Everyone is saying it will be Armageddon if the US doesn’t raise the debt ceiling, because then it will be unable to pay its creditors for some time, which will raise the future cost of borrowing, and then have a giant ripple effect throughout the rest of the economy.
But here’s what I don’t understand. Isn’t the fact that we are *approaching* the debt ceiling already an indication to creditors that “Hey, we can’t pay the debt without borrowing more money.” Yet we’re fine.
Doesn’t that distress signal already basically indicate that we can’t really pay the debt? It would be like asserting “It’ll really damage your credit score if you miss a payment” to somebody… who has paid their last 3 years of payments *with other credit cards.* Shouldn’t their credit *already* be shot at that point?
Why do the people lending the government money see the government any differently? Why is our credit considered excellent when we pay off our creditors with other creditors money?
In: Economics
The debt ceiling is meant to be a way for politicians to take stock into government spending and to see if we really need to have the large deficit we have or perhaps we should cut some programs.
The mathematics behind it all is pretty simple though. The government has a budget that gets passed, i.e. Congress and the President sign off on it. Since the value of total debt and the debt ceiling is known, the additional deficit calculated in the budget just gets appended to the debt ceiling. The time to talk about the debt ceiling and deficit is during the budget process, not the debt ceiling discussions.
It’s like saying you have a $1,000 credit card balance, you just agreed to spend $200 and you’re shocked that the total balance is now $1,200. The time to talk about it is during the $200 spending, not when the statement comes in.
Although /u/DarkAlman wrote an excellent comment, I’d like to add that the media also talks uses the personal finance example as a way to dumb it down for people. Considering we’re talking about trillions, people just can’t imagine that kind of money.
They’re correct as far as there is no limit to how much money we can have. First of all, lots of nations have no problems lending to us and presuming they stopped, we can still issue money. Although this mathematically creates inflation, the inflation can be countered with how our currency relates to other governments. For instance, during the 2008 disaster, most of the world was on fire but we were sinking in relation to those being on fire which means we’re *relatively* better and as a result, people would rather lose 10% than 25%. This confidence and investment nullified any inflation created by printing more money. This is unlike other governments, like Zimbabwe and Venezuela as modern examples, where they print the same money we are (though at a much higher rate)… but nobody cares about pouring massive investments into those countries. Therefore massive inflation.
As far as investments, the top countries for these are typically:
* Japan, whose 10-year bond yield is 0.016%
* Germany, whose 10-year bond yield is -0.444% (yes, negative, i.e. you’re losing money)
* UK, whose 10-year bond yield is 0.587%
* US, whose 10-year bond yield is 1.278%
There’s also China that has a 2.916% bond yield but… it’s China and it’s more difficult to invest there than the other 4 countries. Switzerland is also negative, at -0.397%.
US bond yields compared to the other major powers are so much higher that other people, companies, and governments would invest in our bonds.
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