why can a country like the USA go into trillions of dollars into debt but other developed countries have to be careful?
In: Economics
Because you have trillions of dollars in investment too.
Usually, country’s dept are never directly repaid, but invested somewhere where the money gain is higher than the interest saved from paying it.
National debt, which is held by individuals (government bonds), institutional investors (bond funds, mutual funds etc.) or other governments is only good so long as there is confidence in that government to pay back its debts – plus the interest, or “yield” on the bond. The US government is still seen as one of the most able to pay back its debts of most around the world – largely due to the strength of its economy. So far the US government has not (to my knowledge) ever defaulted on its debt.
Other countries like Greece etc. kept borrowing and borrowing until the literally could not afford to pay it back and then they defaulted. The countries that Greece owed said “hey. we’ll forgive a certain amount, and youll pay us back the rest. and no more loans until you do.” – the Greek government was forced to slash various government budgets… so called austerity measures. Meaning military expenditures cut, social programs, health care cutbacks etc.
So long as the government continues to make payments on its debts, its good. But there will come a point when government revenues from taxation can’t fund its budget AND make payments on existing debt. Then the government will be forced to make hard decisions – raise taxes or cut spending elsewhere.
Part of the difficulty in being a fiscally responsible government and NOT increasing debt, is it is unpopular. Ultimately you have to raise taxes or cut spending. So congressmen and senators _pass the problem on to future governments_ by drawing budgets that have deficits – i.e they spend more than the tax revenue can pay for, but the shortfall is covered by borrowing – government debt in the form of notes from other governments or bonds with banks or individuals.
If you’re at all concerned about this, you should be reviewing which of your congresspeople or senators consistently voted for or against deficit budgets and demanding to know why they’re ok with passing the buck to future generations.
Think of it like this. If you have a really well paying job, you can take out a really big loan. If you have a very bad job that doesn’t pay very well, you can’t take out a really big loan. You may not be able to take out a loan at all. The USA has the equivalent of a really well paying job. We make lots of money compared to other nations, so it’s not that bad for us to have really big loans that we have to pay off slowly. Whereas, a smaller nation doesn’t produce as much money, so any loans they get must be smaller too.
it’s because everybody wants U.S. dollars; because there is tremendous demand for its currency, the united states is able to ‘sell’ it at extremely favorable rates; other nations (and banks, and other institutions) will pay large amounts up front for quite low 20-30 year yields just because they want to have access to a reliable supply of U.S. dollars. Even during the 2009 credit crisis when the interest rate on U.S. treasury bonds briefly flipped negative people were still buying them, because they were seen as the least risky instrument on the market.
So, why does everyone want dollars so badly as opposed to their own currencies? Because the value of the dollar is historically extremely stable; the U.S. has a massive economy, there’s no much chance its government will topple, and it’s extremely hard for it to dodge debt service since it’s constitutionally mandated. If you are a nation looking for a store of value for your currency reserves there’s really nothing better (though all of course do diversify.)
It’s worth remembering too that a large amount of the U.S.’ government debt is essentially illusionary; that debt is held by the government itself, in the form of the social security trust fund. Far more of the national debt is held by the U.S. goverment itself than is held by any foreign entity.
USA has a lot of debt but also a lot of people.
If you sort by debt per capita, it’s actually quite far down the list: https://en.wikipedia.org/wiki/List_of_countries_by_external_debt
Many European countries have higher debt per capita. But Greece which was in a lot of financial trouble has much lower debt per capita. And most developing countries are even lower.
The amount of debt isn’t the issue, it’s if your country has a strong enough economy to pay for it.
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The debt per se isnt the problem it’s the interest payments. The interest rate is set based on its ability to sell bonds in what can be thought of as an auction. So long as there is good demand for the debt the interest rates stay low. The people/institutions who purchase our debt have confidence that we will make good on our interest payments so the demand is high and the interest rates are low.
If the confidence falls then we will have to raise the interest rates, pay more money on the same amount of debt, and things quickly start to get out of hand. This is what other nations are trying to avoid. It’s what happened to Greece and it’s a nasty situation to find yourself in.
Looks like this is answered through various means already. Also, the Dollar is the world reserve currency. This gives us some leverage in our own world affairs for better and for worse.
Every country has to be careful with debt. The U.S. just has more time until they default since they have more money to begin with.
But eventually our debt will catch up to us. In less than 10 years we will be spending more every year on interest than anything else.
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