Debt held by the public

What counts as “the public”

The label is broader than it sounds. “The public” means everyone who lends to the federal government from outside it: American households and mutual funds, banks and insurers, state and local governments, pension funds, foreign central banks and private investors abroad. It also includes the Federal Reserve, which is independent of the Treasury and buys its securities in the open market like any other investor.

What is left out is the debt the government owes to itself. When Social Security or a federal retirement fund collects more than it pays out, the surplus is lent to the Treasury in exchange for special securities. Those are intragovernmental holdings, and they are counted separately.

Why economists prefer this measure

Debt held by the public is borrowing that has to be raised in financial markets. It competes with private borrowers for savings, it is refinanced at whatever rates investors demand, and its interest is paid to lenders outside the government. That makes it the figure that determines how the debt affects interest rates, investment and the budget. The Congressional Budget Office, the International Monetary Fund and most academic research use it for exactly that reason.

Measured against the economy, it peaked at about 106 percent of GDP in 1946, just after the Second World War, and fell below 25 percent in the 1970s as the economy outgrew it. The live split on this site shows where it stands today.

The Federal Reserve complication

One quirk is worth knowing. Securities held by the Federal Reserve count as held by the public, yet the Fed normally returns its profits, including interest earned on those securities, to the Treasury. When the Fed buys large amounts of debt, as it did during quantitative easing, the load on private markets is smaller than the headline suggests. When it shrinks its holdings, more of the debt has to find private buyers.