See how well you understand the Finances of America. Every American should understand the basic components of how our Government manages the finances of the Country. Only through knowledge are we able to understand the financial state of the country, and thus the health of the country and from this knowledge the ability to make informed decisions.
“Knowledge will forever govern ignorance; and a people who mean to be their own governors must arm themselves with the power which knowledge gives.”
James Madison
Test Government Finance Knowledge
About how much Revenue does the U.S. Federal government collect in a typical recent year?
Order of magnitude: Federal revenues are in the mid single-digit trillions, not billions. For example, in Fiscal year 2024 the federal government collected about $4.9 trillion in revenue. That was just under 20% of U.S. GDP for that year. Learn more: Federal Revenue overview.
The Anti-Deficiency Act (ADA) is Congress’s principal enforcement mechanism for its constitutional “power of the purse.” It bars federal officials from obligating or expending funds in excess of, or in advance of, appropriations; prohibits acceptance of voluntary services (with narrow emergency exceptions); prohibits obligations in excess of Office of Management and Budget (OMB) apportionments; and requires agencies to report violations to the President and Congress. In modern shutdowns, these prohibitions are the legal force that halts non-excepted activities unless and until Congress enacts appropriations or a continuing resolution. See 31 U.S.C. § 1341 (limitations on expending/obligating), § 1342 (voluntary services), and § 1517 (apportionment violations) [1–3, 5–6].
The same framework also empowers the executive branch—principally through OMB—to direct operational shutdown steps and to meter spending during the year through apportionments and reserves under 31 U.S.C. § 1512 and § 1513, subject to the Impoundment Control Act (ICA) and Government Accountability Office (GAO) oversight [4–6, 16].
Constitutional and Legal Foundations
Article I, § 9, cl. 7 of the Constitution provides: “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” Congress operationalized that rule through the Anti-Deficiency Act, now largely codified through:
31 U.S.C. § 1341 (no obligations/expenditures above or before appropriations) [1].
31 U.S.C. § 1342 (no voluntary services except in narrow emergencies) [2].
31 U.S.C. §§ 1349–1351 (administrative sanctions and reporting to the President and Congress) [5].
31 U.S.C. §§ 1511–1519 (apportionment controls; violations of apportionment limits are ADA violations) [3–4].
The Government Accountability Office (GAO) calls the ADA one of the primary enforcement mechanisms of the appropriations framework, and its Principles of Federal Appropriations Law (“Red Book”) treats it as the backbone of budget execution discipline [6].
History: How and Why the ADA came about
1860s – 1880s: Origins, the problem of “Coercive Deficiencies”
After the Civil War and through the late 19th century, agencies (notably in the War and Navy Departments) developed the habit of entering obligations without available appropriations and then pressuring Congress to provide supplemental funds after the fact—so-called “coercive deficiencies.” Congress responded first with an 1870 appropriations rider (Act of July 12, 1870, ch. 251, § 7, 16 Stat. 251), later reenacted as Revised Statutes § 3679—the antecedent to today’s ADA [10]. Congress strengthened the regime in 1884 and again in 1905–1906 by adding the apportionment discipline and penalties, so agencies could not front-load obligations and then create deficiencies (1905: 33 Stat. 1257; 1906 added criminal penalties) [9–10].
Sponsors and partisanship: The 19th-century Anti-Deficiency restrictions were riders to large appropriations bills carried by floor managers rather than single named sponsors. The emphasis was institutional control, not partisan signature [9–10]. Riders are provisions to larger bills, often used as policy bargains hitched to bills to insure passage of legislation (often appropriations).
1930s–1950: toward a modern control system
As executive budgeting centralized (Bureau of the Budget (BOB), predecessor to OMB), Congress overhauled execution rules in the General Appropriation Act of 1951 (enacted 1950). Those changes formalized apportionment authority and prohibited obligations in excess of apportionments—now codified at 31 U.S.C. § 1517—and allowed limited reserves to realize savings [3, 10]. Legislative histories note Rep. William F. Norrell (D-AR) as a House sponsor/manager of key 1950 execution amendments—an indicator of bipartisan, process-oriented reform rather than a partisan initiative [11].
1982: positive-law codification (bipartisan and executive-signed)
In 1982 Congress enacted Title 31 as positive law (Pub. L. 97-258) to “revise, codify, and enact without substantive change” existing fiscal statutes—including the ADA—into the structure we use today. The bill H.R. 6128 was sponsored by Rep. Peter W. Rodino, Jr. (D-NJ), cleared both chambers by voice/unanimous consent, and was signed by President Ronald Reagan (Sept. 13, 1982) [12].
1990: narrowing the “emergency” exception (OBRA-90)
Responding to disputes over the scope of “emergencies,” Congress amended 31 U.S.C. § 1342 in the Omnibus Budget Reconciliation Act of 1990 (OBRA-90) to state that “emergencies involving the safety of human life or the protection of property” do not include “ongoing, regular functions of government” whose suspension would not imminently threaten those interests. OBRA-90 was sponsored by Rep. Leon Panetta (D-CA) and signed by President George H. W. Bush (Nov. 5, 1990) [2, 13].
Summary: Modern legal framework
What the ADA prohibits and requires
No obligations/expenditures above or before appropriations. Officials may not “make or authorize an expenditure or obligation exceeding an amount available” or “involve the Government in a contract… before an appropriation is made,” unless otherwise authorized by law. 31 U.S.C. § 1341 [1].
No voluntary services. Agencies may not accept voluntary services or employ personal services beyond those authorized by law, except for bona fide emergencies involving safety of human life or protection of property, as narrowly defined in the 1990 amendment. 31 U.S.C. § 1342 [2, 13].
No obligations against apportionments. Even with an appropriation, agencies cannot obligate/spend above OMB apportionments or allocations; violating an apportionment is itself an ADA violation. 31 U.S.C. § 1517 [3–4].
Mandatory reporting. Agency heads must report ADA violations to the President and Congress, with a copy to GAO, detailing facts and corrective actions. 31 U.S.C. § 1351; GAO publishes compilations and guidance [5–6].
Sanctions. Administrative discipline (including suspension/removal) applies for violations; knowing and willful violations of key provisions carry criminal penalties under 31 U.S.C. § 1350. Criminal prosecutions are rare; agencies usually impose administrative remedies and procedural fixes [5–6, 18–20].
GAO’s Red Book underscores that the ADA, combined with purpose/time/amount restrictions, is how Congress ensures the executive uses funds only as appropriated [6].
How the ADA governs Shutdowns and empowers Government Branches
The Shutdown logic
When an appropriation lapses, 31 U.S.C. § 1341 bars incurring obligations for affected activities; § 1342 bars acceptance of voluntary services; and § 1517 bars obligations in excess of apportionments. The only work that can lawfully continue is (i) authorized by law (e.g., multi-year/no-year funds, user-fee accounts, mandatory programs), (ii) falls within the narrow emergency exception of § 1342, or (iii) is necessary for an orderly shutdown [1–4, 14].
The Department of Justice Office of Legal Counsel (OLC) articulated the modern framework in the Civiletti opinions (1981) and a 1995 OLC memo refining the emergency and “necessary implication” doctrines; both are the basis for today’s practice [8–9, 14]. OMB Circular A-11, Section 124 operationalizes shutdowns: agencies must keep current lapse/contingency plans, and, once a lapse occurs, OMB directs initiation of orderly shutdown activities. Office of Personnel Management (OPM) furlough guidance aligns with A-11: non-excepted employees are placed on shutdown furlough; “excepted” personnel perform only those duties necessary to protect life/property or to support legally funded programs; and employees may not volunteer to work prohibited duties [6–7, 15].
Bottom line: the ADA is the legal brake that halts most operations during a lapse; OMB and OPM provide the playbook for how to stop [1–4, 6–7, 9].
Legislative branch (Congress) Power during shutdown
1) Hard stop without appropriations. The House and Senate control whether operations continue by enacting appropriations or a continuing resolution. The ADA makes non-excepted obligations unlawful absent that legislative action. 31 U.S.C. § 1341 [1, 6, 8–9].
2) Control through conditions and time limits. Congress can embed caps and conditions; exceeding those limitations can itself be an ADA violation, per OLC (e.g., “not to exceed” caps). This gives Congress fine-grained policy control via riders [5, 36].
3) Oversight leverage via mandatory reporting. ADA reporting to the President, Congress, and GAO gives committees a direct oversight tool. 31 U.S.C. § 1351; GAO ADA portal [5–6].
Executive branch (President & OMB) Power during shutdown
1) Direction of shutdown execution (procedural control). Under OMB Circular A-11, Section 124, OMB tells agencies when to initiate orderly shutdown steps, what must be in contingency plans, and how to classify activities as exempt (legally funded) or excepted (narrow emergency/necessary implication). Agencies act through those plans; OMB coordinates. This is a real (though bounded) form of executive operational power during a lapse [6–7].
2) Apportionment power – year-round metering of obligations. Outside a lapse, OMB uses apportionments to meter how much of an appropriation is available to obligate (by quarter, project, or activity) to avoid deficiencies and ensure economical execution. That authority is grounded in 31 U.S.C. § 1512 and § 1513. If an agency obligates above an apportionment (or agency subdivision limits under § 1514 regulations), it violates § 1517, an ADA breach reportable to Congress and the President [3–4].
3) “Necessary implication” and defining excepted functions (during lapses). OLC’s 1981/1995 opinions recognize that some functions must continue when other statutes would be defeated without supporting work (e.g., to protect life/property, maintain constitutional functions, or support ongoing legally funded activities). OMB/agency plans translate those legal standards into concrete “excepted” workforces. This is a gatekeeping role – OMB and agencies decide what qualifies, but their discretion is cabined by the narrow 1990 definition in § 1342 and OLC’s tests [2, 8–9].
4) Limits: the Impoundment Control Act (ICA) and GAO review. OMB’s apportionment and reserve tools cannot be used to effectuate policy deferrals or impoundments that Congress has not authorized. GAO concluded OMB violated the ICA when it withheld Ukraine security assistance by footnoting apportionments to make funds temporarily unavailable for obligation; OMB disputed GAO’s view, but the decision remains a prominent constraint on using apportionments to pursue policy ends [16].
5) Live leverage examples. Shutdown-era guidance—such as how OMB and agencies describe eligibility for work vs furlough, or the expectation of back pay under the Government Employee Fair Treatment Act of 2019—can shape the negotiating environment even while remaining bounded by statute. The key takeaway is that procedural control (sequencing, classifications, pacing) gives the Executive Branch influence, while substantive authority (whether money exists) remains Congress’s [6–7, 14–16].
Net: The ADA constrains the executive from operating beyond legal funding, but within that constraint OMB exercises material procedural and timing control—both during lapses (sequencing shutdown and defining excepted functions) and during execution (apportionments). Congress retains the decisive substantive control: whether, when, and on what conditions funds exist at all [1–6, 8–9, 16].
Enforcement, Reporting, and Consequences
Enforcement: Agencies manage (often via the agency’s Office of Inspector General, OIG) whether an Anti-Deficiency Act (ADA) violation occurred, impose administrative discipline, and file the mandatory report to the President and Congress under 31 U.S.C. § 1351. The OMB polices execution through apportionments and Circular A-11; exceeding an apportionment is itself an ADA violation that the agency must report. The GAO provides independent legal decisions, audits, and publishes ADA violation compliance reports, but does not enforce
Reporting: Agencies must report ADA violations to the President and Congress, with a copy to GAO, including facts, causes, and corrective actions. GAO maintains public resources and compilations. 31 U.S.C. § 1351; GAO ADA resources [5–6, 32–34].
Consequences: Administrative discipline (suspension/removal) is typical for negligent management errors; 31 U.S.C. § 1350 provides criminal penalties for knowing, willful violations. (Judge Advocate General [JAG] practice notes describe administrative discipline under a strict-liability standard for the underlying breach, with mens rea (must show specific intent) required only for criminal cases.) [5, 18–20] For criminal cases (rare), the Department of Justice (DOJ) – typically through U.S. Attorneys – prosecutes knowing and willful violations referred by an agency/OIG (sometimes flagged by GAO or OMB). Congress receives § 1351 reports, conducts hearings and oversight, and can tighten or condition future appropriations reinforcing accountability across the system.
Controversies and recurring Gray areas
The ADA is not without controversy, when a shutdown occurs, interpretations of the statutes create gray areas that each party and branch may try to exploit.
Scope of “necessary implication” and “authorized by law.” OLC recognizes some functions must continue when other statutes would be defeated without supporting work. Critics argue agencies occasionally read these exceptions too broadly; Congress narrowed § 1342 in 1990 to tether “emergency” to imminent threats [2, 9, 13].
What counts as “protection of property/life.” The line between routine operations and true emergencies is fact-bound. Agencies must document why a function is excepted in their A-11 plans; OMB reviews [6–7, 9].
Internal caps and conditions as ADA triggers. Department of Justice OLC has advised that exceeding internal caps or conditions embedded in an appropriation can itself constitute an ADA violation—giving Congress fine-grained policy control via riders [36].
Shutdown employment practices and back pay. The Government Employee Fair Treatment Act of 2019 (GEFTA) requires post-lapse compensation; how agencies and OMB frame the mechanics can affect expectations and pressure, but cannot override statute [14–15].
Apportionment overreach vs. execution discipline.31 U.S.C. § 1512 requires apportionment to prevent deficiencies and ensure economy; § 1517 makes exceeding apportionments an ADA violation. Used correctly, it’s neutral budget discipline; used to delay or condition funds for policy, it risks ICA violations [3–4, 16].
Practical takeaways (for practitioners and watchdogs)
During a lapse, assume “stop” unless funded or excepted. The default is to halt affected work; exceptions exist but are narrow, documented in agency plans, and coordinated with OMB. 31 U.S.C. §§ 1341, 1342; OMB A-11 § 124 [1–2, 6–7].
Multi-year/no-year funds are a lifeline—but still subject to apportionment. Activities with unexpired prior-year or permanent appropriations can continue if legally available and within apportionments. 31 U.S.C. §§ 1512–1513 [3–4].
Don’t accept “free help.” Voluntary services generally violate § 1342 unless an explicit, lawful authority applies; otherwise you can create an implied claim for pay [2, 35].
Exceeding an apportionment is an ADA violation, even if the appropriation has funds left. That is § 1517 in action [3–4].
Congress’s leverage is structural; OMB’s leverage is procedural. Congress decides whether and on what terms funds exist; OMB controls sequencing and the pace of execution within those terms (subject to ICA limits) [1–6, 16].
Conclusion
The Anti-Deficiency Act provides the operational legal framework for Congress control over Federal spending, the so called “Power of the Purse”. Born to end Coercive Deficiencies and strengthened with apportionments and reporting, it ensures that Federal officials/agencies cannot obligate or expend funds without legislative authorization. In governs Government shutdown activities: non-excepted activities must stop. It provides Congress leverage and control via appropriations/funding. At the same time, the ADA’s architecture (as implemented by OMB through A-11 and by agencies via contingency plans) gives the Executive branch real procedural power to direct how a shutdown is managed and how funds are metered during the year—bounded by statute, OLC opinions, and the Impoundment Control Act, and monitored by GAO [1–6, 8–9, 16]. For more, see our article on the Federal Budget Process.
Citations
[1] 31 U.S.C. § 1341 (limitations on expending/obligating amounts), Legal Information Institute. [2] 31 U.S.C. § 1342 (limitation on voluntary services; 1990 amendment narrowing emergencies), Legal Information Institute. [3] 31 U.S.C. § 1517 (prohibited obligations and expenditures in excess of apportionments), Legal Information Institute. [4] 31 U.S.C. § 1512 (apportionment and reserves) and § 1513 (officials controlling apportionments), Legal Information Institute. [5] 31 U.S.C. §§ 1349–1351 (administrative discipline; criminal penalties; reporting), govinfo/LII. [6] GAO, Principles of Federal Appropriations Law (“Red Book”) and ADA overview pages (role of ADA as primary enforcement). [7] OMB Circular A-11 (current), Section 124—Agency Operations in the Absence of Appropriations (shutdown procedures and OMB direction). [8] OLC (1981) “Civiletti” Opinion—Authority for the continuation of government functions during a lapse in appropriations. [9] OLC (1995) Memorandum—Government Operations in the Event of a Lapse in Appropriations (refining “necessary implication” and emergency tests). [10] Historical summaries of 1870/1884/1905–06 Anti-Deficiency provisions and their aims (ending “coercive deficiencies”). [11] Legislative notes indicating Rep. William F. Norrell (D-AR) as a sponsor/manager of the 1950 execution amendments. [12] Pub. L. 97-258 (Sept. 13, 1982): Positive-law codification of Title 31; H.R. 6128 sponsored by Rep. Peter W. Rodino, Jr. (D-NJ); signed by President Reagan. [13] OBRA-90 change to 31 U.S.C. § 1342—narrowing “emergency”; H.R. 5835 sponsored by Rep. Leon Panetta (D-CA); signed by President George H. W. Bush. [14] OMB/agency shutdown contingency plans and OPM furlough guidance aligning with ADA and A-11. [15] Government Employee Fair Treatment Act of 2019 (back-pay baseline after lapses). [16] GAO decisions on apportionment/ICA (e.g., Ukraine assistance), constraining OMB’s use of apportionments for policy ends. [18] 31 U.S.C. § 1349 (administrative discipline). [19] 31 U.S.C. § 1350 (criminal penalties). [20] Agency ADA violation compilations and GAO reporting instructions (annual ADA reports). [32–36] Additional GAO decisions and DOJ OLC advisories on voluntary services, internal caps, and shutdown boundaries (for deeper case-by-case applications).
Introducing the Government Financial Literacy Answer Center
We’re excited to announce the launch of the Government Financial Literacy (GFL) Answer Center, a collection of over 200 FAQs organized across 12 Government Finance categories.
This new resource is designed to give citizens, students, educators, and policymakers clear, fact-based answers to the most common questions about how Government Finances, including answers on government finance terms, taxes, budget processes, how public spending really works, and where to get information and how to stay an informed citizen. Whether you want to understand the difference between federal and state tax systems, how budgets are decided, what’s the difference between “Headline” and “Core” inflation, or where to find your local government’s financial data, the Answer Center makes it accessible in one place.
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Franklin D. Roosevelt
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You can search or view all the FAQs by category. The Answer Center is a free and open resource with a growing library. As new questions arise, we’ll continue to expand the library so that every citizen has the knowledge needed to understand and engage with how our government manages the finances of the country.
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The National Debt is the total amount of money the U.S. Federal government owes to its creditors. It is the result of borrowing over time to cover the difference between government spending and tax revenue. When the Federal government spends more than it collects in taxes and other revenues, it must borrow to make up the shortfall—accumulating debt in the process. Those shortfalls get added to the National Debt.
Some National Debt, like household debt, is a normal occurrence for most countries. Our National Debt has accrued across many decades and administrations, with spikes in spending deficits increasing generally during periods of war, economic downturns, or national emergencies. As of 2025, the U.S. National Debt exceeds $37.2 trillion (37.2 x 1012). This figure may seem abstract or overwhelming, but it represents a fundamental aspect of how the U.S. government operates and finances its obligations.
Understanding what the National Debt is – and is not – is essential for anyone interested in how public finance is managed. This article explain the mechanics of how our government, including the institutions within our government, borrows, creates, and manages the U.S. National Debt.
U.S. Treasury’s Role
The U.S. Department of the Treasury plays a central role in managing the National Debt. While Congress controls the power of the purse, authorizing how much the government can spend, the Treasury is responsible for ensuring there is enough cash on hand to meet those obligations. When spending exceeds revenue, the Treasury borrows money to fill the gap. So while the Treasury does NOT set policy, they ensure that there is enough money to manage authorized government spending.
This borrowing is done by issuing debt instruments, such as Treasury bills, notes, and bonds, which are sold in public auctions. The Treasury’s Office of Debt Management oversees this process, aiming to finance government operations at the lowest possible cost over time while maintaining a stable and efficient market for U.S. debt.
Treasury debt management is a balancing act. On one side is the need to borrow funds efficiently to support government functions. On the other is the responsibility to maintain investor confidence, manage interest costs, and ensure that debt issuance does not disrupt broader financial markets. (See our Article on Return of the Bond Vigilantes)
Role of Other Government Institutions
Although the Treasury is part of the executive branch, it does not act alone. Its operations are closely tied to other branches and institutions:
Congress holds the authority to tax and approves spending. It also sets a legal cap on how much total debt the Treasury is allowed to issue, known as the Debt Ceiling. When the Debt Ceiling is reached, the Treasury cannot issue more debt until Congress raises the limit, even if spending has already been authorized.
The Federal Reserve, an independent arm of Government, the Fed interacts frequently with Treasury markets. The Fed is responsible for Monetary policy which they do in part by buying and selling Treasury securities, which affects interest rates and market liquidity. The Fed is also a major holder of Federal debt.
The Executive Branch sets Fiscal policy through the President’s annual budget policy proposal. The actual borrowing is implemented by the Treasury within the constraints set by law and market demand. (See our Article on U.S. Federal Budget Process)
The coordination of processes between these Institutions ensures that the government can meet its obligations and that financial markets remain stable and predictable.
Deficit vs. Debt: What’s the Difference?
A common source of confusion in discussions about federal finances is the distinction between a deficit and the debt. Though related, these two terms refer to different aspects of the government’s fiscal position.
Annual Deficit
A Federal Deficit refers to a shortfall that occurs in a single fiscal year—when the government spends more than it collects in revenues such as taxes and fees for a given Fiscal year. For example, if the government collects $4.5 trillion in revenue but spends $6 trillion in a given year, the resulting deficit is $1.5 trillion.
Deficits have become increasingly common and the U.S. is currently experience a stretch of over 20 years of annual Deficits in a row, many consider this a structural deficit (i.e. a ongoing gap between spending and revenue). This happens often during times of war, economic downturns or national emergencies when spending needs spike. The government covers the gap by borrowing—that is, by issuing new Treasury securities.
The National Debt
The National Debt is the total accumulation of all past deficits and interest minus any surpluses. If the government runs a deficit every year, the National Debt grows correspondingly. Surpluses—when revenue exceeds spending—can reduce the debt, but those have been rare in recent decades.
In this way, the National debt functions like revolving credit on a credit card: each year’s deficit is an additional charge, and the total balance owed plus interest on the debt is the National Debt.
Understanding this relationship helps clarify how policies enacted in one year (such as tax cuts/increases, economic growth, interest rates, or new spending) can have long-term implications for the size and trajectory of the National Debt.
Components of the National Debt
The National Debt is made up of two main components: debt held by the public and intragovernmental holdings.
Debt Held by the Public
This is the portion of the debt held by outside investors, including individuals, corporations, mutual funds, pension funds, state and local governments, foreign governments, and central banks. These entities (buyers) purchase Treasury securities as a safe and liquid investment. U.S. Treasuries are considered some of the safest investments in the world due to the size, economic power, and unlimited ability to tax possessed by the U.S. Government. This category of debt is the most economically significant because it represents funds the government must repay to outside parties, with interest.
Publicly held debt is auctioned on the open market and is influenced by investor demand, interest rates, and broad macro economic conditions but ultimately comes down to the trust and credit of the U.S. This is also the figure economists typically refer to when evaluating the sustainability of federal debt, particularly when comparing it to Gross Domestic Product (GDP) and it is usually expressed as a measure of National Debt / GDP as a ratio.
Intragovernmental Holdings
This portion of the debt is held by Federal government accounts. For example, when Social Security or Medicare collects more in taxes than it currently pays in benefits, the surplus is invested in special Treasury securities. These holdings represent a claim on future government resources and must be repaid when the funds are needed.
Although these debts are internal to the government, they still represent real obligations. The Federal government is legally required to honor these commitments when the time comes.
Gross vs. Net Debt
Gross Federal debt is the total of both Debt Held by the Public and Intragovernmental Holdings. It reflects the full scale of federal obligations or sometimes called Total Debt.
Debt held by the public, a subset of gross debt, that excludes Intragovernmental Holdings, and is commonly used to gauge economic impact, particularly when comparing across countries or over time.
Government Funding Operations
The Federal government raises money (borrowing) through the sale of Treasury securities, which function as IOUs. These securities are issued with different maturities and structures, allowing the Treasury to manage its borrowing needs flexibly.
It is common to hear phrases like “the government is printing money,” especially in debates about debt and inflation. However, that expression is misleading. The U.S. government does not directly print money to pay for its expenses. Instead, when it needs to spend more than it collects in revenue, it borrows by issuing Treasury securities. These securities are bought by investors who exchange their existing dollars—already in circulation or on deposit in banks—for government debt instruments.
In this system, money isn’t magically printed by the Treasury or the President flipping a switch. Here’s what actually happens:
Congress passes a law authorizing spending in excess of expected revenues.
The Treasury calculates how much it needs to raise (borrow) and schedules the issuance of new debt—typically through a series of regular auctions (i.e. sale of treasury securities).
Investors—banks, individuals, mutual funds, pension plans, foreign governments—buy Treasury securities, moving money from their accounts to the Treasury General Account at the Federal Reserve.
The Treasury uses that money to make payments, whether it’s funding Social Security checks, building infrastructure, or paying military salaries.
So where does the confusion about “printing money” come from? It often stems from the role of the Federal Reserve. The Fed can buy Treasury securities in the open market (or during extraordinary times, directly from dealers right after issuance). When the Fed does this, it credits banks with new reserves—electronic entries in their Fed accounts—effectively expanding the monetary base (i.e. creating money).However, this isn’t the same as printing physical currency, and it still represents a debt-backed transaction rather than a direct grant of money.
To review: government borrowing creates debt, not new money. Money enters the system when the Fed decides to inject liquidity by buying those securities or otherwise increasing bank reserves. This distinction is crucial to understanding how modern fiat economies function and why inflation is tied more to overall money supply and velocity than simply to the size of the national debt.
Types of Treasury Securities
When the Treasury is borrowing to raise money it may issue different securities with different interest rates and maturities to maintain a flexible financial position.
Treasury Bills (T-Bills) are short-term securities that mature in one year or less. They do not pay interest directly; instead, they are sold at a discount, and investors receive the full face value at maturity.
Treasury Notes (T-Notes) have maturities of 2 to 10 years and pay interest every six months.
Treasury Bonds (T-Bonds) are long-term instruments, typically maturing in 20 to 30 years, with semiannual interest payments.
Treasury Inflation-Protected Securities (TIPS) adjust their principal with inflation, preserving purchasing power for investors.
Savings Bonds, like Series EE or I Bonds, are sold directly to individuals and are not traded on secondary markets.
Each type of security is suited for different investor needs, and together they create a stable and liquid market for government debt.
How Securities Are Sold
The Treasury conducts regular auctions, where it offers new securities to the public. Institutional investors, banks, and even foreign governments participate in these auctions. The process is competitive, and interest rates are determined by market demand. If Demand is low, interest rates go up and if Demand is high interest rates go down.
After the initial auction, Treasury securities can be bought and sold on the secondary market, where prices fluctuate based on interest rates and investor sentiment. This liquidity makes U.S. government debt attractive around the world.
History of the National Debt
The United States has carried a National Debt since its founding. Alexander Hamilton, the first Secretary of the Treasury, famously argued for the benefits of maintaining some National Debt as a tool to build credit and promote economic stability. [1]
“A national debt, if it is not excessive, will be to us a national blessing; it will be powerful cement of our union…”
Alexander Hamilton
The National Debt has grown and shrank in response to various needs and policy priorities in our country over time. However, in general, these factors generally play a significant role in rapidly rising National Debt.
War: During wars, the government borrows heavily to finance military operations. This was true during the Civil War, World Wars I and II, and more recently in the conflicts in Iraq and Afghanistan.
Economic Crisis: In economic crises, such as the Great Depression, and the 2008 financial crisis the federal government has borrowed large sums to stimulate the economy and support households and businesses.
National Emergencies: In periods of National Emergencies, like that brought on by the COVID-19 pandemic, the federal government may step in and provide an economic boost to the economy to support households and businesses.
Structural Deficits: When the annual yearly budget has a deficit, and that deficit is consistent for a number of years it is often due to a structural imbalance. This means that the difference between revenues and expenditures is more than a one off and represents a consistent shortfall. This, for example, could be from rising healthcare and retirement costs, and tax policy decisions that reduce revenues without equivalent spending reductions. This can be slow, but consistently add to the National Debt.
The key measure economists use to assess debt sustainability is the debt-to-GDP ratio. This compares the size of the debt to the size of the economy. While the dollar amount of debt is high, its impact depends largely on whether the economy is growing fast enough to keep pace.
In the years following World War II, debt was over 100% of GDP but declined as the economy grew. In recent years, however, the debt-to-GDP ratio has once again exceeded 100%, driven by major events (COVID-19 Pandemic, 2008 Financial Crisis), and higher spending on entitlement programs and interest.
Figure 1 – US Total Public Debt Source: Federal Reserve
Interest Costs and the Federal Budget
Just like a credit card, or mortgage, the U.S. must pay Interest on its debt. As the National Debt becomes higher, so do the Interest payments. Interest payments on the National debt represent a major—and growing—component of the Federal budget. Last year the Interest on National Debt became the 3rd largest budget item on the Federal budget surpassing National Defense. These payments are the mandatory cost of borrowing, and they must be paid regardless of other spending priorities.
As the debt grows and interest rates rise, these payments consume an increasing share of federal resources. In fiscal year 2024, interest on the debt surpassed $1 trillion
This means that a significant portion of taxpayer dollars goes toward servicing our debt versus providing services or benefits to Americans. Over time, the interest costs from a large National Debt with high interest rates could squeeze out spending from other areas, including some deemed mandatory/critical.
Figure 2 – US Interest Costs Source: Federal Reserve
Who Owns the National Debt?
The U.S. National debt is widely distributed amongst many different investors and classes, both domestically and internationally. They generally fall into 3 categories based on Foreign, Domestic, or Federal Government ownership. Understanding who holds the U.S. National Debt may help you understand what control and influence a entity may or may not have.
Domestic Holders
Most U.S. debt is held by American investors, including mutual funds, pension funds, banks, insurance companies, and individuals. These entities view Treasury securities as a low-risk, stable investment, especially during uncertain times.
The Federal Reserve also holds a substantial amount of Treasury securities. These holdings are part of its monetary policy toolkit and help influence interest rates and economic activity. The Fed does not hold debt for profit, and any interest it earns is returned to the U.S. Treasury.
Foreign Holders
Foreign governments and investors, especially those with trade surpluses, purchase U.S. debt to hold as part of their foreign exchange reserves. Japan and China are among the largest foreign holders. While foreign ownership raises questions about influence, these countries invest in U.S. debt because of its reliability, liquidity, and the dollars use as the Global Reserve currency to settle payments between countries. A little less than a 1/3 of U.S. National Debt is held abroad.
Intragovernmental Holdings
As noted earlier, federal agencies like the Social Security Administration hold Treasury securities as a way to invest trust fund surpluses. These are essentially internal transactions, but they still represent obligations that must be honored in the future.
Figure 3 – US Foreign Held Debt Source: Federal Reserve
Conclusion
The National Debt is a ongoing function for the U.S. government to manage its finances and activities. It is neither inherently good nor bad—it is a tool. Debt enables the government to respond to emergencies, invest in infrastructure, stabilize the economy, and fund essential programs. Productive uses of spending and debt can add significantly to the Economic well being of the country. However, it also carries responsibilities to maintain long-term fiscal management and interest costs.
Informed citizens can better interpret political debates and media coverage related to debt, deficits, and budgeting. By grounding the conversation in facts and data, we can move toward a clearer, more productive understanding of how our government manages its finances.
If interest rates rise faster than growth, debt becomes a trap.
I. Introduction – The Spread That’s Breaking the System
For decades, America managed to grow its economy faster than the cost of borrowing. That dynamic kept deficits manageable and debt levels sustainable. But today, a worrying shift is underway: the effective interest rate on government debt (R) is now greater than the real growth rate of the economy (G). In economic shorthand, we’ve entered an era of R > G.
This equation may sound academic, but it has very real consequences. When borrowing costs exceed economic growth, the debt burden doesn’t just increase – it compounds. This creates a growing strain on the federal budget, limiting our ability to invest in future needs.
The R > G concept was popularized by economist Thomas Piketty in his book Capital in the Twenty-First Century, where he applied it to inequality: when the return on capital exceeds the rate of economic growth, wealth concentrates at the top. But the same logic can apply to nations. When the interest rate on debt exceeds growth, public debt compounds and can overwhelm fiscal capacity.
As of 2024, the U.S. national debt reached $36.2 trillion[1], with annual net interest payments of $1.125 trillion, consuming approximately 22.0% of all Federal revenue, according to the latest FRED data[2][3]. This means that more than $1 of every $5 dollars in revenue goes just to service debt. In fact, interest has now surpassed National Defense spending to become the third-largest Federal expense, after Social Security and Medicare[4].
II. What Happens When R > G? A Costly Imbalance
There are negative consequences when the government’s interest payments (R) rise above its economic growth rate (G), and those consequences can build quickly. The result is a compounding debt burden that becomes more difficult to manage each year.
At its core, the National debt grows based on a simple formula:
Debt(T+1) = Debt(T) × (1 + R – G)
Where:
Debt(T) = total debt in the current year Debt(T+1) = total debt in the following year R = effective interest rate on the debt G = real GDP growth rate
As long as Growth (G) exceeds Interest Rates (R), debt tends to shrink relative to the economy – that’s GOOD! But when R > G, even a stable budget with no new spending deficits leads to rising debt as a percentage of GDP – that’s BAD! This is worse in the U.S. context, because the Federal government has run over 20 consecutive years of deficits. We are compounding the problem even before adding the negative effects of R > G.
In 2023, the average interest rate on publicly held debt rose above 3.3%, while real GDP growth hovered near 2%[2]. This gap means the government must devote more revenue for the same services just to stay in place—and even more to reduce debt.
Figure 1 Source: FRED
III. The Cost Spiral: Interest is Crowding Out the Future
Interest on the National debt is now the fastest-growing part of the federal budget. In FY2024, interest payments exceeded $1.1 trillion, surpassing military spending for the first time[3][4].
As interest rises, it reduces the budget available for priorities like:
Infrastructure and clean energy projects
Scientific and medical research
Education, public health, and social services
These tradeoffs are already showing up in budget negotiations. If trends continue, interest could consume more than 25% of federal revenue by 2030, even under conservative projections[5]. That would mean better than 1 in 4 dollars would be spent servicing debt payments. Imagine the dinner table discussion if your credit card interest alone was taking a quarter of your income, that is the situation America could soon face.
Figure 2 Source: FREDFigure 3 Source: FRED, CBO
IV. Why are Interest Rates Rising? What It Means for the Future?
To understand the R > G dynamic, we first need to ask: why are interest rates rising?
Interest rates are set by a combination of factors:
The Federal Reserve’s target rates
Investor expectations about inflation
The supply and demand for government bonds
Since 2022, the Federal Reserve has raised rates to fight inflation. Meanwhile, investors have demanded higher returns to protect against rising prices from inflation. Additionally, increasing government borrowing has added more bonds to the market, pressuring yields upward[6]. All of which are putting upward pressure on interest rates.
Can we control interest rates?
The Federal Reserve’s role in Monetary policy gives them huge power to influence rates, however even they are subject to market forces during their Open Market Operations. So in short, yes they have great influence, but not control and where that control occurs changes based on the term.
Short-term rates? Generally yes, the Federal Reserve sets the Fed Funds rate which sets short term rates.
Long-term rates? No—those are driven by global investor confidence, inflation expectations, and the perceived durability of U.S. fiscal policy and trust in the dollar.
That’s why many economists believe elevated interest rates may persist, especially if inflation remains sticky or if global lenders become more cautious about U.S. debt levels. In fact, nearly $11 billion exited U.S. long-term bond funds in Q2 2025 amid concerns over debt and inflation, while investors favored short-term securities[6]. Federal Reserve Chair Jerome Powell recently emphasized that the Fed will maintain its “wait-and-see” approach due to persistent inflation risks shaped by tariffs and uncertainty[7].
What it means for the future?
When looking at our current situation and what the future may hold, you must evaluate the impact of rising Interest Rates (R) would have on the budget and our debt costs. We created a sensitivity table using our current National Debt to show the effects of a 1% to 3% increase in Interest Rates (R). As you can see the increase in Debt Servicing costs goes up substantially, exacerbating an already challenging problem. Is this likely to happen? Interest rates have been fairly stable and the Federal Reserve monitors this closely, but is it unheard of? In the late 70’s early 80’s with inflation out of control, interest rates peaked over 20%, and were over 10% for more than 3 years, and never dropped below 6% for Paul Volker’s entire term as Chair of the Federal Reserve from 1979-1987.
Avg Interest Rate (%)
Est. Interest Cost ($T)
Increase from 2024 ($B)
0% (2024 Actual 3.36%)
$1.10T (Actual)
0
1% Increase (4.36%)
$1.43T
$327B
2% Increase (5.36%)
$1.75T
$655B
3% Increase (6.36%)
$2.08T
$982B
V. Ignoring the Problem Makes It Worse
The future may come faster than we expect, and this isn’t one of those challenges that if you ignore gets better on its own.
Just a few years ago, some projections warned interest might eventually exceed 30% of Federal revenue[5]. But with today’s rate environment, we’re already at 22%, and climbing – you don’t have to imagine too hard with annual structural Federal Budget deficits adding to the National debt, reaching 30% no longer seems like a stretch.
If left unresolved, rising debt interest may eventually leave policymakers with only difficult choices:
RAISE TAXES: Broad increases that may include middle-income earners
REDUCE SPENDING: Cuts to Social Security, Medicare, defense, or other mandatory programs
PRINT MONEY: Central bank debt monetization—risks inflation or currency credibility
This is no longer a theoretical risk. It’s embedded in the current budget and growing with every year of inaction. Interest is no longer just a line item — it’s becoming as challenging as Medicare, and Social Security entitlements. All growing, or having funding challenges simultaneously.
Figure 4 Source: FRED, CBO
VI. Japan: A Glimpse into the future? A Blueprint to Not follow?
Some point to Japan as evidence that high debt can be sustained without any issues provided inflation remains under control if the debt is held in the states fiat currency. But key differences limit the comparison:
Japan’s debt is largely owned domestically
It has a current account surplus
It battled deflation, not inflation
However, even Japan is now being tested. After years of ultra-low rates and decades of stagnant growth, it has begun reversing policy, increasing interest rates, and weakening the long-standing yen carry trade where people would borrow from Japan at low interest rates and invest in higher returning areas outside of Japan. These shifts have raised Japan’s borrowing costs and led to rising debt service burdens as interest rates rise (R) [8][9].
Analysts from Barclays and the IMF have noted that Japan’s growing interest expenses could strain its fiscal outlook if growth remains weak[10]. This has important implications for the U.S., which faces a more inflation-prone environment and heavier reliance on foreign buyers of US Debt.
VII. How Do We Escape? The Tough but Necessary Choices
Solving the R > G imbalance will require a mix of political will power, discipline, and hard policy choices:
RAISE REVENUE: Greater revenue sources through taxation, tariffs, and fees
SPENDING DISCIPLINE: Slow or reduce spending, reevaluate larger budget items including mandatory spending on entitlements
BOOST GROWTH: Invest in productivity, innovation, infrastructure, and labor force participation
RESTORE FISCAL CONFIDENCE: Send clear signals that America’s Fiscal position is sound to reduce risk premiums
AVOID MONETARY SHORTCUTS: Don’t Print Money to ease debt that risks creating runaway inflation
It is likely to require a combination of a number of these solutions. The solutions are not mysterious—they’re well known. As noted by the Committee for a Responsible Federal Budget, former Fed Chair Ben Bernanke, and former CBO directors, the issue isn’t technical—it’s political will[11].
VIII. Conclusion
We are no longer warning about R > G — we’re living it. It may not scream that the sky is falling or that America will become insolvent tomorrow. However, it is quietly altering the structure of our National budget by crowding out other items, limiting our ability to provide services, putting pressure on our structural annual deficits, and creating growing economic risks that continue to build over time creating great and greater consequences for the health of America’s future.
In the past, fiscal hawks cautioned that rising interest costs could one day consume a dangerous share of revenue. That day has arrived. As of 2024, 22.0% of federal revenue is already going to interest — and rising.
This isn’t theoretical. It’s a structural shift embedded in the fiscal outlook. Every year we delay action compounds the problem. Interest becomes the dominant force in our fiscal future — not a side expense, but a driver of debt itself.
The good news? The earlier we act, the more options we have, and the easier (not easy) managing it becomes. With thoughtful, balanced reform, the U.S. can navigate this challenge and return to fiscal stability. However, it starts with recognizing that this isn’t about politics or beliefs — it’s about math.
Because when the Rate of interest (R) exceeds the rate of Growth (G), time is not on our side.
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
