eli5 If the U.S. is in so much debt, how do they remain one of the most powerful & influential countries in the world?

Question

I feel like the United States is always meddling in other countries affairs and yet still climbing further into debt. Kind of like someone giving you advice on a golf course who is terrible themself. Is it the military presence? Economic relationships?

In: Economics

Answer 1

When you owe money you pay it back plus a little extra, which is called interest.

People who have a lot of money make more by loaning it out and getting paid interest.

But they only want to loan money to people who can probably pay it back. When people can’t pay, you might just lose everything you lent them with no way to get it back. So loaning has risks.

For example if someone runs two successful restaurants and wants to borrow some money to build a third, that sounds like a good loan to make. They’ve proven their ability to run restaurants successfully. They’ll probably do well with a third location too and you’ll get all your money back.

That restaurant owner’s debt is someone else’s investment.

So why does the USA have all this debt? Because so many people think it’s a great investment and will pay it all back. And America isn’t afraid to borrow because we’re like a business owner who runs a million successful restaurants. Borrowing to open 100 more is no big deal.

By contrast, if you lend people money in Somalia you are taking a huge risk because very few businesspeople are succeeding there. You could even loan to the government of Somalia and lose big when that government gets toppled in a revolution next year.

So yeah. Rich successful people borrow money all the time. They have their own cash to spend but they get to play with a much bigger pool of cash than that: they get to play with all the money anyone is willing to lend them, too. It takes money to make money but as long as you’re able to earn more than the interest is costing you, you’re golden.

If you can borrow $100 and turn it into $200 with your business, but you have to pay back $120 then you’ve earned $80 out of thin air. You’d borrow as many $100 bills as people would loan you. And you’d be in debt. But you’d be making tons of money. And so would your creditors.