then it reaches a critical mass and you have what they called the Bang! moment… With debt-to-GDP ratios, all we know for now is that the Bang! moment exists, but the precise point for any one given country is not something we can calculate. But wherever that line happens to fall, once it is crossed, Bang! Everything changes” (February 22, 2013).