How the U.S. national debt is different from federal deficit spending

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The difference between government deficit and national debt is the deficit is thought of on an annual basis whereas national debt is long-term. Moreover, the deficit is the total expenditures and costs incurred by the federal government that exceed revenue from sources such as taxes in a given fiscal year, and according to the U.S. Bureau of Public Debt, national debt is the total debt which includes deficits and debt owed on financial instruments that has been accumulated by government over time.

To illustrate further, the annual federal budget deficit does not add the deficit or unpaid balances from previous years of deficit spending. The Congressional Budget Office (CBO) states the deficit is the net amount by which government 'outlays' exceed revenue for a given period. The forecasted budget deficit for 2011 is $1.645 trillion or 10.9 percent of GDP according to the 2012 U.S. Budget released by the U.S. Office of Management and Budget.

The national debt is the total amount owed on financial instruments such as Treasury bonds and deficit spending that has contributed to national debt. The CBO describes national debt as the total value of debt instruments issued by multiple federal agencies. Since the budget deficit is not financed by debt instruments, it is incorrect to conclude the national debt is the cumulative total of all unpaid deficits based on the CBOs definition of each.

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The U.S. Bureau of Public Debt keeps an ongoing tally of total national debt which was  $14.287 trillion on April 29, 2011. This amount includes public debt and 'intragovernmental' debt which is debt held by government rather than the public. The national public debt was predicted to reach its legal limit on May 16, 2011 according to U.S. Treasury Secretary Timory Geithner and as reported by MarketWatch.

The national debt became a money management controversy when it reached a percentage of Gross Domestic near 100 percent. President Obama addressed this issue by putting forward a proposal to cut this debt by $4 trillion within 12 years according to Bloomberg. However, opposition to this plan did not agree with the amount of tax increases that would be necessary to make the debt decline under Obama's plan.

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In summary, government financing comes in the form of debt instruments such as bonds in addition to revenue from taxes where budgets are thought of in terms of government revenue and expenses where debt is a function of money owed on debt obligations. In light of this, three key variables including the type of financing, the time period for which fiscal policy takes place, and whether or not the negative balances are cumulative defines whether money owed is from an annual deficit or national debt.

Impact of Government AIG Bailout on Investors

The impact of the AIG financial bailout on investors varies depending on which investors one is referring to. U.S. banks and investors in American International Group (AIG) actually benefited from the bailout because AIG skirted bankruptcy and more severe repercussions from the impact of no bailout on the market as a whole. However, the affects of AIG's bailout on investors is not quite so simple as it involves a number of different investors from Wall Street to Main Street and around the World. Moreover, the reasons for the bailout are two sided, with both short-term and long-term repercussions for private and public investors alike.

Investors were impacted by AIGs bailout

Of the investors who did not benefit from the financial bailout of AIG are short sellers who are investors that believe the stock price of a company will decline. Short sellers did not benefit from AIG's bailout because the bailout propped up the price of AIG's stock. There are however, many levels to the impact of the AIG bailout meaning different investors were affected in different ways, some of who are listed below:

• U.S. Banks and the Federal Reserve
• AIG investors; stockholders, bondholders etc.
• Mutual funds, ETF's, Market makers
• Competing company/industry investors
• International investors

The impact of the AIG bailout on investors in general was that the bailout contributed to the restoration of the U.S. economy which in turn affected the securities markets from losing more confidence that it did. AIG equity valuations themselves experienced a propping up due to the financial bailout. This however, is debated because the main beneficiaries of the bailout is the company and the investment community rather than the average U.S. person, also referred to as 'main street' and the U.S. taxpayer.

Short term vs long term AIG bailout impact

The rules by which investors make their decisions were somewhat trumped by the Federal Reserve's decision to provide billions of dollars in financial assistance to AIG. The reasoning for the bailout was to prevent a decay of the U.S. standard of living via increased costs and lower household net worth as per the following linked to September 16, 2008 Fox news report. However, what this implies is that the banks that were insured by AIG later bailed themselves out by buying the insurer that would have otherwise went bankrupt i.e. the insured bought their own debt thereby gaining the capacity to write the debt off their own debt off via the Federal Reserve.

i) Reasons for AIG's bailout:

• Banks could save themselves
• Helped to restore economic stability
• Prevented the meltdown of large institutional investors
• Supported the financial community

The short-term benefits of the AIG bailout included 1) the prevention of multiple bankruptcies of major financial institutions across the United States, and 2) a short-term cubing of decline in investor equity valuations. The benefits outweighed the costs for banks, investors and the American economy at the expense of trust in the American financial system, it's administration and the public's wealth. Thus, the bailout only reduced the public's wealth rather than immobilizing it. After all, the wealth managers in America can't get rich if they completely bankrupt the source of their income i.e. the American people.

ii) Intangible affects of the bailout:

• Perception of financial administration
• Economic affect(s)
• Government credibility
• Decreases public wealth

In the long-run the affects of the bailout are better than worse for the U.S. economy. It waters down the solvency of the American government a little but does protect against the economy's complete failure. As a whole many investors lost net worth by the failure of the financial system courtesy of AIG, and national banks. If those investors were banking on the real estate market, their long-term prospects are financially hampered at the very least. However, those investors who were invested in long positions within the insurance industry were somewhat saved by the bailout's affect on equity valuations.

iii) Investment benefits of the AIG bailout:

• Greater control of financial markets
• Larger stake in the insurance industry
• Improved financial solvency
• Higher probability of long-run fiscal recovery

Summary

The Federal Reserve's multi-billion dollar bailout of American International Group (AIG) is essentially market manipulation by the banking community primarily for its own financial objectives, and secondarily, for the guise of protecting the U.S. economy from the very financial institutions that put the U.S. economy in danger in the first place. Since many banks heavily invested in mortgage derivatives were insured by AIG's credit default swaps, AIG's failure could have meant a collapse of America's financial institutions.

Since U.S. Banks are collectively the owners of the U.S. Federal Reserve, they also collectively decided to bail themselves out and take ownership of a greater stake in the future of America. Thus, in the short run, U.S. banks took a steep decline in equity valuations, however in the long run, the Federal Reserve and indirectly, U.S. banks have more control of the financial markets via ownership of the insurance company that insures them. In a sense, U.S. Banks are insuring themselves, henceforth, ensuring future profitability, leveraging and financial control. So, the biggest winners of the AIG bailout are the banks that own the Federal Reserve.