How is the United States able to give billions to other countries when we are trillions in debt and how does it get approved?
In: Economics
Let’s say you are a bakery called the Ultimate Sweets of Arcadia. You bake bread and you sell it. And you make a bit of cash.
One day, you create a new pastry that makes you famous in the neighborhood, and you constantly sell out of it. You’re already baking as much of the pastry as you can, every day, and you’re selling out by noon, and people are still banging at your door for more. You make $1000 per day on the pastry.
If only you could afford a bigger bakery, that would be swell, but increasing the size of your bakery means spending $250,000 for a larger oven and a larger floor space for the extra workers and customers but you could make 3x as many pastries. It would take you most of a year saving up just to be able to pay for the upgrade. By then, you might lose your customers. What do you do?
This is where you go to your local bank called the First Reserve Bank of Congress and you ask them for a loan for $250,000 with a promise that you’ll pay it back in a year with interest. Of course, now that you’re making 3x more pastries, you be able to pay off the loan in less than 3 months… if you spent all your profit on that.
But you can’t. Because you need to pay the workers and you need to save up for a rainy day and you’ll need to support the local baseball team to increase your name recognition and you’ll need to hire a marketing company to help you determine what to do next with the company. Sure you’ll be able to pay off the loan, but you can also do more building with the extra cash you’re making.
When the 3 months come around, your business is doing gang busters. If you expanded to the next neighborhood over, you’ll do even better…. But that’s going to take $500,000 to get a build a brand spanking new bakery where there is none… and you don’t have the cash on hand…
But you can go back to the First Reserve Bank! And you can show them you’ve made good on your investments so far, and they’re liable to agree and loan you for your next adventure and so on.
Going into debt isn’t a bad thing if what you’re doing with the money will pay off debt anyway.
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