Who Do We Owe?
Who do you think is the biggest holder of U.S. government debt? China? No. It is the U.S. government. Why?
Please think about extra money the government might collect for Social Security. What does it do with those funds? Retaining cash would mean no return at all. Buying stock could be risky. What is the safest investment? Government bonds. Another major holder is the Federal Reserve. The Fed has to buy and sell bonds when it implements its monetary policy.
According to CNBC, in descending order, the largest holders of the U.S. debt, after 1) the US government, are 2) a diverse group investors such as businesses and savings bond owners, 3) China, 4) Japan, 5) Mutual funds. To learn more about the deficit and who holds it, you might want to look at Where Does The Money Go?
Knowing who owns the debt is one consideration when you decide how worried you are about the size of the deficit.
The Economic Lesson
A second consideration when deciding how worried you should be about the deficit is how the size of the deficit compares to the value of the goods and services produced by the U.S. According to Teaching Company Lecture 10 from “Modern Economic Issues,” since 1929, the deficit has averaged 2.1% of GDP. You can see on this table, though, that during 2010, the deficit will be closer to 10% of G.D.P.