I’m a middle aged dude with a family, own a house, have four kids, investments, all the adulting things.
However, I’m still not sure how a multi-trillion dollar national defecit seeps down to affect my day-to-day life
In: 492
Answer: it depends! Assuming you live in the US, it’s not a problem for the foreseeable future. We have a strong tax base that means that even though we use debt financing a lot, we don’t default on that debt. The way it affects you depends on what you’re trying to do. Say you’re concerned about your retirement account. Well the short term federal interest rate will hurt stocks and bond in the short term but over the long term, it will even out to a positive (you can take a 10% hit today because 20 years from now you’ll have had multiple years of gains to compensate). If you’re a capital firm, any drastic change in national debt or financial policy will drastically change how to invest on a day to day basis.
There’s a million more ways our national debt could effect you but the most common is long term growth for retirement and debt financed purchases (house, car, new business, etc).
Answer: it depends! Assuming you live in the US, it’s not a problem for the foreseeable future. We have a strong tax base that means that even though we use debt financing a lot, we don’t default on that debt. The way it affects you depends on what you’re trying to do. Say you’re concerned about your retirement account. Well the short term federal interest rate will hurt stocks and bond in the short term but over the long term, it will even out to a positive (you can take a 10% hit today because 20 years from now you’ll have had multiple years of gains to compensate). If you’re a capital firm, any drastic change in national debt or financial policy will drastically change how to invest on a day to day basis.
There’s a million more ways our national debt could effect you but the most common is long term growth for retirement and debt financed purchases (house, car, new business, etc).
It’s important to understand that whatever the negative implications of the debt are for Americans, a lot of it is offset by the positive effects for the people who hold the debt. And most of the debt is owned by… Americans!
About 1/3 of the debt is held outside the US. The other 2/3 is held by Americans, American institutions and other parts of our local and federal government.
So the interest on the debt, that we need to pay as a country? Most of that interest is being paid to Americans and other parts of American government.
It’s important to understand that whatever the negative implications of the debt are for Americans, a lot of it is offset by the positive effects for the people who hold the debt. And most of the debt is owned by… Americans!
About 1/3 of the debt is held outside the US. The other 2/3 is held by Americans, American institutions and other parts of our local and federal government.
So the interest on the debt, that we need to pay as a country? Most of that interest is being paid to Americans and other parts of American government.
I have tried to EL5 it bunches of times, but both because I am not smart enough and its a complicated interaction that can actually affect economies it’s really difficult without trying to explain more and more complicated instruments. The short answer is next to nothing, the debt is a kind of indicator and it’s information taken into concert with many other pieces. If we are talking about the specific case of the United States debt load that’s really difficult to even be clear on because the size of that economy is so much large and the appetite for that debt still high it’s still largely a good deal for the American government.
It mainly gets bad when there is no one to purchase/invest in the federal debt but American debt is so far away from that concern that there isn’t any serious tangible effects and a citizen level.
I have tried to EL5 it bunches of times, but both because I am not smart enough and its a complicated interaction that can actually affect economies it’s really difficult without trying to explain more and more complicated instruments. The short answer is next to nothing, the debt is a kind of indicator and it’s information taken into concert with many other pieces. If we are talking about the specific case of the United States debt load that’s really difficult to even be clear on because the size of that economy is so much large and the appetite for that debt still high it’s still largely a good deal for the American government.
It mainly gets bad when there is no one to purchase/invest in the federal debt but American debt is so far away from that concern that there isn’t any serious tangible effects and a citizen level.
Deficit means you don’t have the money to pay all the bills. Normal people cut spending and/or get a better job. When government runs out of money they usually vote to increase the amount loaned from the Fed. This money is not backed by anything and when added to the economic pool of dollars results in watered down value, 401K, and cash savings. Everything starts to get more expensive, then you need a raise to just to match the buying power you had before, which causes more things to get expensive. Rinse and repeat. FYI if you are in the US each of your lil kids already owes upwards of $90K to the government just by existing.
The “real world” consequences to you specifically would be in the form of potentially higher interest rates for your personal debt (mortgage, car loan, etc) and potentially lower valuation of your assets.
A country carrying an ever expanding national debt increases the risk that it may not be able to pay back the interest and principal. As this risk increases, future lenders may ask for a higher interest rate for making loans thus compounding the country’s credit risk. It works the same way as for an individual.
Historically and even today, the perceived risk of the US defaulting on its debt payments is low. However, it’s not a guaranteed law of nature that this perceived risk will remain low. The political environment, political stability, transparency and application of law & regulations that create a more attractive investment environment, and how the US spends its money will all affect this risk. (Ignoring many other factors)
If the US doesn’t strike the right balance between investing for a better future (i.e. economy) versus important and useful social programs that have a less obvious economic benefit, it’s perceived risk and hence the interest it pays to borrow will increase.
This will flow down to you in the form of higher and less stable interest rates and asset valuations.
HOT TAKE: The much bigger issue is the USA’s inability to tax the rich coupled to growing inequality.
Your taxes don’t get deposited into an account at the central bank. They simply disappear. Uncle Sam cashes your check, the money is removed from your checking account and is not added anywhere.
When Uncles Sam prints a paycheck for some meat inspector with the FDA, it is actually printing money. Bob cashes his paycheck and money appears in his account.
The purpose of taxation is to induce demand for our currency. You can only pay US taxes in US dollars. The other purpose is to destroy some money so the market isn’t flooded with dollar bills.
It is hella complicated and not 1 dollar in must equal 1 dollar out, but printing money does affect inflation. **If we can’t pull enough money out of circulation via taxes, the dollar eventually becomes worthless.**
Taxing the rich — we are told over and over by the rich — is completely impossible. They will simply take their ball and go home. Find another nice country to protect their private property.
Pay no attention to the fact the government (both parties) is bought and paid for by the rich, or that our laws are literally written by the rich for their own benefit and rubber-stamped by the government.
As more of the nation’s wealth is concentrated in fewer and wealthier hands, there is simply less and less to tax. Eventually that house of cards must collapse.
ELI5 for a country like the US that has complete control over its fiscal policy — it can issue money at-will?
The short:
It doesn’t matter and you shouldn’t worry about it. The government can issue money at-will until the heat-death of the universe. Inflation from rising deficits is only a concern if either: (A) The economy’s maxed out and the government tries to buy stuff without raising taxes to make room for its spending, or (B) The government does something stupid like, say, base the entire economy on one commodity whose sales are used to fund imports of everything, and whose price crashes (Venezuela), or destroy the entire agricultural sector (Zimbabwe). And we’ve seen in post-2011 earthquake Japan that in the case of (A) the excess spending gets soaked up by the bond market. In fact, deficits have to increase so long as the population wants to accumulate net financial assets, because the government is the only legal source of new financial assets.
The long ELI5 was [written by Bill Mitchell in 2009](https://billmitchell.org/blog/?p=1075):
>Imagine the economy is my household which is comprised of me (the parent) and you (the kid)! As the parent I assume the role of “government” and you thus comprise the non-government (private) sector. As the government I decree that I will offer 100 of my personal calling cards per week, if you agree to tend the garden on a weekly basis. These are the cards I exchange at meetings with various professional associates outside of the household. They are normal size rectangles of cardboard.
You say, naturally: “Why would I want your worthless personal calling cards?”
I reply (reflecting my knowledge of how modern monetary systems like the household work): “because to stay living in the house I expect 100 personal calling cards a week to be paid in taxes”.
You say: “when do I start work!”
Immediately, by imposing tax obligations in the currency of issue (the personal calling cards) I have created a demand for the currency and this allows me to transfer private resources (your work in the garden) to the public sector (the nice garden). However, also note that I have to spend the 100 cards each week before you can pay the tax of 100 cards – which clearly means that the taxation can never be considered a source of revenue which “finances” or allows me to spend the cards in the first place. The cards come from no-where and I have the monopoly rights to spend them. I am never financially constrained in my own personal calling cards (the currency).
So this sort of currency is what we call a fiat currency – being made legal by legislative fiat. It has no intrinsic worth and its value is tax driven. Just like the Australian dollar!
Note that I probably would never “print” any cards. I would run some spreadsheet on the house computer and just keep “bank entries” to record all the outflows (spending) and inflows (taxation). All the transactions would just be numbers entered into relevant columns. If I slipped up and added a 0 to my spending one week, I wouldn’t have to “print” 900 new cards. You would be better off by 900 cards because it would show up as a deposit in your account. But nothing else would be required. Same as in the Australian economy.
Now under these conditions, the household ‘budget’ would be balanced each week: I spend 100 cards and you pay 100 cards. You are unable to accumulate any cards (that is, save) because you can only get access to the volume of cards that I make available via spending. Same as in the Australian economy.
What if I wanted to teach you to save as preparation for managing your own affairs when you became an adult? Well the only way you can save is if I, for example, decided to employ you more each week and offered, say, 120 cards per week as wages (government spending) yet continued to tax you only 100 cards. The same effect could have been if I reduced the tax rate and held spending constant or a combination of increasing spending and reducing taxes.
Whatever, and lets stick to the spending of 120 and the tax of 100, the fiscal position now goes into deficit of 20 cards per week. You now can save 20 cards per week because my spending (the government spending) has provided the “finance” to permit you to do that. As the weeks go by you could accumulate more and more savings (numbers in the spreadsheet would increase) and you would soon see that the non-government saving over time is the exact record of the cumulative deficits being run by me (the government). Same as in the Australian economy.
Now, you might want to make more money (cards) on your savings. The only way that can happen is if I offer you a government bond (a bit of paper saying that if you deposit your savings with me each week I will pay them back at some future time plus some interest all in personal calling cards). So the offer of a new financial asset – the household debt instrument (the bit of paper) gives you a chance to compound your saving and maybe take a holiday – not work some weeks but still pay taxes!
So the debt issuance in the household establishes a non-zero rate of interest in the household and increases your wealth. I didn’t have to issue the bond to keep running the deficits. The bond just replaced non-interest bearing savings (reserves in our “banking” system) with an interest-earning asset (the bond). Same as in the Australian economy.
Now lets say I am reading some neo-liberal literature on the Internet which warns me against running fiscal deficits. As a result I get the feeling we have to get back into fiscal surplus to be a responsible government. So I tax 100 cards but cut my spending on garden work to, say 90 cards per week.
Can you predict what will happen now? Well in that particular week there are not enough cards “spent” to generate the funds necessary for you to pay the tax. There are 10 cards short. The household (government) fiscal position is in surplus for that week to the tune of 10 cards. But this shortage of cards liquidity in the private sector (that is, you!) means that you will:
(a) Demand more work to earn the shortfall – noting that the household has now reduced employment levels (in hours) and there is some underemployment creeping in. If I made the example more complicated with 2 or 3 kids in the house I could have easily cut spending by not paying anything to one or more of the kids thus creating unemployment.
(b) Try to sell some of your possessions to get some cards. In this simple case, you will offer your bonds (the bits of paper) for sale to get the funds. So the surplus starts to eat away at your wealth portfolio. I would be boasting like a neo-liberal would that I was running down the government debt – “getting the debt monkey off the government’s back” – which may help me sleep better – but you would just be feeling less well off (and maybe developing insomnia!).
(c) Start to run down any savings that are not being stored in bonds. Either way you run down your wealth holdings.
But in aggregate, the fiscal surplus is squeezing your card liquidity and forcing you to run down wealth. Same as in the Australian economy.
If I kept running fiscal surpluses, you would eventually run out of assets and your labour would be severely underutilised. You might be able to persuade me to start lending you the money (I might set up a privatised bank in the household) and this would keep you afloat (paying the taxes) as long as you were prepared to accept increasing private debt levels. But this is not a sustainable option. Same as in the Australian economy.
Now in [Manga](https://www.mmted.org/smithfamily/) format!
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