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. Be sure to check out more of our
CNBC Explains over here. We’re also always taking your
suggestions for future ideas so leave those in the comments section, and
while you’re at it, subscribe to our channel. Bye for now!