What is government debt?


I cannot get my head around it, what is it? I have heard it is not like debt we go into, who are the government in debt to exactly? And what are the consequences of not paying said debt? Could another country claim our assets or something?

In: 3

The govt can sell stuff like bonds (and prob a bunch of other stuff I don’t know about) that they pay back with interest.

They’re in debt to holders of such assets. Could be individuals, corporations, other countries, etc. Whoever wants a “safe” investment vehicle for their money.

The consequence of not paying it back is a lack of faith in your bonds. Like if I buy bonds and the govt doesn’t pay me back with interest I’m not buying that again. And no, I can’t like claim I own the United States govt now.

Govt debt is a lot different than personal debt. For one, the govt can print money and simply pay it back whenever they feel like. And you may say “wait! Inflation”. And look, I didn’t say there’d be no consequences to that I said they could legally do it. If you printed money to pay your credit card bill you would go to jail. If you stop paying your mortgage the bank takes it back eventually.

It depends. When the currency is issued by a 3rd party (Eurozone by ECB), it works like a normal debt like any other business. The ability to repay the debt is determined by its ability to levy taxes, so the orthodoxy is that the currency issuer can pressure the government to raise taxes and reduce spending in order to keep the debt under control.

When the currency is issued by the government, it works more like a currency control which limits the amount of currency in circulation in order to keep the value of the currency in a certain range. When the government cannot pay its debt in its own currency (Argentina), what happens is that the investors sell its debt to recover some of the losses, and sell the currency because investing in that country in general becomes risky. Importing goods start to be difficult because people don’t buy the currency of the country to do business of that country.

The government borrows money to fund some of its projects, particularly the budget deficit, the money it needs to spend which is higher than the money it collects in taxes.

Let’s say that the government has identified a need for a bridge over a river. People drive miles out of the way of the shortest possible route to get to an existing bridge. The area has grown and there is more traffic and it takes a lot of time. So the government can either raise taxes now for money to build the bridge (not always a popular choice) or it can “save” up money over many years and then build the bridge, or it can borrow money. The way the government borrows money is to “sell bonds” basically bits of paper for a hundred bucks that says “the government owes you this money.” The government borrows this money from you by selling you this paper and promises to pay you back with interest. It’s the government, so you can trust them. The constitution also requires that they be trusted.

So the government borrows this money, maybe a hundred million dollars, builds the bridge, so people are happy and their life improves, and you have a little piece of paper which says that in some years the government will give you that hundred dollars back plus interest. So you could have taken that money and put it in the bank, or put it in the stock market, or put it under your mattress. But you chose to loan it to the government buy buying a bond. You can keep that or you can give it to your kid, or you can cash it in and get the money with interest, or you can actually sell it to someone else who is looking to own a piece of paper saying the government will give them money plus interest.

So now the government has that big debt to all those bond holders. And that’s ok, in theory, as long as it can pay the interest when it needs to. Now you might say ideally it wants to pay the whole thing back. But in the meantime there are other projects which it wants to do, so it sells more bonds. What we have is an increase in public capabilities and resources – roads, schools, dams, power plants, infrastructure – and an increase in debt.

So the government can keep borrowing money and eventually borrow money to paying the interest on the debt it already has, or it can pay it down, or it can at least stop borrowing money.

The big “red button” if you will with the debt is that at any minute the government can simply print off the money it needs and pay everyone off. That’s kind of like the assurance that it can pay its debts, but at the same time it would destroy the faith in the system.

It’s been about 190 years since the US government last paid off all its debt. The last time the taxes were able to cover all the government funding for one year was about 2000.

To get into more detail the government debt is very complicated because you have different kinds of payments and different kinds of income allocated for them, this is especially true with social security because it has a separate revenue stream. Some people want to talk about it like its part of the general taxation system, but it’s separate. However, congress has botched it up too.

To explain it at a simpler level than the other people here.

Imagine if your town wants to build a bridge, and it would cost 50 million dollars. Your town could now borrow this money from various sources including banks, a bigger government, or more likely by issuing a bond.

In a bond, the government might make 500,000 bonds for $100. If you buy a bond for $100, the city might promise to pay you back $3 a year for 50 for years. Over 50 years they would pay you back $150 for each bond.

Now the city might not be able to afford 50 million today. But they might be able to afford $1.5 million a year to pay back that bond.

The same is true for a whole country – you might buy a fighter jet for your country using loans or bonds.

A big country though can print more money to pay back the loan.

However if they do print money to pay the loan, this can cause major inflation.

The person you paid that money to now has a lot of money and they can afford to pay more for things than many people in your country can.

It’s similar, yet different, than debt “normal people” have. The government either borrows money from another government or entity, or moves it between departments (i.e. borrowing money from social security to help cover the costs of the dept of transportation). Or, they “pay” for a project with credit (like if you take out a home improvement loan). And, some of our “debt” is strictly for political reasons. We borrow or loan money between governments in these days in a similar fashion to how royal families inter-married in the past to establish relationships.

The term “government debt” covers a lot of territory, because not only are we in debt to other countries, the government can be in debt to itself.