Question

• Determine about what percent of the debt is publicly held and what percent is intragovernmental (debt held by other agencies in the government).

• Find out approximately what are our current interest payments on that national debt (you should be able to find figures for October 2020-ish). Research what percent of the budget is dedicated to paying interest on the debt.

• Calculate what you think an average annual simple interest rate is on the publicly held debt using the amounts you found.

• Extrapolate (use that information you found to estimate) what you think our national budget is currently.

• What happens if that interest rate increases by one percentage point? How much would that change the interest we pay? What percent of the budget (using your estimation) would then be needed to pay the interest?

Answer 1

Debt has been a part of this country's operations since its economic founding. However, the level of national debt spiked up significantly during President Ronald Reagan's tenure, and subsequent presidents have continued this upward trend. Only briefly during the heydays of the economic markets in the late 1990s has the U.S. seen debt levels trend down in a material manner.

From a public policy standpoint, the issuance of debt is typically accepted by the public so long as the proceeds are used to stimulate the growth of the economy in a manner that will lead to the country's long-term prosperity. However, when debt is raised simply to fund public consumption, such as proceeds used for Medicare, Social Security, and Medicaid, the use of debt loses a significant amount of support. When debt is used to fund economic expansion, current and future generations stand to reap the rewards. However, debt used to fuel consumption only presents advantages to the current generation.

Evaluating National Debt

Because debt plays such an integral part of economic progress, it must be measured appropriately to convey the long-term impact it presents. Unfortunately, evaluating the country's national debt in relation to its gross domestic product (GDP) is not the best approach. Here are three reasons why debt should not be assessed in this manner.

Based on this definition, one has to calculate the total amount of spending that takes place in the economy to estimate the country's GDP. One approach is the use of the expenditure method, which defines GDP as the sum of all personal consumption of durable goods, nondurable goods and services; plus gross private investment, which includes fixed investments and inventories; plus government consumption and gross investment, which includes public-sector expenditures for services such as education and transportation, less transfer payments for services such as Social Security; plus net exports, which are simply the country's exports minus its imports.

Given this broad definition, one should realize the components that comprise GDP are hard to conceptualize in a manner that facilitates a meaningful evaluation of the appropriate national debt level. As a result, a debt-to-GDP ratio may not fully indicate the magnitude of national debt exposure.
First, about half of government debt held by the public is, directly or indirectly, owed
to U.S. citizens. When people own Treasury bills (T-bills), Treasury notes, or Treasury
bonds, they own government IOUs. From their point of view, the government debt is
an asset, a form of wealth. If your grandmother gives you a U.S. Savings Bond, she is
giving you a benefit, not a burden. These assets are some of the safest ones that you
can own.

A)The national debt is simply the net accumulation of the federal government's annual budget deficits. It is the total amount of money that the U.S. federal government owes to its creditors. To make an analogy, fiscal or budget deficits are the trees, and the national debt is the forest.

Intragovernmental debt is debt that one part of the government owes to another part. In almost all cases, it is debt held in government trust funds, such as the Social Security trust funds. These debts represent assets to the part of the federal government that owns it (i.e., Social Security), but a liability to the part of the government that issues them (the Treasury Department), and so they have no net effect on the government's overall finances.

As of today, intragovernmental debt totals $5.5 trillion, up from $3.9 trillion a decade ago. However, it is projected to fall to $5.2 trillion by the end of the decade, as some major trust funds will soon be forced to begin selling off the debt they hold in order to continue covering their expenses.

Debt held by the public is all debt that the federal government owes to those outside of the federal government. It includes debt held by individuals, businesses, banks, insurance companies, state and local governments, pension funds, Most economists regard debt held by the public -- particularly as a share of GDP -- as the most economically meaningful measure of debt. Debt held by the public measures the amount of U.S. debt held by entities other than the federal government and traded publicly. It is thus relevant for understanding the extent to which debt is providing fiscal stimulus, crowding out private investment, influencing interest rates, and consuming fiscal space. funds, foreign governments, foreign businesses and individuals, and the U.S. Federal Reserve Bank. However, it does not include intragovernmental debt.

B)The interest on the national debt is how much the federal government must pay on outstanding public debt each year. The interest on the debt is $378 billion. That's from the federal budget for fiscal year (FY) 2021 that runs from October 1, 2020, through September 30, 2021.1

The national debt is the public and intragovernmental debt owed by the federal government. It’s also called sovereign debt, country debt, or government debt.

It consists of two types of debt. The first is debt held by the public. The government owes this to buyers of its bonds. Those buyers are the country’s citizens, international investors, and foreign governments.

Finance minister Nirmala Sitharaman presented Union Budget 2020 in Parliament on Saturday. She announced the launch of a new personal income tax regime which can help the middle-class save taxes and also scrapped dividend distribution tax (DDT). Here is the full text of Sitharaman’s budget speech.

C)Discussing interest starts with the principal, or amount your account starts with. This could be a starting investment, or the starting amount of a loan. Interest, in its most simple form, is calculated as a percent of the principal.

With simple interest, we were assuming that we pocketed the interest when we received it. In a standard bank account, any interest we earn is automatically added to our balance, and we earn interest on that interest in future years. This reinvestment of interest is called
compounding.

For example, if you have a savings account, you'll earn interest on your initial savings and on the interest you've already earned. You get interest on your interest.

This is different to simple interest. Simple interest is paid only on the principal at the end of the period.

The power of compounding helps you to save more money. The longer you save, the more interest you earn. So start as soon as you can and save regularly. You'll earn a lot more than if you try to catch up later.

D)Extrapolation is a way to make guesses about the future or about some hypothetical situation based on data that you already know. You’re basically taking your “best guess”. For example, let’s say your pay increases average $200 per year. You can extrapolate and say that in 10 years, your pay should be about $2,000 higher than today.

The black line shows the data points. The dashed line shows a hypothetical extrapolation.

D)

Extrapolation is a statistical technique aimed at inferring the unknown from the known. It attempts to predict future data by relying on historical data, such as estimating the size of a population a few years in the future on the basis of the current population size and its rate of growth.

Extrapolation may be valid where the present circumstances give no indication of any interruption in long-established past trends. However, a straight-line extrapolation (assuming a short-term trend is to continue far into the future) is fraught with risk because some unforeseeable factors almost always intervene.

E)

Interest can be a funny thing. When you’re collecting it on a bank account or investment, it can make you smile. Not so much when you’re paying it to a lender. But either way, knowing how to calculate interest rates can help you know exactly how much a loan will truly cost, or how much income a particular investment will generate.

The challenge is, while simple interest rate calculations can be easy, in the real world how to calculate interest can get really complicated really fast.

Interest and Interest Rate Basics

Interest is the amount of money a lender charges you to borrow a set amount of money (the principal). It is the lender’s incentive to lend, and it is customarily quoted as an annual percentage of the principal. Interest can be thought of as the lender’s rate of return—so the more risk the lender expects from a borrower, the higher its incentive typically needs to be. What you, as a borrower, usually must repay is the principal amount plus calculated interest charges.

Interest rates go by many names, including borrowing rate, lending rate, mortgage rate, and lease rate. But whatever the name, interest accumulates based on the stated interest rate of a loan or on the annual percentage rate (APR) of a credit card. By law, the interest rate must be disclosed to consumers when the lending relationship begins.¹

Where Calculating Interest Rates Starts Getting Complex

While interest rates usually are stated on an annual basis (called the nominal interest rate), they are often calculated at different frequencies depending on the terms of the loan. The different frequencies of Interest accrual tend to make real-world interest rate calculations more complicated. Some common frequencies:

• Annually
• Monthly (e.g., mortgages)
• Weekly
• Daily (e.g., credit cards)

For example, a 12 percent nominal interest rate translates to a 1 percent monthly periodic interest rate or a 0.033 percent daily periodic rate (DPR). That DPR is the 12 percent nominal rate divided by either 360 days (called “ordinary interest”) or 365 days (called “exact interest”), again, depending on the borrowing terms.

In the compound interest method, interest accrues on the outstanding principal plus any interest that was not paid during the previous compounding period—in other words, you’re charged interest on interest. The more frequent the compounding periods (represented by “N” in the formula below), the higher the resulting interest charges. Compounding is the most frequent method by which interest is calculated for mortgages, credit cards, and small business loans.

Interest is the amount of money a lender charges you to borrow a set amount of money (the principal). It is the lender’s incentive to lend, and it is customarily quoted as an annual percentage of the principal. Interest can be thought of as the lender’s rate of return—so the more risk the lender expects from a borrower, the higher its incentive typically needs to be. What you, as a borrower, usually must repay is the principal amount plus calculated interest charges.