The US has debated back and forth about the deficit for years. Without getting political, how does it work–are we basically operating on a credit type system? And our creditors are foreign nations who float us money, like China?
My rough-and-dirty understanding is that beyond what is paid in by US taxpayers, any federal budget exceeding the income from taxes is a deficit. This gap is shored up by funding from foreign countries, much like a big bank floating you money on credit. But the US is so big-for-its-britches that every time we hit our credit limit, our creditors just bump us up more and more.
Given what’s happening with the whole Coronovirus Stimulus packages, it appears our new deficit will be around at least 3 trillion. Where does all this emergency spending come from? Is it all funny-money–as in only debt on paper? Is it held by any collateral?
My friend, who I think is smarter than me, argued against my as-just-presented premise, saying "but at some point, it can’t be funny-money or just some floating credit bill–at some point, someone is going to have to pony up real life actual money to pay for this stuff. (This is especially specific to the CARES ACT funding).
So where does this money come from when we are already over budget?
Will there ever come some cash-out moment where the US will have to pay the tab, or do we just get floated credit into infinity?
The excess comes from selling bonds, some of which are held by foreign countries, but most of them are held by American investors and institutions. The country does not have a “credit limit” as such; people will happily buy US government securities as long as they are confident that they will be paid on time. But there is a statutory debt limit which restricts how much debt the US treasury may sell. But that’s a purely political problem; Congress can do away with the limit or raise it as they please.
In addition to foreign central banks, domestic and foreign private investors, and U.S. government pension funds (incl. Soc Security), some of the debt is held by the Federal Reserve Banks themselves.
These F.R. banks are effectively(*) owned and operated by the federal government itself, so the net effect is that the U.S. is borrowing from itself and printing money with the “proceeds.”
In addition to buying its own debt, the U.S. government will be buying some of the debt of such private corporations as deemed worthy by appointees of the Administration. This will also serve to prop up the value of debt generally.
To answer OP’s specific questions:
Considering just the $1.5T created by FedRes over 5 weeks, some of it is printed as FedRes bank notes by the U.S Treasury at the order of FedRes Banks. But mostly it is created by pushing buttons on the Banks’ computers, injecting money into the accounts of member banks which served as intermediaries. The “collateral” for the money created to purchase U.S. Treasury debt is the Treasury debt itself. (This isn’t too different from the way private banks create money when they lend.)
This question can be rephrased as “When will lenders, especially foreign central banks, demand higher interest rates to lend to the U.S.?” Nobody knows, but interest rates are still at record lows. Part of the GQ answer is that alternatives (euro, yen, sterling) suffer from problems similar to, and often more severe than, the U.S.A.
The “reckoning”, if it comes, would in principle be a devaluation of the currency against other currencies and/or high inflation.
But, as you say, U.S. national debt is not an outlier relative to the other major economies. See here, where you can reorder by level of debt:
Japan has by far the highest debt of the developed nations. So if the $ were to devalue, the appropriate question would be - against what?
As for inflation - at the moment we are seeing exactly the opposite of high inflation, with no sign or market expectation that it will change in the near future. Yields on 10 year government bonds:
U.S. 0.6%
UK 0.3%
Germany -0.4%
Italy 2.1%
Japan 0%
All I can say is that I don’t understand why anyone would be willing to hold long term government debt at these levels. There seems at least as much risk in that as in holding stocks at present, and far less potential reward.
The United States government is the one who literally prints US money, which is treated as real life actual money by virtually everyone on the planet. And no one who thinks US dollars are not real life actual money should buy treasury bonds*, since that’s what they’re bought and sold in. For countries that have their own currency, government debt is radically different from private debt because a government with a currency can always generate more real life, actual money to cover debts issued in their own currency. And there’s no risk of someone ‘calling in the debt’ because most treasury bonds don’t pay out before maturity date - if you call up someone in the government and demand they pay a note not according to its terms, you’re not going to get far.
The interest rate isn’t based on ‘how likely are they to pay out’ like it would be for a person, it’s based on ‘how confident are we that their currency will stay reasonably valuable’.In the long run, if the US issues excessive debt, then the interest offered on treasury bonds (and other similar instruments) will have to go up to entice buyers, and the value of the dollar relative to other currencies will go down as it inflates. But that’s not even starting to happen, and in fact a number of people are worried that the Coronavirus shutdowns are going to cause severe deflation.
I’m using ‘treasury bonds’ as shorthand for the various instruments the treasury issues, there are a variety with slightly different rules.
But it’s not as though the U.S. has financed most of it’s debt out to 20 or 30 years and doesn’t have to worry about it until then. Debt is constantly maturing and must constantly be refinanced, so although you are correct that technically the notion of “calling in” the debt is not the way the market operates, if people were no longer willing to buy newly issued bonds that would be functionally equivalent.
Basically, the government collects some money now in the form of taxes. If the government wants to spend more money than it collected, it borrows money by selling bonds to people. These bond buyers give the government money now, which the government spends. And the government promises to pay the buyers back with more money spread out over the next thirty years. And then the government collects taxes over the next thirty years to make the payments. Or it borrows a new amount of money to pay the people it borrowed money from in the past.
The collateral is essentially that the United States government promises to pay the money back. Most people see that as a pretty good bet. It seems almost certain that the United States government will continue to exist for the next few decades and they have a proven record of paying money back on schedule.
No, most of the money is borrowed from Americans (about 75%). It’s not like it’s difficult to get in on the ground floor; you only need a hundred dollars to buy a treasury bond.
The U.S. dollar has a very high status as a reserve currency. Other countries hold a high level of U.S. dollars or securities as a portion of their liquid wealth. One reason for this is the oil trade system. But in many ways it derives from the situation after the Second World War and decisions made at that time. The U.S. was in a very good position at that time. And strengthened the position going forward for quite some time. Many real things of financial import happened in or in relation to the position of the U.S. for many years.
The gold standard has been abandoned. The U.S. dollar has seemed to take on that standard. Or maybe it is the petrodollar, denominated in U.S. dollars. But whatever the reason for it being such a staple of world standard for value. I feel it has not been properly tracked in reality. The U.S. levels of debt and what they choose to create and invest/waste, their currency on does not seem to support the value of the U.S. dollar in relation to other currencies.
The situation is slowly changing. Or maybe it will change quickly given the unusual current circumstances. More countries are lessening their amount of U.S. dollars in their reserves. A lot are increasing gold reserves. Some stronger major oil and gas producers/consumers are sidestepping U.S. dollar system. Others that tried where bombed out of existence, but I think it will continue. Overall, the U.S. dollar will devalue. I don’t think it will crash all that much. But it will come down.
I think it will be a good thing if the U.S. reacts sensibly. Even out the playing field a lot. In many ways.
The current situation and values of currencies.
A lot of countries are putting massive amounts of money and real resources out at this time. But the fact that it is so many countries will soften the financial blow going forward in relation to the value of their currencies and inflation and other things. One country manufacturing a ton of money and or taking on a lot of sudden debt, will devalue it’s currency and financial footing. But that is in relation to others. A falling tide lowers all boats. In relation the world in general, the extreme finacial actions taking place will somewhat balance out.
One thing I do not like. If a country borrows/sells debt at such a time as this. The results will be long lasting payback to speculators at an increased cost over the long term in interest. It is better to just create the dollars and eventually tax them back at no interest. As we are all in this. There is less chance of any currency devaluation in relation to another currency.
No, it wouldn’t. If ‘people’ suddenly radically altered their treasury bond buying practices, the debt would still come due exactly on its standard schedule - there would not be the ‘you must come up with $50,000 by Tuesday’ scenario that an individual having a debt called in would face, bonds would still gradually mature and pay out over their standard time of 90 days to 10 years.
The scenario where ‘people’ suddenly stop buying US treasury debt doesn’t make any kind of sense. For one thing, large chunks of the debt (to the tune of 75% according to one poster’s source) is held by American investors who aren’t suddenly going to want to pull the rug out from under the US economy. And where it’s not, the bulk of the debt is not owned by some mysterious entity who just holds one set of 90-day bonds issued on the same day, it’s held by investors who hold a variety of treasury bonds of varying issue dates and maturities. If those investors start engaging in sudden irrational behavior like making a consortium to swear not to buy US debt, they run a very real risk that what the US does in response (like printing more money) lowers the relative value of the dollar, making all of their other holdings less valuable.
In a realistic scenario where there is a general trend of people becoming less interested in holding US debt, the US would just raise interest rates to make it more attractive to hold debt and look at altering long-term trends. Countries are already moving away from being extremely dependent on the dollar, though no one seems to mind holding US debt, and as a gradual trend it’s just something to deal with. In the silly scenario where ‘people’ stop buying debt, the US can still pay all of its debts by printing another trillion dollars, or can just say ‘if you’re not going to keep buying our debt, we’re not going to honor it - enjoy losing your trillion dollars, suckers.’ Both would be a financial disaster, but the disaster would also really badly impact the people trying to ‘call in’ the debt.
U.S. government debt is so well regarded that the Treasury department has seriously considered issuing 100-year bonds. “Give us some money now and we’ll pay you back in the 22nd century”
Not all countries’ debt is a safe investment. There’s the risk that, if a country owes a bunch of creditors a total of a trillion dollars or whatever, that they’ll just print up all the money they need to pay off those creditors, inflating the heck out of their currency in the process, and leaving the creditors with worthless money. It’s happened many times in history, to many countries.
But most investors don’t think that it’ll happen to the US, at least not any time soon (“soon” meaning “before they can get paid back on their investments”). Anyone who did think it was going to happen soon wouldn’t want to buy US debt (or at least, would only want it at a high interest rate, to hedge against that risk). But there are still plenty of investors out there who are so confident that the US won’t inflate its debt into worthlessness that they’re not only willing to buy US bonds, but they’re willing to do so at extremely low interest rates. And as long as those people are still willing to buy the bonds, the US can keep issuing them.
There is also the fact that the US is economy is so huge and connected with so many other countries that if the US does anything weird with its monetary policy, it will have huge worldwide effects. When Zimbabwe inflated its currency to worthlessness, it hurt Zimbabwe and people who were directly involved with the country, but it didn’t really do much on a global scale. If the US did the same thing, the global economy would be wrecked and would have to go through major restructuring. So I think there’s a certain amount of ‘if they do screw up that bad, any investment we have is going to be trashed anyway, and everyone else is in the same boat, so everyone will try to stop it from happening’ behind that too.
It seems like you’re saying that bond investors operate for their own financial convenience rather than with irrational political motives. That’s good, since nobody is arguing differently.
You also argue that interest rates will rise when dollar debts become less appealing. Again, you’re in agreement with everyone else in the thread, although others make the point without words like ‘silly’ and ‘irrational.’
I’d be less sanguine than you about prospects when interest rates rise. Ballooning debt would eventually provoke inflation.
As for
AFAIK Donald J. Trump is the only major thinker who has hinted at plans like that.
BTW, the Treasury prepares a quarterly report called “U.S. Long-Term Securities Held by Foreign Residents” which includes both private and official holdings, and with corporate bonds and stock included as long-term securities. (Do these totals include short-term Treasury bills?) The eight largest holders in the recent report, in order, are Japan, United Kingdom, Cayman Islands, Luxembourg, China, Canada, Belgium, Switzerland. UK and Cayman totals are mostly from Stocks; Belgium’s mostly from Corporate bonds, Luxembourg’s corporate stocks and bonds. When only U.S. Treasury debt is considered, UK is in distant 3rd place, way behind China.
One reason, maybe the main reason, is that there is no good alternative at this time. Gold is just as impractical now as it was when we came off the gold standard. Crypto currencies are way to new, shady, and small scale. The Euro has the disadvantage of having to rely on the governments of multiple countries for it’s management. Other western currencies, such as the Australian and Canadian dollars, Japanese yen, British pound, and South Korean won, don’t have the huge domestic economy to back them up and allow them spread and become prominent worldwide.
I’m not sure what this means. [del][COLOR=“Black”]If I were sadistic I’d mention that the gold price set another 7-year high today and that central banks have been net buyers of gold bullion.[/del][/COLOR] But that would mean another thread gets hijacked to a discussion of whether gold is suitable for use as toilet paper and/or bullets, so I won’t.
I was just using gold as one example of potential alternatives to the US dollar, and why all the alternatives are bad. The implication, which I should have stated more clearly, is that the reason the US can “get away with” a high level of debt is because there is no (currently) useful alternative to the US dollar.
If we all agreed that gold was a useful medium of exchange, it would be, but so would cowrie shells or poker chips or little pieces of paper with dead presidents on them.
