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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A country is not exactly the same as its government.
The government needs to spend money on stuff (mostly, paying government employees) They get this money primarily through taxes. If they spend more than they tax, they have a deficit and generally borrow money to pay the bills.This debt usually takes the form of government bonds.
It does not matter how rich a country is if thr government doesn’t tax enough of that wealth to pay government expenses. Therefore the wealth of a country does not determine whether it is in debt; that is determined by the tax vs expenditure balance.
The primary lender in most rich countries is usually the people of that country. In the US’s case the primary lender to the US government is the various pension funds (not China, as some will claim).
Right away you can see one reason why rich countries can have more debt: the citizens (and various pensions/funds) have more money to lend their government. But also because rich countries have more trust and so can convince people to lend them money.
Politicians everywhere like promising benefits at the expense of future taxpayers. The richer and more productive the country, the more debt they can accrue before destroying itself.
The banking system (debt) creates money. Well as much as money is a tangible thing these days. Makes sense the richest nations would have lots of debt.
A better question might be, if the US is trillions of dollars in debt why is it considered rich?
The absolute number of dollars is less important than the debt to GDP ratio. Paying off the debt doesn’t matter if the countries GDP keeps up with or outgrows the debt.
However, the debt in the US is greatly outpacing the GDP these days, so it is a problem.
The US has one weapon that allows us to sustain this longer than you would think, and that is the fact that the US dollar is the global reserve currency, and most of global trade is transacted in dollars. We also have the biggest military, which allows us to protect that status.
However, Great Britain used to have that status and no longer does. Before that, it was France, and before that, the Dutch. The US will probably.lose it’s status at some point, but that would moat likely happen after a huge war or some massive global economic upset.
It’s similar to how richer people have bigger debt. They have more leverage to borrow more money and enough income to keep up with interests. They need more debt because their house/expanses cost more, etc.
**The very simple version:**
A country issues bonds to fund operations in the here and now with the promise to repay it later.
People can buy these bonds whether individuals or institutions in return for more money later from the government that issued them.
Some economies are seen as super stable and unlikely to default (Discharge debt and not pay anyone back.) or be forced to restructure (arrange a sort of payment plan and perhaps discharge or consolidate some debt.) except in a disaster so great that your money is likely no longer useable anyways.
As a result it can be among the most stable form of investment for both big financial firms and pension plans, and for any random citizen.
The natural followup question:
**So why do countries borrow debt and not raise taxes instead?** Taxes are unpopular debt is easy and as long as your taxbase grows faster than your debt you come out ahead anyways, this also works on an individual level provided you are wealthy but its a whole different scale when countries start doing it.
For the same reason that states with the coldest annual temperature often have the highest annual ice melt.
Because wealthy countries are able to pay off large amounts of debt on a rolling basis.
The level of debt is the level of debt, not loans that have been accumulated. Think of it like a wealthy person putting more on their credit card each month, even if they pay it off diligently.
Debt in a country isn’t like a house.
Firstly, as a person, your income is fixed based on what you do.
Secondly, your expenses are separate from your income; one does not affect the other
Thirdly, there is a maximum you can borrow its hard limits from institutions that say nope! No more, and then you’re shit out of luck
Fourthly, you die or lose the ability to earn money.
Finally, if you owe money, the bank can collect on you; it has the state to back it up with courts, police, etc
None of these are valid if you are a country.
This means the standard rules do not apply to a country.
So, a country’s income is ultimately based on its taxation and investment returns, but it can also print currency if it really needs it. The first is based on the number of transactions that take place and the velocity of money. The more times money changes hands, the more taxation. Investment increases if the government has a stable country, increasing revenue again, but the investment also creates jobs, etc., which creates more taxation points. Suppliers, for example, have to pay tax on the profits they make selling to the country. So your income goes up as investment goes up.
Expenditure in government terms is small, but to the economy, they are the most significant single buyer of everything. If a country cuts back on expenditure, it means less money in the hands of people with low incomes, so grocery stores go bankrupt, and it means fewer bridges, which means more construction goes under. Those lost jobs go on welfare, and government expenditure increases, not decreases, EVEN though you cut back on spending!!
Because of this, debt doesn’t work like a person. A country can borrow over centuries and issue debt like ‘perpetual’ bonds, which pay the owner forever. As such, a country has no actual limit on what it can borrow, and when it does, it could just punt to the future. But if its income increases enough the debt becomes orrelvant to the country, take the UK government its still Payong off the Napoleonic war bonds but it a Pittence to what it once was.
The limit is thus the confidence that the country’s current budget will be able to meet current interest repayments and still have enough to keep investment and spending at sensible levels. If the market believes that investment and current spending are at risk, people will stop lending. But they can never actually collect on what they’ve lent as they don’t have an army or police to do it.
We tend to use indicators like debt to GDP as a guide for this confidence, but there is no real metric; it’s an ethereal thing that a country’s credit is good because we all believe it is good. As such, big countries are better than little ones, so they can borrow more because we believe bigger is better for various technical reasons.
There are some decent comments here, but I think I can dumb it down even further for you. Here goes: US debt isn’t really debt at all.
What!? Am I high?
Here’s the thing, when a sovereign country issues or incurs debt denominated in its own currency, that debt is just a promise to print more money later. To own a sovereign currency issuer, is to have an unlimited right to print as much of the currency as you want. So the US national debt is nothing more than a promise to print a bunch of dollars out and hand them to people.
You are used to thinking of debt as it exists for people who don’t have infinity money, but the US government has infinity US dollars. This should open up a whole new way of thinking about deficits and debt.
And it gets better! Because printing currency is a vital part of the US governments core task! The higher the debt, the better the job it’s doing!
Am I taking this too far? Is it really this easy? Ok, sure, while the US government could print a quintillion dollars tomorrow with a few keystrokes, that would be a bad idea. Too much currency printing could in theory devalue the currency and create inflation. Nobody knows for sure how much debt that would take, all we really know is that it would be really fucking hard because it’s essentially never happened for a rich country with a floating currency since China was admitted to the WTO. So it would clearly take a much, much much larger budget deficit than anything the US has ever done. Even then it would really depend on the net consumption growth and supply elasticities.
Okay this has stopped being ELI5 but bottom line, the US owes most of its debt to itself, and even the debt it owes to others , it owes it to them in monopoly money. Sovereign debt is a completely different thing than personal debt. US debt is just a number to track how much money we’ve decided to print, and even there, deficit as a fraction of GDP is the only metric that matters. Even though most people talk about it just to panic about minor changes to the ratio that don’t matter.
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