Can you explain like I’m five, what is the national debt, how does it exist, where does the money come from or go?
Do we just pay monthly on it, because God knows if I was to not pay on my debt, someone would hold me accountable….
Thanks.
In: Economics
> what is the national debt
* I = total income the government gets (ex: taxation)
* P = total payments the government makes (ex: funding the military)
* If P – I is greater than zero then the difference is the yearly *deficit*, i.e. how much money to be borrowed one way or another to pay for government spending
* the total sum of deficits is called the *national debt*
For instance, say the government brings in $100 and pays $110 then $110 – $100 = $10 deficit. The first year the national debt is $10. If we do the same thing next year then same $10 is now added to the $10 national debt to get $20 national debt.
> how does it exist
Most governments borrow money. Look at the US for instance. We literally didn’t have any tax revenue when we founded because we haven’t built the mechanism yet. Plus we had that Revolutionary War to fight. So we instantly went into debt – we borrowed money – because we had expenses (fighting the war, i.e. paying soldiers, plus startup costs of creating the government and its institutions). We couldn’t just wait to go on a bunch of fundraising places to then start everything.
> where does the money come from or go
The money is raised through two main sources:
* we print more money, i.e. money is invented from thin air. This isn’t ideal because – all else being equal – it devalues our currency. However if other countries are in a worse situation then it might not devalue our currency. If our house is on fire and all other houses have been swallowed up in an earthquake then our house is still the best *relatively*.
* most of the time, the money is raised by the government issuing bonds, i.e. a way for anyone – individuals, corporations, other governments, and that’s foreign and domestic – to invest (i.e. give us money) where we pay them interest on that loan. Loans can then be refinanced which depend on interest rates (this can get complicated)
Funny US quick: the government can also borrow money from itself. For instance, Social Security currently has a [surplus](https://www.ssa.gov/oact/progdata/assets.html). This extra money isn’t needed right away so the Federal government borrows Social Security surplus to fund some of its activities. The US government has been doing this for a while and it owes around 3 trillion dollars to Social Security.
> Do we just pay monthly on it
Yes we pay it and the interest we paid last year was around $658 billion. This will jump to around one trillion dollars in the next year or so. We keep borrowing and the interest rates have been going up which sharply increases payments.
> if I was to not pay on my debt, someone would hold me accountable
That’s because you’re a person. Even if you were Elon Musk, your inability to pay off your debt is irrelevant. When the government can’t pay its debt then countries fail. It’s in everyone’s best interests that countries do not fail which is why various multi-government organizations try to make sure they don’t collapse and they lend those struggling governments money – with stipulations (i.e. reduce debt levels).
The high level of debt isn’t a *huge* problem for governments usually. As long as the governments can continue to make payments on the debt. The key point is how well that money is being used. For instance, if the government increases its deficit by spending $100 (or not collecting $100 via tax cuts) and if this grows the economy $50 then that’s a failed program because, mathematically, it’s a poor investment. But if the government spends $100 (or not collect it via tax cuts) that grows the economy by $150 then that’s a worthwhile investment even if the deficit – and debt – both increase.
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