Why is the World in debt, how do we pay it off, and why should we care?
In: 69
Here’s the problem, normally Country A imports goods from Country B using currency from A. Well, normally relatively quickly, that currency is spent on goods in A.
The problem specifically in the US is that sometimes the country/citizens of that country will keep that money to use amongst themselves since they trust USD more than their local currency. Well, now the US has tons of money outside of the US that can be spent on US products. In the short term, this means that we can import goods essentially for free. And since the supply of dollars in the US goes down, each dollar is worth more. This keeps prices low (in the short term) and actually causes transient DEflation. Until that money is returned back to the US (by buying US products). Well, the US has the Fed, and they see that artificial/transient DEflation and that justifies them printing more money. I’m not even going to get into how the fed printing money affects price signals that should be used to naturally control spending…
Anyway, back to debt. If we have a bunch of debt, there’s nothing stopping us from paying that debt in newly printed money. Well, adding money to the money supply causes inflation, and could cause other people to doubt the stability of the USD. If you’re holding 100 dollars that’s worth 90 dollars a year later, (like the 10% inflation we’ve seen lately) this could cause people to no longer want to hold US dollars (or debt which is paid back in USD).
So, the US will have no problem paying back the debt. That will never be a problem, we can always print money, the problem is the consequences of doing that.
Printed money used to pay back debt will cause the people that hold that debt to use the USD they got when the debt was paid off to buy US products. This causes US prices to increase, which causes more people to want to spend their money NOW before it becomes even more devalued, and prices increase even more. And so on, and so on… Additionally, people will be less likely to take on debt from the US since buying a 10 year Treasury at 1% interest (but 10% inflation) actually loses 9% per year. Therefore, less people will take on our debt, and we’ll have to increase interest rates or simply print even more money to pay off those debts.
There are benefits however… People who own assets will retain their value, and people who own assets with leverage (think mortgages) will actually make money.
If you own a house, you out 100g down on a 500g house and inflation hits, say, 100% inflation, your house/property will go up with inflation 1mil, but your loan is still only for 400gs. So you just used 100gs and leverage to make yourself 500gs.
You may have heard, but property prices have gone up… Obviously COVID affected the labor supply and supply lines etc… But large investment companies like black rock are buying like crazy. This could be their way of hedging and profiting from inflation.
But you can see how the consequences of inflation and federal debt mostly hurts the poor. People that don’t have assets, people who don’t own homes, people who are on a fixed income. And wage increases always lag behind the inflation. How many of you have had a 10 percent raise this year? Well, the company you work for is getting temporarily lower wage costs, ya, they are paying more for materials, but their prices are going up to account for that, and your still getting paid the same even though prices for everything have gone up.
Latest Answers