The US External Debt Anatomy

Emzar Jgerenaia
TSU Professor PHD

Today, the world is facing disaster. In any case, this is announced by leading TV channels and agencies. Once again the circumstance becomes obvious that the US economy is not only the one that sets the pitch, but also it actually represents the only backbone of the world’s economy, on which economies of other leading countries are constructed; there is no balance and the world market is unprotected from this point of view – one wrong step made by the US politicians and economists might throw the world into abyss.

From this point of view, the most important issue today is external debt of the Unites States and the problem of its limit, in addition to the war started between republicans and democrats concerning the start of fiscal year.

It is noteworthy that the rule of huge emission of treasury securities, as the main factor in effect, was defined by republicans and now it is surprising that these very republicans are blocking increase of ceiling of debt, they are ardently resisting it, in the times when they were the authors of such ideology of governing public finances.

Table #1.


Table #1 shows how these processes were developing. It is interesting when did such a dramatic increase of external debt start? – This is mainly connected with the period of Nixon and Ford governing, i.e. 1970-76 years, the period when monetary system of Bretton Woods was collapsing. Jamaica Conference was approaching and the world was moving to the new monetary system, free floating currency, while at the same time whole world was plunged into oil crisis.

It is widely known that the world crisis of 70ies defined change in monetary policy and generally organization of public finances. It took the external debt notion to the new dimension. From this period external debt is calculated in trillions. First time in 70ies, due to increased expenses on Vietnam military operations, lack of investments, the practice of taking huge amount of debt was applied during Nixon’s presidency. Its first trillion was accumulated during governing of Nixon’s office. Then, there was Ford and naturally, critical 80ies, when the economies of the whole world, and that of England and the US among them, were facing huge catastrophe. They could not stand increased expenses, especially military ones. On its hand, increased oil expenses had serious influence on the US economy. During Carter’s office external debt was increased up to 2 billion. Afterwards, the leading idea of Reagan’s election campaign was reduction of budget deficit and decrease of external debt. Despite this, it should be noted preliminarily that the amount of debt during Reagan’s office exceeded the total amount of the debt taken by all previous presidents. The external debt of the last two republican presidents – Reagan and Bush, in amount of billion and a half exceeded 5 billion during the Bush’s presidency in 90ies.

In 1984, it was announced that the budget deficit should have been decreased. The promise was made to decrease deficit to 2.16 billion during Reagan’s administration. Already in this period, every sixth Dollar of public finances was serving the debt, because of this Congress decided to make active measures and in 1985, it adopted Gramm–Rudman–Hollings Balanced Budget Act, according to which it was planned to cut the deficit during the following five budgetary years and nullify it by 1990. This was considered as the cornerstone of Reagan’s economic policy, though later this term was postponed to 1992 and in the end, it was not fulfilled, as it represented quite an optimistic decision of its time. It was not supposed to be accomplished in the hands of republicans. This model looked quite suspicious in the physical policy and further developments in the States made it clear that it would be unable to avoid deficit.

The crisis started over in the beginning of 1990. Before that between 1983-90 economies revival was noticed that was caused by particular steps made by Reagan in the economy. For instance, encouragement of free trade, NAFTA agreement with the North American countries, that initially played some kind of positive role in investment attraction and stabilization of stock market. Crisis of 90ies started and the US government was forced to increase budget deficit. During the office term of Bush the Elder congress made a decision to have the deficit in amount of 110 billion. This adopted law was also violated, despite the fact that the government took measures for reduction of federal costs, the condition of economy did not allow republicans to cut budget deficit. Finally, in November, 1990 the plan of cutting federal budget was adopted, which was supposed to decrease deficit even below the indicators defined in the Gramm–Rudman–Hollings Act. There were quite a number of vague and pointless regulations in the plan. For instance, according to the plan, the money would have been saved if the government would rent buildings instead of purchasing them. Of course this would decrease expenses for the year of 1990, but long-term costs would increase. Similarly, with the Medicare medical assistance federal program, which is still the subject of controversy, the payment of expenses on doctors’ remuneration was postponed to the next financial year. Starting from the year of 1976, financial year in the US starts on First of October and finishes on September 30. Until 1976 the budgetary year was starting in July. Budget Implementation Act was adopted as the part of budgetary agreement that would control budget deficit afterwards. Annual limit on discretional expenses of several categories was set. With this framework of all-round cutting-down was violated. Discretional expenses that change include army maintenance, health care and etc. Besides the expenses that have been considered for debt service, agricultural subsidies and so on, domestic discretional expenses that amounts to about 19-20% are considered as the most complicated and controversial parts of the budget. Based on discretional expenses, the system known as pay as you go was already created, that implies hold back from taking debts. Despite republican’s wish this provision to have desired influence on budget it was unable to make difference in this difficult situation.

The situation with regard to budget improved during Clinton’s administration in 1995-2000. Despite the fact that external debt indicator increased in this period too. In 1997 Clinton’s administration together with ruling party attempted to convince Congress to adopt act which aimed to balance federal budget. By 2002 budgetary savings should have amounted to 122 billion. Main part of the savings included cut down of so-called Medicare expenses of health care. In this case, republicans were the authors of the request to cut down this program, which would result in 55 billion savings annually. Another important initiative regarded cut of taxes by 95 billion USD in the course of the next 5 years. The program considered opportunity to receive credits for high education, assistance of families with kids and decrease of capital profit. This was quite a risky step for democrats. It might be said that this contradicted with their nature.

However, Clinton’s administration managed to succeed – eradication of budget deficit and achievement of surplus. The most important was so-called boom of years 1999-2001, when quotation of shares of electronic companies reached its peak. This was a serious growth of the US economy. Thousands of internet-companies were established and their share on stock exchange grew. This was a period preceding big ascension. Alan Greenspan was in the head of Federal Reserve Bank. He tried to increase business activity through providing cheap money. They were implementing about the same policy which Ben Bernanke is doing now. This was a pre-condition, start of big bubble that burst in 2007.

It’s worth of mentioning that the government, despite the fact that they were Democrats, were able to invest resources in more productive fields and to mitigate the severity of social burden in budget expenditures. In the hands of the Democrats, in terms of public finances not social costs but promotion of production and investment in strategic sectors of the economy became priority. The result of all the above-mentioned was 81 billion dollar surplus in the budget during last period of Clinton administration.

This trend should have continued for the next 10 years. From 2001, Alan Greenspan’s era of cheap money supply begins. When the Federal Reserve system and Greenspan decided to supply cheap money for rapid economic revival. The market quickly went full of cheap money, and the Republican’s governing began again, who took over from Democrats reduced deficit with a budget surplus. However, it should be noted that during Clinton’s administration foreign debt has not decreased, on the contrary, it was 5.6 trillion U.S. dollars in 2000, and the Republicans took over external debt of thus figure.

The Bush’s administration is very important for the history of U.S. foreign debt. Although Alan Greenspan carried out quite liberal monetary policy, by 2000 the figure of foreign debt made up 5.5 trillion. In a short time after this bull trend began in the growth of foreign debt. That debt in the course of 2000-2013 increased from 5.5 to 16 billion to the current figure, i.e. the United States foreign debt has tripled.

In the hands of republicans, during Bush’s administration, from 2000 foreign debt made up 12 billion, while Obama brought it up to 16 billion. The trend existing during Bush’s administration did not slow down, on the contrary. It’s interesting that Bush used the result of fiscal policy existing during Clinton’s administration quite well. He decided to carry out tax reforms. He used surplus budget and take a course towards tax reduction. Initially it was planned to cut income tax by 1.6 billion, though Congress, even devoted supporters of Bush doubted this plan, as this was a huge decrease. In June 7 of 2001 Bush cut the version initiated by him and decreased the figure to 1.3 billion that should have been implemented over 10 years. The Bush’s plan considered growth of economy and business. Tax reduction should have stimulated business. Whole Congress supported this decision, majority leader Dick Arny said that drug addicts should take treatment and Congress is not going to keep drug addicts with other’s money, and they were proving that stimulation of economy was of much considerable importance by that time. Key element of Bush’s plan was decrease of individual income tax.

Gradual repeal of real estate tax and the increase of the tax credit of employee, in case of some need, for example, studies, etc. It was the Republicans’ main plan. This plan also included increase in the pension scheme. It was also mentioned that the role of private pension funds was growing. The growth expenditures of charitable organizations was included in amount of 10-15 %. Despite the fact that plan of Bush’s administration was subjected to huge criticism, it reduced taxes three times that in 10 years was expected to decrease income of budget by 10 billion USD. Unfortunately, materialization of budget surplus did not take place, expenditures outrun incomes and debt grew catastrophically. During Bush’s presidency, economic recession, terrorist acts and corporate scandals, operations in Iraq and Afghanistan, together with new expenditures increased government’s debt even more. Debt of 5 billion USD was added to the surplus budget existing at the moment of start of Bush’s administration. Deficit of budget of 2007 already amounted 2.4 billion, while foreign debt exceeded 9 billion.

The growth in the volume of foreign debt cased quite a debate among specialists. It should be noted that at the time when Nixon’s foreign debt has reached the trillion mark, for the first time, many economists predicted the end of America. It was a very difficult period. But afterwards the U.S. debt has amounted to much more than one trillion and the same situation continues even today. There is one part of economists, who say that this debt together with the internal debt will doom the U.S. – make it lose the leadership position, on the other hand, there are people, such as Paul Krugman and other economists who think that in case of debt service no threats endanger the U.S. On the contrary, it will be able to attract investments and retain the leader’s role in the economy.

Today, there is a very important moment. They are arguing in the U.S. on Healthy Care program, exemption from taxes of health care institutions; and approve of 16.7 trillion debt ceiling. As for the budget, pursuant to the U.S. law, the country can keep funding of some of the costs even without adopting budget of new fiscal year. However, it cannot serve the debt until the debt ceiling is approved; they are facing the default that will cause the world to collapse, especially Japan, China, Saudi Arabia and Europe appear in critical condition, as the holders of these bonds. As for discretional costs, I say again, the government is able to finance them equal to the previous year. There was a similar crisis in August, 2011, which made international financial markets quite volatile, and especially developing countries appeared to be affected, as is seen from the charts # 2 and # 3.


So, in the end, since 1970 till 2014 a record increase in foreign debt from 1 trillion to almost 17, can be mainly credited to Republicans, the result of their doctrine and now they are trying to hand over this burden to the Obama administration, and the Democrats. Naturally, the default of the U.S. – is not going to happen. In the period when these lines are written, 3 days remain before default. None of the republicans allows it. Now they are trading on the concessions they have to make, so that each party to make maximum political benefit out of this. In this case, the Republicans act similar to the proverb, “I told you my problem” because starters of foreign debt era in 1970ies were that very Republicans.

1. US Department of The Treasury
2. US Social Security Administration
3. Robert B. Denhart, Jennet v. Denhart, Public Appeal, Tbilisi 2012