Since the US is already $10 trillion in debt, where are they getting the $800 billion required for Obama’s stimulus package? Why isn’t the US govt already crippled by current expenditure plus interest payments? If not now, then surely there will be a point where it can’t even service the interest.
Who keeps giving the US govt money and why would they? Under other circumstances it would seem like a safe investment due to the strength of the US economy. However, the economy has imploded and it appears that the US govt has no intention of ever paying down the debt. Why? Obama wants to spend and the Republicans want to spend and cut taxes; neither group appear to have any intention of balancing the books.
This just doesn’t seem to make sense to me, my instinct says that the debt must be real and there must be consequences for letting it get out of control. Plus the idea of continually increasing spending and decreasing income (tax cuts anyone?) seems insane. It makes a mockery of the whole situation.
So with that in mind I figure that I’ve missed something fundamental about the situation and how debt works. I tried to figure it out by doing some reading, and while I can find some explanations of what each piece of the puzzle is, I can’t find someone to put it together.
They are borrowing it. The government issues bonds and so forth, people give the government money in return for a promise to pay all the money back with interest.
Not yet, but there could be a point beyond which the government cannot service its debt. Last year the taxpayer spent $412 billion on interest on the national debt, which is currently about $10.7 trillion. Most government spending is on Social Security, Medicare and Medicaid, defense, and interest on the debt. (Cite.) Medicare and other entitlement spending is projected to increase enormously in the coming years.
People who think they will get their money back with interest.
Paying down the debt is different from paying back the individual Treasury notes.
One of the great dangers is borrowing money to service the debt. Once this happens, we are doomed, as we will continuously fall behind.
The government is Constitutionally obligated to pay back the debt.
Yes, you are entirely correct.
Government revenues have increased significantly over the last few years. There has been no decrease in government revenues since 2003.
Cite. Most of the discussion, to call it that, that says the tax cuts reduced government revenue, mean merely that, assuming that the tax cuts had no stimulative effect, and that the economy would have performed as it did regardless of the tax cuts, that a higher tax rate would have meant the government collected more money in taxes than it did.
My questionable google-fu reveals that approximately 20% of taxes taken in each year go towards paying interest on the debt. How much of an increase in this are we looking at if all the bailouts and recovery plans get funded?
It depends on the interest rate of treasury notes. For now, it’s probably not that much extra; treasuries have been in a bubble recently, e.g., there is actually higher demand for them (!) than before, which pushes yields (interest rate paid out) down.
In fact, at one point, the interest rate on a three-month note dipped below zero – if the interest rates are negative, that means the national debt is actually a profit making mechanism. :eek:
The government is pulling out all stops to keep this interest rate low, and yesterday, they reaffirmed their intent to buy T-Bills (thus keeping the demand high and yield low) if the demand for the bills goes down, pushing the yield up.
So why is demand for treasuries so high? Simply put, EU and other nations are all fubar’d worse. Everyone’s paranoid and needs a parking place for their money. Perhaps surprisingly, the US national debt has been determined to be the safest place for this.
Let’s make some assumptions. Obama and the Democrats spend, say, two trillion over the next two years in a stimulus package. Now we want to pay it off.
We need therefore to cut the budget by a trillion dollars a year (to reduce the deficit back to where it is now. If we wanted to balance the budget, we would need to cut the budget, or raise taxes, or both, by $1.455 trillion a year).Then we need to raise taxes (or transfer spending from something else) by a total of two trillion, plus interest, over whatever period is the life of the bonds.
A number of years ago, I realized that the economy is much more global and worldwide then it had been in the past (like, in the 1800’s). Since the US economy is so integrated with the rest of the worlds economy - there is inherent interest, worldwide, to keep things somewhat afloat over here. So other countries (such as China) have a self serving home interest to purchase and help prop up the US economy when it is slacking.
Then when I started travelling for work, and going overseas every now and again - I realized that as bad as things may be in the US with our debt - things are just as bad, if not worse, elsewhere. Other govt’s struggle with their finances, balancing budgets, deficits, etc.
It was a very enlightening day when that dawned on me…
Governmental economics is not like individual household finances or even that of corporations. (And government accounting practices are also not like those of corporations. GAAP (generally accepted accounting principles) don’t apply to the federal budget.) In addition, the U.S. as the world’s strongest and in many ways default economy is not even like other countries.
Shodan’s post is correct. As long as governments (and quasi-governmental agencies, a new thing that many East Asian countries use as a device for investment) have literally trillions of dollars to invest, the safest place to invest them is in the economies of other countries. Countries can default. Russia did famously in 1998 and that brought down Long Term Capital Management (LTCM), a fund run by Nobel prize winners who planned for everything except that.
Russia is hardly a western economy, though. The U.S. economy is orders of magnitude bigger and safer than Russia’s was. A default of the U.S. is conceivably possible in the near future but it would involve a situation in which the entire world’s economy flatlines. That would offer no alternative.
So the U.S. is the default, the place that can absorb trillions of other country’s dollars and pay them back with known amounts of interest. No other country can do this. The EU appeared to be coming close at one time and money was therefore moving into the Euro but they’ve been hit by the global recession as much as if not more than the U.S.
We can’t guarantee how far into the future this will continue. If current trends continue, it will be decades before other economies can pass us, though.
And no one knows if current trends will continue. The U.S. economy may continue to falter. Medicare and Social Security payments in the trillions may devour the budget. Alternatively, investment in the country - either as part of the government stimulus or by other countries or private firms - may contribute to increased productivity and growth so that the economy maintains its global awesomeness.
For now, the consensus of economists seems to demand deficit spending as a way of stimulating the economy. This is old-fashioned Keynesianism, out of favor under a more conservative-directed economy theory for the past few decades, but the pendulum has this way of swinging back.
In short, the debt and the deficit, especially the money that goes into servicing the debt, worries me considerably. However, in the short term it doesn’t frighten me and I see no alternative. Government can do some collective projects that private enterprise is not constituted to do. That is not an absolute and there is a line at which private enterprise should take over. People can and do disagree where that line is. However, government is better suited to long-term capital investment than private sources are. (Note that investment is not the same as management, which is the difference between government and LTCM.) As long as the dollars keep pouring in the rest of the world seems to agree.
If I’m understanding you correctly, there are people out there who are saying, “Dear Uncle Sam: I have $1000 for you, and I trust that next year you’ll give me $995 back. I don’t usually take negative interest, but everyone else is paying even worse, and I know I can trust you to give me the $995 when the time comes.”
OMG, I can’t believe things are really that bad. How far below zero did the interest rate go?
Public Agenda released a book called Where Does The Money Go? about the debt. You might take a look at that.
Can Exapno or someone comment on the idea that we are cool if the GDP were significantly greater than the debt, although I don’t know by what ratio. It is sort of like borrowing $50 is a bigger deal if you only have $100 compared with someone having $1000
I opened another thread inquiring whether we had a plan to get us back to a manageable debt. No responses so far.
Comparing national debt to a person’s or company’s debt is not always a good idea, but doing so might make you realize that the national debt isn’t so big.
Let’s take a person I know who has too much debt, but is representative of a lot of Americans who are just getting by:
$60,000 income (excluding non-taxable benefits)
$180,000 mortgage ($11,000 interest per year)
$60,000 student loans ($3,600 interest per year)
$15,000 car loan ($1500 interest per year)
$10,000 credit cards ($1500 interest per year)
So their debt is about 4.6 times their yearly income with interest payments of about 27% of their annual income.
The US government makes about $2.6 trillion per year and has about $11 trillion in debt and $260 billion in interest payments. That’s 4.2 times the government’s yearly income, but only 10% of the annual income thanks to the fact that the government pays lower interest rates.
I don’t know how far we want to stretch the analogy, but it would take another $15-20 trillion in debt to make interest payments the same as my individual person example. On that scale, $800 billion or even $2 trillion doesn’t seem so large. We could keep that up for decades. The question is not so much “Can we pay it back?” but “Does anyone have $15 trillion to lend in the first place?”
The GDP is not significantly larger than the debt. Best figures I can find are 14.561 trillion for January 2009 GDP and 10.632 trillion for the current national debt. With the anticipated annual trillion dollar deficits the two numbers could be almost the same by the next presidential election.
Which is why mostly nobody cares that the two numbers are so close. Either the economy will improve over the next four years or it won’t. The ratio of one to the other isn’t a factor. As I said earlier, many economists advocate increasing the debt in order to stimulate the economy. If the economy improves tax revenues will also go up and the percentage of the federal budget going to servicing the debt won’t increase. That’s a far more important ratio.
Well, Obama has been in office a week. He’s starting with a stimulus package. That’s the beginning of his plan. Presumably he will keep introducing new components to that plan. No other plan matters. Whatever the current president does is the plan. You’d be better off taking the question to GD where people can argue about whether it’s the right plan or not. In GQ the plan is the plan. Asked and answered.
It was only to the tune of losing 25 dollars per million or something along these lines.
I expect this happened because the real movers when it comes to treasuries are -huge- clients. I can go to my local bank and ask for a $100,000 CD. But, I cannot go to my bank and ask for a 10 billion CD, there’s no way they can cover that. And I can’t physically hold 10 billion in cash, at least not without paying for storage, lots of security, guards, etc. So, Uncle Sam is still the cheapest and best vehicle for, say, moving money between banks.
At what point is the government obligated to pay back the debt? If they choose to ignore the Consititution, so what? Who can punish them? On the other hand, what happens if due to short-term thinking or a mistake, that the govt reaches the point that they have to borrow to service the debt?
I don’t want to go all doomsday on everyone, just trying to get my head around what incentive the govt has to pay back the debt. Afterall, if creditors keep assuming the US is always a good investment and there’s no incentive and no penalty for the govt to clear its debt then there’s little likelihood of doing anything about it. Right?
Ok, given that in this situation the US debt appears to be the safest investment I can see why they would invest. However, my I’m incredulous that creditors would invest with an interest rate <=0 when it would be better to simply hold their money in a vault. I mean, I have $1 billion and I’m giving it to you so you can throw away $100 million and give me $900 million back. That doesn’t add up, why would I do that?
Simple, because it is cheaper than buying a vault. FDIC covers accounts up to $250,000. If you are a organization that just pulled $10 Billion out of stock market (at a considerable loss) and you are worried that the bank that is holding that money could go out of business, what do you do? Buy land and build a Scrooge McDuck vault and hire guards? No you buy treasury notes even if the yield is -.01%.
The date on which the debt is due and payable is agreed to when the note is bought.
There isn’t any one due date for the whole eleven trillion. It is made up of some debt that is due today, some due in six months, some that isn’t due for ten years, and so on. The government has borrowed money every year since WWII, almost - I believe the budget was balanced in 1969, and then in 1998 - 2000.
But the whole debt that has been built up since the end of WWII isn’t all coming due at once. When people talk about how much we are spending to service the debt, they mean money that is spent to pay back the folks who loaned the money (plus interest) months or years ago. But since the government is borrowing more at the same time, the total debt load goes up.
As discussed above, if the US government defaults, the whole world economy goes down in flames. It would be much, much worse than the Crash of 1929.
The technical answer is “we’re fucked”.
There are a number of things we could do, but many of them are worse than the problem - the government could inflate the currency, as the Weimar Republic did after WWI. What is most likely is some kind of refinancing, where the government agrees to pay back over a longer term than agreed to. Think of it as Chapter 11 for the USA. That would be almost-but-not-quite as bad - ruining the “full faith and credit” of the US. I would hope that before we reach that point, we bite the bullet and jack taxes up, and cut spending on things we really, really want, and pay down the debt. That will suck most horribly and unpleasantly.
Well, sort of. There is almost no chance of us ever having no national debt. It would have been a good idea to pay down the national debt during the 1990s and up to 2001. It would have been a great idea if we had cut spending during the 1980s and started paying down the debt then. But politicians don’t get re-elected by cutting spending. They get re-elected by getting money spent on programs they convince the voters they need.
So if we didn’t pay down our debt during the boom years, we sure as hell aren’t going to pay it down during a recession. So now we have a President and Congress who are going to add more to the national debt in their first six months than what Reagan or Clinton did in eight years.
Plus, it’s not quite as bad as it seems. See dracoi’s mortgage example. A certain level of debt is manageable. There are even economists who claim it is a good idea, even in good times.
We could do something about this whole mess. But we are well past the point where we could do so at minimal suffering and unpleasantness. We could have restrained our spending during the last twenty-five years, and spent the surplus on reducing our debt. That would mean not spending on things like health care and things that we want. We could have put restrictions on mortgage-backed securities and things like that. That meant that some people who now own their own homes would not be able to do so.
But, we didn’t, and now we are in a bad recession, when we haven’t had a bad recession since 1982.
Is it the end of the world? No. But it is going to suck pretty hard for a while. And eventually, we are going to have to pay back what we borrowed.
It makes no sense to compare debt to government income (taxes) because the government can and cannot set its own income. It makes more sense to compare it to GDP and that is what is customarily done.
One more thing to take into account is that all debt is not the same. It might make sense to incurr debt for investments but not for expenses. It makes sense for me to borrow to buy a house but not for a vacation. It makes sense for the government to borrow to build infrastructure but not for current expenses. If I borrow money to build a bridge I have a bridge I can use while I am paying back that loan so I am really paying for the use of the bridge as I use it. Like with a house. But if I borrow and spend it on social security I am left with debt and nothing more. Very different scenarios. Current expenses should come from current income except in the most dire circumstances.
The USA has a debt of about 60% of GDP but what makes it worse is that it is using the money for expenses and not for investments.
China has a debt of about 18% of their GDP but they are spending the money in public works and other investments.