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
The U.S. raises money by selling bonds. These bonds have low low low interest rates.
For example they sell 1 bond to China for 1 million dollars that they will pay back with a low interest rate in 20 years. 20 years comes around and they pay China 1.1 million dollars back for that bond.
These are set payments which is why China just can’t “call in their debt” whenever they want. And also why the deficit is much more important then the actual debt.
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.
Sovereign debt is fundamentally different from household debt.
If you’re a regular person, debt is a hard limitation – in part because *money* is a hard limitation. Money is something that you have to constantly struggle to acquire. You have constant expenditures required simply to survive. If your debt grows out of control, you’ll lose access to your property, your home, and so on.
A nation does not interact with money or property in that way. Nations create money. Nations declare and define property.
Nations are also more complex entities. Imagine owing money to your own lung, or to a single blood cell; that’s nonsensical for a human, but entirely mundane for nations. Not only is much of that debt to their own citizens, some of it is even from one government agency to another.
Thus, for a sovereign nation, “debt” is just one form of control and distribution of power. It’s not simply that a nation can take more debt than an individual – it’s that the meaning of “debt” is deeply different.
All the functions of sovereign debt are outside the scope of an ELI5, but probably the simplest way to view it is a promise to exert power in the future. The US has a history of not breaking that kind of promise, and has the power to make good on that kind of promise. All the different kinds of power feed into that – economic foremost, but its economy is also backed by military power, cultural power, diplomatic power, and so on.
Debt for countries works a lot different than for people. Debt in and of itself is *not* a bad thing for countries. It only really becomes an issue if the interest payments become so high that they impact day to day business or if potential lenders lose confidence.
One reason for this is, that countries don’t “die”. If a person dies with a lot of debt that means creditors lose that money. That is not the case for countries. If you lend the US money for 30, 40, 50 years you will get it back (with interest).
So, what it really comes down to is, what the country does with the money and what does it cost in interest rates. If the US borrow say a billion dollars at 2% interest rate for 10 years to invest in something (streets, infrastructure, schools, what have you) and the value of that is higher than the interest rate (I.E. the value is higher than ~220 million), then it does make sense to take that credit even if it means more debt.
One example would be, you could borrow some money now to repair small potholes. That means more debt for now. The alternative is you save the money and wait until the street is completely broken and remake it completely. The latter is very likely going to cost a lot more in the long run. So, taking on more debt in the short run will save money in the long run.
An interesting sidenote: During the last financial crisis the trust in the financial market was so low, that some countries (I know it of Germany) could borrow money at negative interest rates. People would literally pay Germany to take their money.
TLDR: The amount of debt a country has isn’t that important. Interest load is the more relevant metric.
I think the simplest and most important thing you may not be thinking about is GDP.
Think about it. You’re 5, and you’ve get an allowance of $1,000 a year.
Your older brother mows the lawn for extra allowance, so he gets $2,000 a year.
BUT your older older sister has a real job and she makes $100,000 a year.
If your older brother owed you $1,000, he’d probably be able to pay you back, but it’ll take him 6 months minimum if he doesn’t spend a dime!
However, if your older older sister owed you $1,000, she could pay you back in 3-4 days. Just wait until Friday when she gets paid.
Who would you rather lend money to?
The US debt-to-GDP ratio is like 105%. It’s big, but don’t let the size of the number scare you. Think about it’s relative size!
Debt = Money in circulation. Too much money/debt can be a bad thing, but there are no upper limit to how much money/debt we have in the system.
If a country’s currency goes down, then goods from that country become cheaper. So with a big economy you can get some slack.
Secondly, even when I buy goods from Europe and ship them to Japan, I quote the price in dollars as it is considered stable. So if the dollar collapses, it would really great for my import business but not so much for the supplier, hurting the whole world economy. The dollar is mainly stable due to the oil price being set in dollars.
When a country has too much oil in control and starts selling it in euro or riyal or dinar or whatever, the US introduces freedom to that country in the form of a coup of military invasion. There is a very stable synergy between arms exports/military conflict, oil and us dollar currency. This is why for example a certain Arab country is in such a pivotal position, the US has their back in everything as long as they keep the OPEC on the dollar as a currency. But the same is true for South America and other places.
Not going to elaborate too much as I don’t want to end up in a ditch somewhere.
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