I saw this today:
“The United States federal debt is forecasted to grow to a record 202% of the gross domestic product by 2051, the Congressional Budget Office reported on Thursday, reflecting healthcare and debt services cost growth. The national debt for 2021 is estimated at 102%.”
So I’m curious, if the U.S. is in so much dept (I think a lot of countries are?) How doesn’t it run out of money?
In: Economics
Its a bit like you owing $100 to your crack dealer.
He knows you got way more juice left in you to squeeze.
There you go, debt basics explained.
Get to near Greek level debts and you may find yourself ignored..
Because the assets that the country holds are still far more valuable than the debts. All the land, mineral rights, water, etc.
Because debt payments are still manageable.
There are plenty of people out there making $100k doing just fine with a $300k mortgage and $40k worth of car loans (so 340% of income). As long as the federal government continues making its monthly obligations, people will continue to loan them money.
A few things… debt that’s 2x GDP is sort of like a person having a home mortgage that’s 3x their salary — and that’s a pretty common guideline for home affordability. What matters is not the debt in terms of current time period, but what the repayment terms are. Clearly nobody could repay a mortgage that’s 3x their income in a year, but it’s not hard over 30 years. Similarly, the U.S. debt is manegable because it’s owed over time, in the form of bonds with re-payment schedules that are often 10, 20, 30 years. The fact the U.S. dollar is stable and the government always pays back its debts means they can borrow at very low interest rates.
And the government has additional benefits in that it could always raise taxes to help pay back debt, or literally print money to repay them. Much of the debt is because Republicans have focused on tax cuts rather than debt repayment (they only care about the deficit when Democrats are in power), and as a result tax rates are at historic lows — especially for the wealthy. Raises those taxes back to where they were in the 30’s – 80’s and we could pay down the debt more quickly.
The whole world is invested in the USA. If it goes bankrupt, the whole world sees a truly titanic amount of wealth go “poof” and disappear. The USA is to the world what big banks were to the USA during the last financial crisis. Literally “to big to (be allowed to) fail”.
The Federal reserve can “print money” to pay for its debt. It does it by borrowing money and then leaving it with the person it borrowed from.
So, for example. You borrow $100 from me and I write you a check. Then I borrow $100 from you but I don’t ask for it right now, you can hold on to it and just give me an IOU. Since this is done in your computer, you can just type into your bank account that you now have $100. I can give you permission to do that because I’m the US government. Now you owe me $100 of money that I just gave you permission to make. Since I know I can always ask for the $100 from you, I borrow $100 from someone else. If that person ever wants their money, I’ll come to you and get it. But I’ll never do that. Instead, I’ll just create more money with someone else, the same way I did with you.
Not really an easy concept for a 5 year old. The best way to do that would be to say that if someone I borrowed money from wants it back, I’ll pull out my ink jet printer and make some.
This is a bit dated on the amounts, but still a great explanation on US debt.
“Debt” and “Deficit” are different things and a lot of people seem to get that confused. ‘Debt’ is what the US owes to other countries. ‘Deficit’ is the shortfall between tax revenue and expenditures. (If there’s more revenue than expenditures, they refer to it as a ‘surpluss’.)
Anyway, as far as the deficit is concerned, since that is what most people are concerned with (especially since healthcare was mentioned) there is no such thing as the Federal Government ‘running out of money’. It cannot declare bankruptcy.
Effectively, taxes are collected and then written off. (The fund are debited from the source bank account and exist only as a record showing that the tax was paid. The US Treasury doesn’t deposit that money anywhere.) At the same time, the Treasury creates new money at the direction of Congress. If more money is created than collected, this imbalance leads to an increase in the supply of currency which eventually (not immediately) leads to inflation. To prevent that, another organization, the US Federal Reserve, collects interest on Federally backed bank loans and writes it off to remove it from circulation. (Some of that interest is used to pay the bills, payroll, fund other loans, but a specific calculated amount is permanently removed from the economy.)
It seems a bit far fetched, but currency in the US is actually not a closed-loop system like a lot of people seem to think it is.
A nation’s debt is not like a person’s debt. Every dollar that exists in every American’s pocket is “US debt” and if we ever made the national debt go to zero dollars for some fool reason, we wouldn’t have an economy any more.
National “debt” is used in this context in an accounting sense. It confuses people in the same way they get confused about the term “fitness” in an evolutionary sense. Debt is bad when you owe somebody money, but debt is not inherently bad when a country owes it’s citizens money in it’s own currency.
To understand what it would be like to control a country’s debt, imagine inventing your own currency. We’ll call it “StockCuriousbucks.” You could pay your kids “StockCuriousbucks” to do chores, by writing “1 StockCuriousBuck” on a piece of paper and handing it to them. You could then demand that your kids give you 5 “StockCuriousBucks” a week or else they’re grounded. In this way, you would make your kids do chores. If your kid did 100 chores, you would be “100 StockCuriousBucks” in debt, but this doesn’t cost you anything.
If you give out too many “StockCuriousBucks,” you can reduce their value. For example, if you give your son 1 StockCuriousBuck to wash the car on Monday, and your daughter 10 StockCuriousBucks to wash the car on Tuesday, your son will probably be mad. So it is in your best interest to keep your StockCuriousBuck debt growth steady, to maximize your ability to get your kids to do chores.
That’s all the government really cares about. If they print so much money that it demotivates the population because of all the inflation, that’s bad. If they print so little money that nobody can get their hands on it and activate their productivity, that’s also bad. So the debt rate is just trying to find the optimal number. The only way we’d “go bankrupt” is if we made dollars completely worthless (like Zimbabwe bucks) or we went too far the other way and experienced hyper-deflation (which happened in ancient times with gold-backed currency but doesn’t really happen in the modern age.)
When you don’t print your own money, debt is cash you need to acquire in order to pay off. When you do print your own money, debt is a bet that you will do better economically in the future.
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