What is the big deal about the US sovereign debt? America is such a big economic powerhouse, surely USA can support that debt?
The official number for the US national debt is 26.6 trillion dollars. It is worth looking at the US debt clock website, which shows just how fast these numbers are rising. In fact the screen grab is already well out of date.
How big is a trillion?
A trillion it’s such a large number that it can become quite abstract to think about.
- A trillion is a million times a million
- A trillion is one with 12 zeros
- A trillion seconds is 32,000 years
- If you stacked a trillion pennies on top of each other they would be 870,000 miles high. That would take you to the moon, back to the earth, and then back to the moon again. And you would still have change left!
When you have budgets including such huge numbers with so many zeros it becomes really difficult to fathom what exactly is going on. One way of putting things into perspective would be look at the US government budget as if it were that of a regular person.
As an anchor point we will use the government income of 2.82 trillion dollars and the regular person’s income of 34 thousand dollars. This ratio can then be used to calculate the remainder of the budget. Note that there is a lot of variation in the reported figures but that doesn’t matter too much. It is the magnitude and overview that is important here.
If US spending annually is 5.63 trillion dollars then the equivalent regular person is spending $68,000 a year (that is twice the income).
- Pay interest on loans $5,440
- Social security $15,640
- Medical $17,680
- Defense $10,200
The regular person’s debt would be $332,000 in terms of bonds, but the big one is the unfunded liabilities such as social security and medicare and this comes to a whopping 1.85 million dollars!
In terms of government assets this is a bit of a gray area because it depends on what you count as an asset. Based on the pie chart above, the regular person would have assets totaling $41,300. Note that this doesn’t include things like US national parks or natural resources.
About half of US government financial assets are in the form of student loans. Reserve assets account for only 3.2% of the total and these reserve assets are quite interesting. According to this the regular person would own:
- Gold $6,242 (3oz) (valued $126)
- Special drawing rights (SDRs) $609
- IMF reserves $369
- Foreign currency $502
Stripping everything back to the basics, if the government was a regular person, their budget is shown in the table below:
There are other factors to consider that does make US debt attractive to investors, but the aim of this is to simply strip things back getting rid of all those ridiculous zeros to get an overview of the state of the budget. A lot of sovereign budgets look like this, or even worse in some cases.
Would you lend your hard-earned cash to this person?