Does U.S. debt matter? | CNBC Explains - YouTube

U.S. debt is ticking up.

In fact, every second, national debt increases by thousands of dollars.

So just since you started watching this video, debt has gone up.

U.S. national debt is more than $21 trillion.

Yep, that’s 12 zeros!

Having trouble visualizing it? Well, think of it this way.

You could wrap $1 bills around the Earth more than 80,000 times with that amount.

So how did we get here? Well, it's simple really.

The government is spending more money than it’s taking in.

The government makes money in one key way: taxes.

Your income or payroll taxes are revenue for the government.

It then spends that money on things like social security, health care and defense.

The catch is the government doesn’t have enough revenue to pay for all of these programs at once,

so it borrows money in the same way that you or I might.

For example, as a consumer, it’s good for me to be able to take out a loan for things like a car or a home.

Without credit, I probably wouldn’t be able to do that. It kind of works that way for the government, too.

Without borrowing money, the government wouldn’t be able to

invest as much in education, national security and infrastructure.

So how does the government borrow money? Well, it issues bonds.

Investors and central banks buy U.S. debt in the form of Treasury bonds and securities,

and they get returns when the government pays interest on those bonds.

Of the $21 trillion debt, around $15.5 trillion is defined as held by the public.

The other $5.7 trillion is money the federal government owes itself, for example in social security trust funds.

When it comes to debt held by the public, six percent is owned by state and local governments

and 15% by the Federal Reserve.

Foreign investors hold 39% of American debt with China and Japan as the two biggest buyers.

The remaining 40% is owned by U.S. investors.

So that means the biggest buyer of U.S. debt is actually the American people.

So does all of this debt matter?

Most economists would agree the short answer to that question is yes,

but there's plenty of debate over just how much.

Economists generally think it’s okay for debt to increase when the economy needs a boost.

You can see in this chart, federal debt held by the public spiked during World War II

and during the financial crisis, when the government borrowed money to boost the economy.

The problem is that the federal debt is set to continue to increase to its highest level since 1946,

even though the economy is now in much better shape.

The Tax Cuts and Jobs Act is passed.

One reason for this is a big law Congress passed at the end of 2017

that lowered taxes without cutting spending, which will result in even more borrowing.

Another reason the national debt is likely to grow?

America's population is getting older.

And that means the government will need to pay for more programs for senior citizens.

For example, spending will increase on Medicare, Medicaid and social security.

Some investors have gotten used to sky-high debt levels that have become the norm,

not just in the U.S., but around the world since the financial crisis.

U.S. bonds have remained a popular investment and the country still has a AA+ credit rating,

meaning it’s rated one of the safest places in the world to put your money.

But economists, policymakers and politicians have warned that a debt crisis is looming

where the U.S. won’t be able to pay its bills or where it’s already so deep

in debt when the next crisis hits that it can't spend its way out of it.

U.S. Director of National Intelligence Dan Coats called the growing debt a

In April, the International Monetary Fund warned about record-high global debt levels,

and it said the U.S. needs to address solutions for its growing deficit.

The Fund found that over the next five years the U.S. is the only advanced economy

where debt relative to GDP is likely to increase.

That’s not even the case for Italy or Greece, countries that have notoriously struggled to pay their debts.

Some here on Capitol Hill have said the growing debt needs to be addressed now

by doing things like raising taxes or cutting spending. But, so far, their efforts have fallen short.

As Congress kicks the debt can down the road, Wall Street doesn’t seem too worried yet.

That could change as interest rates go up, meaning the U.S. owes even more to pay off its debt.

In fact, just since you’ve been watching this video,

interest on the national debt has increased by more than a million dollars.

Hey everyone, it's Elizabeth.

Thanks so much for watching our video from here in Washington.

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