National Debt Myths: Common Misconceptions and the Real Facts
Explore how common misunderstandings about national debt shape public perception and why the reality is more complex than it seems.
National debt is a topic that often sparks strong opinions, yet much of the public conversation around it is shaped by misunderstandings. These misconceptions can lead to misplaced fears or oversimplified solutions, especially when complex economic principles are reduced to household budget analogies.
Understanding what national debt actually means—and what it doesn’t—can help clarify how government finances work. This article breaks down some common myths surrounding national debt and explains the facts.
The Misconception About Endless Borrowing
A common misunderstanding involves the idea that the government can borrow without limit. This perspective often overlooks the legal and market constraints shaping government borrowing.
The U.S. government’s ability to borrow is subject to a statutory limit known as the debt ceiling, the maximum amount the federal government is legally allowed to borrow to meet existing obligations approved by Congress and the President. This concept originated in 1917 to give the Treasury flexibility in financing World War I without needing specific congressional approval for each loan, establishing an overall cap codified in Title 31 of the U.S. Code.1U.S. House of Representatives Office of the Law Revision Counsel. 31 U.S. Code § 3101 – Public Debt Limit Raising or suspending this limit requires an act of Congress, as seen with the Fiscal Responsibility Act of 2023, which suspended the limit until early 2025.
Financial markets also impose practical limits. The U.S. Treasury borrows by selling securities like bills, notes, and bonds.2TreasuryDirect.gov. TreasuryDirect KIDS – How Does the U.S. Government Borrow Money? While these are considered safe investments backed by the U.S. government, investors demanding higher interest rates can make borrowing more expensive if they perceive debt as unsustainable. A significant loss of confidence could restrict access to credit markets, although demand for U.S. Treasury securities has historically remained strong. The interest paid on the debt represents a real cost to the federal budget.
Should the government reach the debt ceiling without congressional action, the Treasury cannot issue new debt beyond replacing maturing securities. It can employ temporary “extraordinary measures,” specific accounting maneuvers, to continue financing operations for a limited time. If these measures are exhausted, the government could face delays in payments or even default on its obligations, an event widely expected to cause severe economic consequences. Government borrowing capacity, while significant, is constrained by law and market perceptions.
Confusion Regarding Printing Money
Another frequent point of confusion is the notion that the government can simply “print money” to pay its debts. This misrepresents the distinct roles of the U.S. Department of the Treasury and the Federal Reserve System, the nation’s central bank.
The Treasury manages the government’s finances, including collecting taxes, handling spending directed by fiscal policy, and borrowing by issuing securities. While the Bureau of Engraving and Printing, a Treasury agency, physically prints currency, the Federal Reserve manages the nation’s money supply through monetary policy.
Established by Congress, the Federal Reserve operates independently, aiming to promote maximum employment and stable prices. The Fed influences the money supply primarily through open market operations—buying or selling U.S. Treasury securities. Buying securities injects money electronically into the banking system, while selling them withdraws money. The Fed does not simply create money to hand to the Treasury for bill payments.
This separation prevents political pressure from forcing the central bank into excessive money creation to finance government spending, sometimes called “monetizing the debt.” Directly printing money to pay off debt without corresponding economic growth would dramatically increase the money supply relative to goods and services, leading to high inflation or even hyperinflation, eroding the currency’s value and destabilizing the economy. Historical examples illustrate these dangers.
The Federal Reserve creates money as part of its mandate to manage the overall economy, not as a direct tool for paying government debts. Its independence helps ensure monetary policy decisions prioritize economic stability over short-term government financing needs.
Belief That All Debt Is Harmful
The belief that all national debt is inherently harmful often arises from comparing government finances to personal budgets. While excessive personal debt can be problematic, government debt operates differently and can serve productive economic purposes.
Governments often borrow to finance long-term investments expected to yield future economic benefits. Projects like infrastructure improvements (roads, bridges, utilities) can enhance productivity, while funding for education and research can foster innovation and workforce skills, potentially boosting long-term economic output. Used strategically, government debt can be a tool for enhancing future economic capacity, similar to a business loan for expansion.
Government borrowing also plays a role in economic stabilization, particularly during downturns. Following principles sometimes associated with Keynesian economics, the government can increase borrowing during recessions to fund spending or tax cuts. This supports demand, mitigates job losses, and can shorten the recession’s severity by acting when the private sector pulls back.
However, not all government debt is beneficial. Debt used mainly for current consumption rather than investment offers less long-term economic advantage. A continuously rising debt level relative to the economy’s size (the debt-to-GDP ratio) carries risks. High debt requires larger interest payments, consuming resources that could go to public services or investments. Persistent large deficits and growing debt can also raise concerns among investors, potentially increasing borrowing costs and possibly “crowding out” private investment. While national debt can be a useful tool, its impact depends on prudent management, the purpose of borrowing, and the economic context.
Misunderstanding of Debt Ownership
A significant misunderstanding surrounds who owns the U.S. national debt, with a common perception focusing heavily on foreign countries like China. While foreign ownership is substantial, the picture includes significant domestic holdings. Federal debt is categorized into debt held by the public and intragovernmental debt.
Debt held by the public includes Treasury securities held by entities outside the federal government: individuals, corporations, state and local governments, Federal Reserve Banks, and foreign entities. As of late 2023, this amounted to approximately $27 trillion, representing funds borrowed from external sources.3U.S. Treasury Fiscal Data. Debt to the Penny
Domestic holders owned the larger share of public debt, roughly two-thirds or about $19.4 trillion as of December 2023. Major domestic holders include:
- The Federal Reserve System (holding securities acquired via monetary policy)
- Mutual funds
- Depository institutions (banks)
- State and local governments
- Pension funds, insurance companies, and individual investors
Foreign ownership accounted for the remaining portion, about $7.9 trillion or roughly 29% of debt held by the public as of late 2023. This includes holdings by foreign governments and private investors. Major foreign holders include Japan and China, followed by others like the United Kingdom and Canada. While foreign holdings increased significantly over past decades, the percentage has decreased from its peak around 2011.
The second category, intragovernmental debt, totaled approximately $7.0 trillion at the end of 2023. This represents money one part of the federal government owes another, occurring when trust funds (like Social Security or federal employee retirement funds) invest surplus revenues in special Treasury securities. These internal transactions represent an asset to the trust fund and a liability to the Treasury but do not involve borrowing from outside the government. Taking both categories together, the majority of total U.S. national debt is owned domestically.