Relevant news story: [https://www.bbc.co.uk/news/world-us-canada-65781359](https://www.bbc.co.uk/news/world-us-canada-65781359)
So the US is borrowing money because it can’t pay for the money it already owes? As a consumer I’d think that is a really bad sign but apparently raising the borrowing limit has historically been “a formality”, so it’s not a bad thing?
Also “The legislation will result in $1.5tn in savings over a decade”, How does that work? Do you not pay interest on national debt or something? Also, where is the money coming from?
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You can’t really compare national debt, especially that of the United States, to like, household or individual debt. The thing is that the US is in control of it’s own currency, which is fiat money – it isn’t tied to the value of anything other than itself. Essentially the US decides how many dollars there are, and the dollars’ value is only decided based on how much people want to have them and how useful they are for buying things. And, the US doesn’t raise debt by like, applying for loans, they instead issue bonds and other securities, mostly to US citizens.
These facts taken together mean that US national debt is kind of just a number. So long as people continue to want and need dollars, and so long the government continues to payout on the value of the bonds it issues, it doesn’t really matter. The government gets to decide how many dollars there are so if it needs more dollars to pay for things, it can just invent more. No external authority can tell the US that enough is enough, we’re not going to lend you any more money, because again, we’re not talking about personal loans, we’re talking mostly about issuing bonds, and the government gets to decide how many bonds it issues.
The borrowing limit has been a formality because it was created to be a formality. The government has to pay for the things that it has put into the budget, and the possibility of not having enough money to cover those expenses can’t exist. When the budget is passed, the Congress already knows how much borrowing is implied in that budget – that’s just expenses minus taxation. But, the borrowing limit was imposed on this process under the thinking that it would limit government spending, and it has stuck around because despite being a formality, it’s a formality that members of Congress can use against the administration.
So let’s try to compare your family to a Country.
Your family has an income coming from the salary of the parents. A country equivalent are the taxes people pay.
Your family has expenses like utiliities. A country has expenses like running schools and hospitals..
In an ideal world if your family earns 1000 in salary every year it should spend at most 1000 every year.
If the family spends more than 1000 they either have to pick money from their savings account or ask for a loan.
A Country works in a similar way: if they don’t have Money to pay Schools and Hospitals they can access their savings (the national reserves) or ask for a “loan”.
When asking for a loan the government of course can’t go to a bank, so they issue a Bond. The Bond is a certificate that states that the Country will pay back money to whoever purchased the bond by a certain date with a certain interest rate.
Countries, like people, have a sort of credit score: Country that have been reliable in paying back bonds and that look “stable” can issue bonds with low interest. If you are a shaky Country, you need to offer high interest rates to attract people to buy your bonds.
Now after many years most of the countries have entered a loop where they need to issue bonds to pay back the money of previous bonds. Something like when people use a new credit card to pay back another credit card.
This means that not only the debt doesn’t goes down, but any new expense requires more bonds to be made.
Sometimes Countries can borrow money directly from other Countries and/or insititutions like the world bank but still have to repay.
So the National Debt is the sum of all the money a Country has spent without having it. And this debt is held by anyone who has purchased the bonds or Borrowed directly the money.
So with that said the National Debt goes up when the government decides to spend more money and the new expenses are not covered by more taxes. And it goes down when the government either gets more money by raising more taxes or by cutting expenses.
Last piece is the default one. If a government, for whatever reason, fails to pay back or refuses to pay back their debt to the Bond Holders, it goes into default meaning nobody will lend them any money for at least some time. This means that country will have to face all.their expenses without the chance to ask for money, so either taxes will.go up by a lot or hospitals and schools will close.
When the government needs to spend more than it takes in with tax revenue, it issues bonds that it sells to investors.
The debt ceiling is like a credit limit on a credit card that caps how much debt the government can issue in total. They’re always retiring bonds that mature, and issuing new ones… when more are issued than retired, then debt grows. There are times where spending in excess of revenue is critically important — times of war, recession, pandemic, etc. where spending needs to increase and revenues decline.
Historically, the debt ceiling is like a credit card limit and raising it is like asking a credit card company to increase your credit limit.
However, the GOP has repeatedly used debt ceiling to hold Democratic presidents hostage and extract spending concessions in return for not blowing up the economy. On the flipside, the Dems have always approved as a formality when needed (3x during Trump’s administration, for example).
The savings come from those concessions/adjustments to government spending as part of the debt ceiling deal. In return for the approval of raising the debt ceiling, cuts were made to programs like Medicaid, IRS staffing/modernization, food stamps, etc.
>So the US is borrowing money because it can’t pay for the money it already owes?
Yeah pretty much, although it’s borrowing for a lot of reasons not just loan interest. This keeps the lights on.
> it’s not a bad thing?
Oh it’s a problem and it’s a growing problem but it’s not as bad as you owing money to the mob. It’s more like the mob boss not being able to pay money back to you right now. Huhhuh, whacchu gonna do ’bout it, punk?
The US government will assuredly pay off its debts eventually. At the very worst when they’re up against the wall, everything’s in a panic, without a dime to their name, they can always strong arm the FED into printing more money. That’s also kind of a bad thing it’s like a consumer like you or me cashing out investments to pay off debts. The value of the dollar goes down and the US diminishes.
Loans aren’t fundamentally bad. If you take out a loan and use the money to go make more money it’s a good thing profitable even. Ie the GDP grows faster than the debt. ……buuuut Congress has gotten used to spending debt and spent it on stupid things. The GDP has not grown faster it hasn’t even kept pace.
If this keeps up we will end up like Japan where half the taxes go directly to the bank just to pay off the loans. The government can’t do anything or get out from under the debts and the nation suffers decades of lost prosperity. It won’t be their end because the bank of Japan lives there and won’t let the nation go under. US debt is held by cities and states and foreign powers which might choose otherwise.
>Also “The legislation will result in $1.5tn in savings over a decade”, How does that work?
It’s just them promising not to spend 1.5 trillion.
>Do you not pay interest on national debt or something?
Oh no the US government pays interest like anyone else. I expect my federal bonds to grow as promised. It is a little different because the government can just print money. The number of dollars the bond is worth grows but are those dollars worth as much?
>Also, where is the money coming from?
Taxes. Also future loans.
The federal government is issuing US treasuries for every dollar it spends because of some arcane law that makes little sense in a fiat monetary system. The federal government can’t run out of US dollars– it has a monopoly on US dollars. The Fed never waits for the US Treasury to sell the treasuries. Two separate operations.
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