I’ve once heard that the USA owns most of its debt to itself, how is that possible? How can you owe debt to yourself?
In: 252
The government borrows money from our pension funds and social security etc. It is about 75% of Americas debt. We will never pay it back. Ever.
This is why Republicans want to get rid of entitlements. So they don’t have to pay it back.
Perhaps you misunderstood? As I understand things, the US floats a lot of loans by selling Treasury Bills, Treasury Notes, and Treasury Bonds. Most of those loans, the US debt, is held by American citizens. While the US, meaning US citizens, own most of the US government debt there is a worryingly large amount owned by overseas citizens and governments.
Edit: u/Caucasiafro made me realize the error in my comment. There are three kinds of Treasury loans. I’ve just fallen into the habit of calling them all Treasury bills as they are all US debt loans with the difference being how long it takes for the loans to mature.
It means that private American citizens gave the US government money, and the US government promised those private citizens would get their money back.
That’s what bonds are, if you have ever heard of those.
along with what others have said there is also interdepartmental debts
say the army has 2 extra planes so they give them to the air force. now the air force owes the army $50 million. that gets calculated as national debt.
or imagine if you lend $50 to your brother. you could say your family is $50 in debt even though its really only your brother thats in debt.
The government sells bonds.
People buy bonds. They can be Americans or Japanese people. Or companies.
So you have for instance FEMA which is a Federal disaster fund. Now FEMA gets given an annual budget and there is a certain amount of admin and prep work, etc that it does but a lot of its fund need to be ready to help out States when a natural disaster like a hurricane hits.
So FEMA has all this money that it needs for the future but what does it do with the money in the meantime? Does it keep it in cash in Fort Knox earning no interest? Does it invest that money in a private bank? Does it play risky stocks on the NYSE? Does it buy overseas bonds? Or does it invest in US bonds?
The answer is it buys safe and secure US Treasury Bonds. Then when the money is needed it sells those bonds off.
It’s primarily issued as bonds and t-bills, etc. Most of those are held by American citizens. They’re particularly common as a portion of almost everyone’s retirement funds. Which is to say, people work and contribute to the GDP and loan some of that money to the government to get back in retirement. This debt is backed by the future economy of the country – the GDP. The U.S. expects that the economy will keep working and therefore it can repay the debts to itself with the higher amounts of future money.
National debt is very unlike personal debt for multiple reasons, but for the sake of simplicity, here’s two examples of owing personal debt to yourself:
Simple example: I took a loan from my 401k to buy a house. The 401k is my money, but the way 401ks work, you can’t access it until retirement (without penalty). However, I can issue myself a loan, which is paid back through my paycheck (just as 401k contributions would be) along with interest. This is, effectively, another investment in my 401k, only instead of being in a mutual fund getting some market-determined rate of return, it’s in a loan getting a specified interest rate. That’s debt to myself, that both provides me with necessary funds now and also provides a rate of return to future me. As long as I keep working, I can keep paying it back.
More complicated: I have credit cards, I put purchases on those credit cards, and at the end of the month I pay them back. Now, technically, that *will be* a debt to the credit card company. But if I always pay them back before that, then it functions as a temporary debt to myself. As long as my cash flow stays positive, I can keep paying myself back and using that to pay off the credit card company before it ever becomes debt to them – I never actually have to pay them interest.
So debt in general is concept that I give you x amount money now and you give me the promise to pay me back in some kind of agreed timeframe. Example: I pay your 10USD meal now and you give me the promise to pay me back next week. The transaction that happens now is I open my wallet and give i.e McDonalds 10 USD for your desired meal. McDonalds gives you your desired meal and you eat it. The physical representation or service (valued 10USD) has been consumed by you. Now I am left with a 10 USD thought credit held by you. Now our relationship comes into play. How well do we know each other. Are we strangers? Are we (close) friends, siblings or is one of us publicly known?
If you are famous and made someone else pay for you it might not reflect well on you. It might affect you social acceptance in some kind of community. You might want to repay me to not lower your perceived social standing in certain communities. Also legal problems probably will arise at some point.
TLDR Debt is a future commitment to pay amount X back that has been spent the the past. The trust component between parties is the one thing that keeps it afloat. If no (trust/hope of repayment) whatsoever no one will ever lend you anything.
Hope I could somehow help.
The Government != The people
So here’s how it typically works. The government wants to remove money from circulation, they do this by selling bonds. You pay them $100 for $1000 in a year.
That bond is purchased by a US citizen, so now the US government is $1000 in debt to the US.
Reagan, who wanted to fund ‘star wars’ technology took the money from social security funds they were building up for the boomer generation, just put an IOU in the ‘lock box’ candidate Gore was trying to explain we needed to protect future demands.
So that’s a few billions we owe ourselves.
We’ve always heard the Chinese and/or Saudis own much of our national debt but its mostly wall street. about 17% is held by China.
Latest Answers