Is there any reason the US (or another country) cold not run a deficit forever? Is there ever a time when a country has to start paying down its total debt?
A budget deficit is not the same as the national debt although they are related. The US government has had budgets without a deficit recently. But there is still a big national debt.
I suppose, in theory, all the creditors of the U.S. government could call in their debts all at once. That would be a good way to ensure a worldwide financial panic.
IANAE
Every year a certain (non-small) portion of the federal budget goes towards paying off interest on the debt. Every year that we run a deficit, we increase the size of the debt and therefore the size of the interest payments that must be paid.
For us to continue to run a deficit every year is like you or me continuing to fill out forms for new credit cards and getting advances on them which we use in part to pay off our existing credit card bills (although in practice we just dump the cash advance into the same pot as our salaries and then from that pot pay the credit card bills, the rent, the electric, etc.).
Sooner or later for us the amount we can borrow plus our salaries no longer covers our expenses, and we either have to shut the lights off or stop paying our credit card bills which makes the house of cards collapse.
In the case of the Fed, it’s not so abrupt (in part because they mint the money and in part because they would probably be more adept in securing a loan), but eventually they money they make would be worth less and less and less (so they wouldn’t run out with a splat but with a whimper) and creditors (who increasingly would have to come from other nations, or be other nations, as our domestic economy did a slow meltdown) would be less and less likely to extend loans without imposing some fiscal responsibility clauses.
IANAE but I think that’s the gist of it.
Well, you are also paying off principal, presumably, so you could run a deficit every year and keep the debt constant or even decrease it at times if you pay off more principle than debt you incur. (e.g. the Gov’t borrows $100 this year witha promise to pay $110 back next year. Next year rolls around and the gov’t pays off the $100 plus the $10 interest payment, but borrows another $100, etc.)
No, if a government is running a deficit, it’s only making maintenance payments on its debt. It’s not putting a dime towards the principle.
It’s not a good idea to run deficits forever, because eventually it will cause interest rates to rise - the government is borrowing so much money that it has to issue its bonds at a higher interest rate to get people to buy them, driving interest rates in other spheres higher as well. Too much of this and the economy tanks, leading to even higher deficits, and the whole thing snowballs.
I have no idea how high government debt would have to be before this would happen, though.
In fact, if I recall correctly (read: I’m not going to bother to search for the information), there have only been a few years in the past 24 that we have paid any of the principle of the national debt.
Something that was never mentioned in the recent adulation of Reagan was that the $2 trillion increase in Federal borrowing during his tenure has not yet been paid off . Given the past history of the various administrations, I doubt if the debt being racked up by the current administration will begin to be paid off in another 24 years. I just wonder what we, as a country, could have funded with the trillions of dollars in interest we’ve paid in the past decades. :mad:
In response to the OP, a Federal deficit can be run as long as there are people willing to let it happen. Kind of like a Pyramid scheme.
Just to note: I am strongly opposed to perpetual US debt. Do not take the following as an endorsement of the idea.
Yep, there’s no problem if the rate of growth of the total debt (including interest) is slower than the rate of growth of tax revenue. Hence the debt, as a % of the total budget actually shrinks. Yes, the piece of pie the debt represents is getting bigger is absolute terms, but as a proportion of the whole pie it will be shrinking.
Note that that is quite an ideal scenario. One should never base government fiscal policy on such a rosy assumption. Economic downturns happen, outside factors interfere (e.g., rising energy prices), wars and other Bad Things cannot be predicted (or at least shouldn’t be), etc. In the case of the US, with even moderately good revenue growth for the next 10 years, the burden of the SS cost for retiring baby boomers is a major “uh-oh”.
So, if you are rational about things, you want to avoid perpetual debt. Just because you can (for the short term) doesn’t mean you should.
The government can also repudiate its debt (like Peru did in the 1970s and Argentina did a few years ago). This is a bad thing because it ruins your credit rating, and pushed up the cost of borrowing. The other thing it can do: it can erase the debt through inflation: that is print more money, such that the real value of the debt drops. If you have HYPERINFLATION (like Brazilhad in the 1990’s), you can wipe out the debt and intoduce a new currency unit.
I fear that the US will lean towrd inflation, and this will start about 2030 (when Social Insecurity runs out ofmoney). Everybody willhave a pension of $50,000/year…but it willonly be worth $5,000.