How is US the world’s largest economy but still in so much debt?
In: Economics
Because the US government is not like a household. That debt is not like a person’s personal debt. Start by thinking about this question: where does money come from, in the first place? Which leads to realizing that the government makes it. The government makes money. But if the government just held on to that money, then what? How would people get the money they need? How would businesses function?
So the government has to spend the money to get it out into the economy. It’s called debt…but maybe we should call it something else?
Also,
Most US government debt is held in Treasury bonds, which are bought predominantly by US citizens. So, we are ‘in ‘debt’ to ourselves.
Debt at the federal level is just an accounting of how much money was created or printed. You need to expand the money supply to grow your economy otherwise you face deflation. You can grow the economy by being more effecient at building stuff of having more citizens period. Both require a bigger money supply.
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Because those are 2 completely different concepts.
Economy is measured in the amount of business people do with one another. How much buying and selling goods and services happen in and outside the country with american people and businesses.
Debt is a measure of how much money the government has spent on government services over years and decades that has not already been covered by taxes on the population or other incomes the government might have.
So both can easily be true.
Have you ever dated one of those girls that probably like your credit card more than you?
Watch this video and you will understand
Governments borrow money below inflation rates, it’s actually cheaper for them to buy something now on borrowed money than it is to wait.
As an example: the government wants to pay someone $1,000 to do something.
A) they wait a year for the money to come in via taxes: 2% inflation means the cost is now $1,020.
B) they borrow $1,000 at 1% interest rate P/A and spend it now, whilst the price is still $1,000. They pay off the debt next year for $1,010.
B not only saves twice as much money in the long run, it means the money can be spent now instead of later, which has a positive effect on the economy sooner (increasing tax returns and creating more demand to lend to the government, worth more than the 1%.)
Now, why would people lend money to the government if they technically lose on the deal? Simple: they lose less than they would if they didn’t lend at all (they have $1,010 now instead of $1,000) and it’s *much* lower risk than an actual investment that may lose money or become illiquid. In fact, the risk is basically zero, so long as you want dollars, because the government can just print money for you (other borrowers can’t.)
So, unlike your debt at home, where you borrow at high interest rates and save (lend) at low interest rates and you should pay debt before you save, the government has it the other way around: it should borrow as much as it can to invest it.
This explains why *all governments* (pretty much) are in debt.
### But what about Norway? Don’t they have all that Oil money? Surely they are not in debt?
Well, actually, their government *is* in debt. It’s still a good deal for them regardless of how much of a wealth fund they have. Ignoring the fact that the wealth fund is separate and has specific rules that prevent government from dipping their fingers in it, they actually earn more money from investing the fund abroad than they would save by paying their low interest debt: the interest on investment is higher than the interest on the debt.
The government of a larger economy can borrow more in its local currency, so it does.
### So why do we care about how the government is going to pay for stuff?
Superstition and malicious politics. There are limits: the government can’t borrow more than what people will lend to it, and spending money in the wrong way carries risks, but the equivocation of government debt and household debt is a total lie. It’s a useful tool to frame all government spending as bad when they are borrowing money and it works because many people believe it. By and large most governments spend well below what they could because of this.
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