March 11, 2006
Saturday

WASHINGTON - Raising the U.S. debt limit once provoked government shutdowns and roiled financial markets, but no more: Congress and President Bush are preparing to raise the debt ceiling to just under $9 trillion next week with little public notice.

Here, in Q&A format, is a look at the issue:

Q: What is the national debt?

A: It's the difference between what government spends and collects in taxes, fees and other revenues. The Treasury covers the debt by auctioning $20 billion or more a week in U.S. bonds, bills and notes as older federal securities come due.

Q: How did the debt get so big?

A: Because presidents and Congresses of both parties haven't collected the taxes required to pay for goods and services they think the public wants and needs. Each American's share of the debt was $27,723.99 as of Friday, March 10, and increasing $2.17 a day, according to the National Debt Clock.

President Ronald Reagan put it another way in 1981 when the debt first hit $1 trillion: He dramatized its "incomprehensible" size as "a stack of $1,000 bills 67 miles high."

Today that stack is 549 miles high and climbing.

Q: What does the debt pay for?

A: The debt finances a range of government goods and services including the $5.3 billion-a-month war in Iraq and Afghanistan, homeland security, and disaster relief including Hurricane Katrina reconstruction. It also goes to crime fighting, courthouses and prisons; college loans, feeding programs for everyone from pregnant women to elderly shut-ins; farm subsidies; small-business and home-loan guarantees; national parks, scientific research and health programs.

Q: Who owns the debt?

A: The public holds $4.8 trillion, from savings bonds bought for a new baby to federal securities in your retirement plan.

Foreigners hold more than $2 trillion today, up from $1 trillion in December 2000 and more than half the publicly held debt.

Another $3.5 trillion is owned by governmental entities including Social Security and Medicare trust funds, which collect interest on invested excess payroll taxes.

Q: Why the jump in foreign debt-holdings since 2000?

A: Our trade partners know that U.S. debt is backed by the "full faith and credit" of the U.S. government and is considered the safest investment there is.

Major holders are Japan ($685 billion), China ($257 billion), the United Kingdom ($234 billion) and anonymous "Caribbean Banking Centers" ($111 billion) as of the end of 2005. However, China's U.S. bonds amount to 66 percent of its portfolio, followed by Venezuela at 37 percent. Japan's U.S. bonds amount to only 5 percent of its holdings.

University of Texas economist James Galbraith says self-interest is why foreigners hold U.S. debt: Japan, because it's the world's most secure investment and because of traditional U.S.-Japanese security ties; and China, because it needs dollars because the United States is its primary export market. To change this setup would be at least as "costly, difficult and risky" to them as to us, he says.

Q: Does it matter where that money comes from?

A: No, says Douglas Holtz-Eakin, the former Bush White House economist and Congressional Budget Office director. "Dollars all look the same; their ultimate source doesn't matter." The real problem, Holtz-Eakin says, is that the U.S. government "does not have a fiscal policy."

Q: What happens if the United States defaults?

A: That fear rattled markets in the 1990s, when the Republican Congress shut the government rather than approve President Bill Clinton's debt-limit requests, and when lawmakers threatened to impeach Clinton Treasury Secretary Robert Rubin for borrowing from federal-employee pension plans to cover the shortfall.

Today, the Bush administration has tapped federal retirement funds to avoid default so far this month. But there's no talk of federal shutdowns or impeachment now, with Congress consumed by Iraq, Iran and disapproval of the Dubai ports deal.

"There doesn't seem to be the same brinksmanship as there was in the past," says economist Catherine Mann of the Institute for International Economics. "There IS a brinksmanship going on, but it has to do with nationalities _ particular nationalities."

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