The USA and Chin have the highest debt in the world but i don’t understand the concept of them being some of the wealthiest countries, does that debt need paying off? How do they get this debt? Ultimately it just doesn’t make sense to me.
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If I’m making $100 a day, but someone tells me I can make $200 a day by buying a fancy new appliance that lets me make cooler stuff, then I might take out a loan to buy that equipment and increase my income as soon as possible. As long as my income gains outpace the rate of interest I need to pay on the loan, I will end up in a better position even if I’m in debt.
Now scale that up to a country level. They will do that over and over and over again, causing their debt to grow, but their GDP to grow even faster. The richest countries are the ones that can handle the biggest loans with the most interest, so they are the ones with the most debt
The richest strongest countries in the world are deemed the most trustworthy by financiers of paying that debt back (with interest). As a result, these countries are allowed to take on more debt than a country like Venezuela or Zimbabwe would be able to.
I’m a little too high to go into detail at the moment, but I think it’s important to note that a lot of the US gov’t debt is internal. In other words, we owe it to ourselves. Foreign accounts hold less than a third of the US debt, IIRC.
I know it sounds contradictory, but the fact is that government debt is just nothing like personal debt.
Government debt it’s an investment in the future and the expected growth of the economy. Deficit spending can actually be good for a country as long as the economy grows faster than the debt and the government budget isn’t eaten up by interest payments. Governments issue debt by selling bonds. People want to have these bonds in wealthy countries with strong, stable economies because they know they’ll be paid back with interest. The U.S. specifically is has the world’s highest GDP and the U.S. dollar is the de facto world reserve currency. It’s just about the safest investment there is.
So yes, that debt does need to be paid, but as long as the government makes timely interest payments, it can just reissue new bonds to pay off old ones, and the economy keeps growing and everyone is happy. There’s no real risk that the U.S. will stop existing or stop being able to to pay off its debts, so people will keep buying bonds and so on.
The richest countries are normally the best at getting good return on investment, so these countries will go into debt to invest in their country.
I will mention the distinction that the debt does get paid off, just with new debt. I may loan the US $1,000 as a 1 year bond at 5%, in 1 year the US pays me $1,050, my principal plus the interest. To pay me back you lend the US $1,050 on a 1 year bond and receive $1,102.50 in 1 year. Both of us got paid back and we will continue to lend money to the US because they are one of the wealthiest counties in the world and we are confident that we will be paid back. This isn’t necessarily a problem for the US because they have $1,000 they can invest in their economy and they should be able to produce more than a 5% return.
Lets pretend you want to start a business. You take out a loan from the bank. Use the money to start a business and then with the profits you make you then pay off the loan. Over this time period your debt has resulted in you marking more profitable.
In general terms if you are able to borrow money in a way that causes a greater return on investment in the future then it makes rational economic sense to do so. The limit on how much you should borrow is basically set by a combination of the expected return on investment and the interest rate you are borrowing at.
A rich country can borrow at very low interest rates because it is expected that they will be able to pay it off in the future. It then can invest that money in infrastructure and education and other services that increases the productivity of its economy and so they are able to service those loans. Making the countries even richer.
Rich countries are able to take up large debts because they are rich and people feel safe lending them money.
Rich countries are rich because they have capital (from loans) to improve their economy.
An improved economy means that it is safer lending to them.
Debt is just a promise.
The more powerful you are, the more promises you can make and still be expected and able to keep those promises.
Theres good debt and bad debt. Good debt makes you money, bad debt doesn’t. Taking out a loan to buy a business is good debt. Buying a house is good debt. Taking out a loan to buy a TV is bad debt.
The more money you have (or make) the more debt you can take out. Apple for example has 100B in debt but makes 85B a year. I have — let’s say — 300k I’m debt but make 150k a year. The US has 35T in debt but makes 29T a year.
As long as you service your debt then it isn’t a problem. The USA pays 900B a year to pay for the debt, or 3% of how much they make. I pay 24k a year to pay for my debt, or 16% of my income. Apple paid 3B for their debt, or 3.5% of their income.
You can’t just look at “debt” I’m absolute terms. It needs to be looked at in aggregate.
The U.S. owes the overwhelming majority of its debt to itself. The U.S. also owns a gigantic amount of foreign debt. It makes for great news stories about how bad it is, but it’s just money that will eventually go right back into the economy.
A person making $500,000 per year may own a $3 million dollar house. A person making $100K per year may have a $500K house. Neither of them pay cash, they borrow the money.
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