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?
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Government debt is in the form of bonds that are sold to investors. You can buy a bond as an individual, but most are bought by large institutional investors like mutual funds, pension plans, insurance companies, university endowments and such. While some may be foreign owned, the vast majority are owned by Americans/American companies and organizations.
The bonds have specific payback terms with regard to interest payments and time frame to maturity, at which point the government pays back the principal. The government often issues new bonds as old ones mature, when they issue more bonds than mature the debt increases, and if they issue new bonds at a slower pace than they mature the debt goes down.
Government debt is in the form of bonds that are sold to investors. You can buy a bond as an individual, but most are bought by large institutional investors like mutual funds, pension plans, insurance companies, university endowments and such. While some may be foreign owned, the vast majority are owned by Americans/American companies and organizations.
The bonds have specific payback terms with regard to interest payments and time frame to maturity, at which point the government pays back the principal. The government often issues new bonds as old ones mature, when they issue more bonds than mature the debt increases, and if they issue new bonds at a slower pace than they mature the debt goes down.
In the US, you can personally go to [www.treasurydirect.gov](https://www.treasurydirect.gov) and create an account.
At TreasuryDirect, you can give the government money to buy a bond, such as an EE Bond, or I Bond. The government holds your money for some time, and at the end, you get your money back plus interest.
Congratulations, you now own government debt.
Banks, other foreign governments, literally ANYONE can buy government debt. Because the US Congress never passes a budget with more taxes than expenditure, government debt is always available for sale.
If the government chooses not to give your money back, or fails to pay interest, the immediate downside for the government? Nothing. They can tell you to pound sand because you can’t order the police to take the government’s stuff to pay you back.
So, if the government wants to default or not pay the debt back, they can do it ONCE. You get ONE free lunch, so you better make it count.
The downside to defaulting, or stealing are:
1. The person being stolen from, such as treasurydirect buyers, have lost money with no way to get it back. Because many of these people are US voters, they can vote out the people in charge, use the judicial system to challenge Congress or the Executive, or not able/willing to pay taxes.
2. Attempting to raise debt in the FUTURE becomes difficult. If people know you have stolen from them in the past, they believe you’ll do it again, so they won’t loan you money. Hence the government MUST pass a balanced budget in the future, or pay higher interest rates for people to be willing to take the extra risk.
3. Other downstream effects. This is where things start to get complicated. Often, banks and other large institutions don’t pay each other in cash, but in government bonds. They use the bonds LIKE cash, because they trust the government will eventually pay it out. But for ease of use, the extra interest, bonds or treasury bills often get used in lieu of cash. If the government defaults on one bill, they might default on other bills. So people currently holding bonds instead of cash start getting nervous and will start dumping them. This can have complicated knock on effects in the economy where the bottom line is places like Walmart, despite being profitable and “rich”, can’t pay their employees because their assets are in bonds and not actual cash.
In the US, you can personally go to [www.treasurydirect.gov](https://www.treasurydirect.gov) and create an account.
At TreasuryDirect, you can give the government money to buy a bond, such as an EE Bond, or I Bond. The government holds your money for some time, and at the end, you get your money back plus interest.
Congratulations, you now own government debt.
Banks, other foreign governments, literally ANYONE can buy government debt. Because the US Congress never passes a budget with more taxes than expenditure, government debt is always available for sale.
If the government chooses not to give your money back, or fails to pay interest, the immediate downside for the government? Nothing. They can tell you to pound sand because you can’t order the police to take the government’s stuff to pay you back.
So, if the government wants to default or not pay the debt back, they can do it ONCE. You get ONE free lunch, so you better make it count.
The downside to defaulting, or stealing are:
1. The person being stolen from, such as treasurydirect buyers, have lost money with no way to get it back. Because many of these people are US voters, they can vote out the people in charge, use the judicial system to challenge Congress or the Executive, or not able/willing to pay taxes.
2. Attempting to raise debt in the FUTURE becomes difficult. If people know you have stolen from them in the past, they believe you’ll do it again, so they won’t loan you money. Hence the government MUST pass a balanced budget in the future, or pay higher interest rates for people to be willing to take the extra risk.
3. Other downstream effects. This is where things start to get complicated. Often, banks and other large institutions don’t pay each other in cash, but in government bonds. They use the bonds LIKE cash, because they trust the government will eventually pay it out. But for ease of use, the extra interest, bonds or treasury bills often get used in lieu of cash. If the government defaults on one bill, they might default on other bills. So people currently holding bonds instead of cash start getting nervous and will start dumping them. This can have complicated knock on effects in the economy where the bottom line is places like Walmart, despite being profitable and “rich”, can’t pay their employees because their assets are in bonds and not actual cash.
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.
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.
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.
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.
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.
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.
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