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?
In: 3
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.
Latest Answers