Part of me wonders what will happen next and a part of me thinks it’s basically irrelevant, as US debt can be bought and sold, traded like actual money anyway.
I mean, who is going to make the USA pay off it’s debts?
The bigger issue, perhaps, is that at some point interest rates will start to get raised, which will increase the amount that we need to pay just to deal with the interest.
Wonder how long it takes for Trump to ask why the US doesn’t just default on it. Bankruptcy is easy. He’s done it lots of times.
The thing that’s nuts is that even in the private sector, the result of Trump’s multiple bankruptcies is that no reputable bank other than Deutchbank will lend him money, at all.
No doubt he will say the country can do the same.
People make the mistake of thinking that government debt is conceptually similar to personal debt, just larger in scale. But it’s really not, at least for countries like the US that control their own currency and mostly borrow from their own taxpayers.
It might be more helpful to think of debt as prepayment of taxes. When you buy a $100 bond, you’ve prepaid $100 of your (or your descendents’) taxes. As an incentive, you get a small discount on those taxes. There is no limit to how long this can go on, because there is no limit to how long the US can make people pay future taxes.
The main issue is that when someone takes advantage of that incentive and prepays their taxes, that money comes out of their saving accounts. And if not enough people prepay their taxes, then the incentive increases, which means even less money remains in savings accounts. To an economist, this is manifested as increased interest rates, and decreased private sector investment (which ultimately comes from our collective savings accounts).
So is less private sector investment and more government spending good or bad? That depends on how it’s spent. Private sector investment efficiently grows the economy. But sometimes government spending does too, for example when it’s spent on research or infrastructure. Other times, not so efficiently.
Isn’t a lot of the debt financed by foreigners?
As of September 2014, foreigners owned $6.06 trillion of U.S. debt, or approximately 47% of the debt held by the public of $12.8 trillion and 34% of the total debt of $17.8 trillion. The largest holders were China, Japan, Belgium, the Caribbean banking centers, and oil exporters.
The Caribbean banking centers part is a bit scary. The island people don’t have that kind of money. That could be mob money, Putin’s billionaire cronies, etc.
2016 put Japan in the lead. Not sure where we’re at now.
This is pure nonsense, on its face.
Well, it’s slightly more complicated than that. A lot of US debt is held by foreigners, and a lot of foreign debt is held by Americans. They almost cancel out.
Hmm… Ok, suppose you buy a $100 bond. The government uses the money to fill in a pothole. Five years later the bond matures and it pays you $100 from its reserves.
I live in bizarro world, where I can’t buy bonds. The government raises my taxes by $100, just for one year. It uses the extra $100 to fill in a pothole. Five years later, the government feels generous and drops my taxes by $100, for one year only.
In your world and in my bizarro world, government finances are indistinguishable. And so are our personal finances. The only difference is that you volunteered the money that paid for a pothole, and I didn’t.
Debt has interest. It costs you something to borrow money. And as you become less and less credible as a lendee, that cost increases, eventually getting to the point where you aren’t considered a credible person to lend to because no one believes you will pay them back.
And you can’t just print money, as you seemed to suggest. I mean, you technically COULD, but you would then destroy your currency’s value, while simultaneously destroying your nation’s credit rating, since you would effectively be screwing over anyone who lent you money, so they aren’t going to do it in the future.
Likewise, the idea that the government can just raise taxes to pay for everything isn’t true. You can’t just extract infinite value from the tax base like that.
I just don’t get what magical difference you think there is for national debt. The size of the US financial structure has inertial, but you seem to be thinking that it extends to some magical invulnerable status, but that belief is based on nothing.
I feel like there’s some fundamental disconnect here, where I am missing some key element of your belief structure.
What does one make of this? It doesn’t seem so hot to me.
That’s exactly why he should have had no one from his organization involved in the government. Plus, we all new he’d abuse his position, and sure enough - there he goes.
Debt has interest, but interest has different implications when it comes to personal debt than with public debt.
When it comes to personal finances, debt usually means that you are paying someone else to buy you something you cannot afford right now. That’s not what it means when it comes to public debt, because lenders and debtors are more or less the same people. Nobody can borrow from the future, only from other people in the present.
Instead, public debt changes how the money will be spent. When there is little debt, the private sector decides where money goes into the economy. As debt increases, the public sector has more say. But regardless, the people who are ultimately paying for stuff and the people who are ultimately getting stuff are theoretically the same.
You don’t need to extract infinite value from the tax base, nor print money. But there is a theoretical limit: when the entire economy is in the public sector. This means that all your income comes from the government, and of course all your money goes back to the government. That’s the only point at which the government cannot spend any more money (without foreign investment).
Zero private sector is not necessarily catastrophic, but of course it’s generally suboptimal. But regardless, private sector spending in the US is not even close to zero.
This is total bullshit. Have you forgotten how Greece’s debt had to be cut because the country was run bankrupt by the interest and an inability to pay back bonds? Or Argentina that did something similar? The US is not some magical entity for which other rules apply. If you have to spend more in interest to borrow money (selling Bonds) then you will suffer some conseque of it. An issued government bond is essentally a long term loan given by the buyers, nothing else. If no one wants your bonds you are in effect unable to take a loan. And Governments that don’t run a surplus are dependent on these bond sales to keep the doors open and pay for things.
@magnet’s view doesn’t make much sense to me either, but the US is in a very different position to Greece/Argentina. USD is the world’s most dominant reserve currency, so your government enjoys lower borrowing costs from people in other countries wanting to hold dollars, and it only gets better when world markets are volatile and uncertain.
US treasury maturity rates after the GFC are the lowest they’ve been since… well, since the series has been recorded.
Meanwhile, the effective federal funds rate has been almost 0% since the GFC.
The last 10 years has been a perfect time to rack up debt, even if it meant that Debt / GDP (which is the metric that actually matters, not just nominal debt, as government debt can grow the economy (or keep it from collapsing) that actually helps budget positions medium-term) goes up.
To ruin it you’d have to elect a madman who puts through massive long-run tax cuts and would have the temerity to casually mention defaulting as the best solution to debt discussions. But unless that happens you’ll be fine.
You have to remember that the US is a superpower, and that its dollar is the world’s reserve currency. That gives it a lot more latitude than Argentina in terms of its fiscal policy. Greece is not a comparable case at all since it signed up to using the Euro as its currency (it doesn’t control said currency in the same way as the US controls the US Dollar or the UK its Pound Sterling, and it wasn’t one of Europe’s wealthier countries to begin with).
Now if the US continues on its course of massive deficit spending by virtue of tax cuts, the bulk of which go to the wealthiest, and thus do nothing to improve the human or material infrastructure of the country, it may find itself in a position where it isn’t a superpower anymore <–this, and the fact that it’s always paid on its debt, is why the US dollar is the world’s reserve currency, and why individuals, businesses and governments buy US bonds.
EDIT: Or what @Tim_N wrote.
I am not saying the US is in the same position, I am just saying it has happened and the way the US is going this could become a real concern sooner or later and that a state is not magically immune to the effects of borrowing money by giving out bonds.
The main problem with this analogy is that most US government debt is bought by foreigners, who do not pay US taxes.
Also, the incentive part is kind of backwards, though I see what you’re getting at. If “not enough” people actually prepay their taxes (ie buy bonds), the incentive decreases, in the real world, because there’s less supply (ceteris paribus, of course). It’s when not enough people want to prepay their taxes relative to the government’s needs that the incentive increases.