Changes

[[File:Federal Debt graphic PD WC.jpg|thumb|280px|Components of Federal Debt As Percentage of GDP FY1980-FY2007]]

[[File:Federal Debt graphic PD WC.jpg|thumb|280px|Components of Federal Debt As Percentage of GDP FY1980-FY2007]]

There are two components to the [[national debt]]: the debt held by the public, and intra-governmental debt. The former is defined as the debt held by any individual or entity that is not the federal government, such as a mutual fund, individual investor, foreign government, or a municipal government.<ref>http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit</ref> Intra-governmental debt is debt the government owes itself, such as the Social Security Trust Funds, the Medicare Hospital Insurance Trust Fund, and the Civil Service Retirement and Disability Fund. <ref>http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit</ref> Currently debt held by the public comprises roughly two-thirds of the total federal debt.

There are two components to the [[national debt]]: the debt held by the public, and intra-governmental debt. The former is defined as the debt held by any individual or entity that is not the federal government, such as a mutual fund, individual investor, foreign government, or a municipal government.<ref>http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit</ref> Intra-governmental debt is debt the government owes itself, such as the Social Security Trust Funds, the Medicare Hospital Insurance Trust Fund, and the Civil Service Retirement and Disability Fund.<ref>http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit</ref> Currently debt held by the public comprises roughly two-thirds of the total federal debt.

== Obama debt ceiling crises ==

== Obama debt ceiling crises ==

Leaving the deficit at an unsustainable size retains the risk that the budget could at some point enter a debt spiral, in which the U.S. Treasury rates rose sharply and suddenly. The direct effect of higher interest rates stemming from greater credit risk would be to reduce the value of existing government debt, as investors would be willing to pay a lower price (i.e., demand a higher rate of return) for Treasury securities to compensate for the greater credit risk. This would cause a negative “wealth effect” for debt holders, and debt holders would be expected to reduce their purchases. Since the publicly held debt reached $10 trillion at the end of FY2011, the wealth effect has become increasingly large. The most damaging wealth effects could come from financial institutions that hold U.S Treasury securities. At the end of 2010, commercial banks held about $300 billion of U.S Treasury securities, while insurance companies, Government Sponsored Entities (GSEs), and bond dealers held another $400 billion. As demonstrated during the [[financial crisis of 2008]], financial firms “leveraged losses” can lead to a credit crunch that affects the economy as a whole.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, pp. 11-12 pdf.</ref>

Leaving the deficit at an unsustainable size retains the risk that the budget could at some point enter a debt spiral, in which the U.S. Treasury rates rose sharply and suddenly. The direct effect of higher interest rates stemming from greater credit risk would be to reduce the value of existing government debt, as investors would be willing to pay a lower price (i.e., demand a higher rate of return) for Treasury securities to compensate for the greater credit risk. This would cause a negative “wealth effect” for debt holders, and debt holders would be expected to reduce their purchases. Since the publicly held debt reached $10 trillion at the end of FY2011, the wealth effect has become increasingly large. The most damaging wealth effects could come from financial institutions that hold U.S Treasury securities. At the end of 2010, commercial banks held about $300 billion of U.S Treasury securities, while insurance companies, Government Sponsored Entities (GSEs), and bond dealers held another $400 billion. As demonstrated during the [[financial crisis of 2008]], financial firms “leveraged losses” can lead to a credit crunch that affects the economy as a whole.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, pp. 11-12 pdf.</ref>

Aside from foreign buyers of U.S. Government debt, borrowing can only be financed through savings, and government borrowing competes with business borrowing to create jobs for the same pool of national savings. By increasing the demands on that pool of national savings, government borrowing pushes up the cost of all borrowing through higher interest rates, causing businesses to finance less capital spending and job creation than they otherwise would be able to. Less business borrowing for job creation, plant and equipment, and capital spending results in lower [[gross domestic product]], and hence lower future national income, than would otherwise occur. <ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 16 pdf.</ref>

Aside from foreign buyers of U.S. Government debt, borrowing can only be financed through savings, and government borrowing competes with business borrowing to create jobs for the same pool of national savings. By increasing the demands on that pool of national savings, government borrowing pushes up the cost of all borrowing through higher interest rates, causing businesses to finance less capital spending and job creation than they otherwise would be able to. Less business borrowing for job creation, plant and equipment, and capital spending results in lower [[gross domestic product]], and hence lower future national income, than would otherwise occur.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 16 pdf.</ref>

== History of the debt limit ==

== History of the debt limit ==