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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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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