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.
Money is debt, if the world has no debt then it has no money and we don’t want to go back to the barter system.
People have already explained several aspects, such as debt not being that big a deal, or people owing debts and being owed debts, so I’m gonna approach another angle, and say something may sound a bit bold:
**Debt is good.**
People panic over debt because, when you as an individual have a debt, your entire thoughts are consumed by paying it back. Being in debt is bad and dangerous, what if you can’t pay it back, and it’s a big fat red minus on your money… Point is, we don’t want to be in debt. So for a country, it must be the same, right?
Not really.
*All debt is, in practice, is a way to move money from the people who have it but aren’t using it, to the people who need it but don’t have (enough of) it.*
Why would governments choose to take on debt? Because you need money to make money, and *having more* money lets you *make more* money. Suppose you want to build a bridge over a river. That bridge will encourage trade, and the toll booth on it certainly won’t hurt. Over the course of (for the sake of the example) a year, it will have completely paid back for itself. But you don’t have the money to build it, so what do you do? Well, you borrow money, and then use the money the bridge made to pay back the money you owe.
Obviously, the government has enough money for one bridge…But now multiply across the entire nation. The more money a government has, the more projects like these it can undertake, the more money it will make. Borrowing money lets it undertake more projects that make money to pay back its debts (and then pure profits baby!). So taking on debt is common sense!
(Mind you, this is essentially the same logic as borrowing money from the bank to buy a house rather than trying to save every penny yourself while also paying rent.)
But let’s say we decided that debt is bad. What would happen if suddenly everyone stopped taking on (or issuing) debt, the world economy would grind to a halt. The money would still be there, valuable as ever (in fact, probably getting *more* valuable under deflationary forces), but it’s being held by people who don’t want to spend it, while the people who *would* want to spend it (and thus keep the economy going) don’t have the money to spend. Heh heh, we’re in danger.
This is what happened during the 2008 banking crisis. The subprime collapse was bad enough on its own, but what *really* fucked everyone over was that the banks suddenly didn’t trust *anyone* to not default on their loans, and so stopped issuing them almost completely. Therefore nobody can take out a loan to buy a house, houses remain unsold, investment is at an all-time low, and the world machine grinds to a halt.
Opinion:
One thing I can think of is time-related transactions/exchange. The basic exchange is “now exchange”. You and I exchange with “what we have” now.
But we can also exchange “what we can” or “what we will have”. I have apple, you have cow ^(readied). Also mean I have orchard, you have barn. What if you want orange, I want goat. Both don’t have that, but “we can have” that, in time.
Larger exchange won’t have everything readied. So, we buy in debt. Pay first or owe first, but half of the exchange “will be liable/in debt”.
#### Why?
Exchange of expertise or anything that need great investment of time, materials, land, etc ^(without wastage generating expensive things like houses, but no one buying)
#### How?
Contracts, treaties, agreements, plans… We ***will*** repay, if:
* we want to keep exchanging needs
* we don’t want to isolated/distrusted by the world for all kind of goods and services
Greater heights only reachable with specialisation and exchange. If every country is for himself, then they need to self provide for doctors, engineers, softwares, etc
If an exquisite tech need a lifetime of a human to achieve, think of what can we achieve if 5 human exchange on 5 lifetime expertise, simultaneously.
**Edit:**
By the way, I think the concept I’m talking has the “fancy name” called **comparative advantage**.
Edit:
Next issue. Owing debt to carry an exchange is not an issue. The real issue is, the large power or payment, that no human can resist without being corrupted. Think of a payment for a plan to build huge rails. The payment for materials are received partly first, in debt. This large payment can be billions. If the **person in charge** fulfill its duty without corruption, trust will grow, and more huge plans/projects can be exchanged.
But it’s hard, for large transactions:
* Secured from everyone so nobody can steal ^(trust issue)
* Complicated needing many human resources and know-how of every fields ^(choosing who to do it, some is not honest but can we tell as a layman?)
* etc
It sounds completely backwards, but money *is* debt.
Without debt, there would be little or no money. Look up fractional reserve banking. There was a great, though basic looking, animation on it in YouTube that I saw ages ago.
Found it…
Latest Answers