What problems are caused by America being trillions in debt? What problems are caused by any country being in debt? Since currency is fiat money, what difference does it make for our governemnt to owe a few trillion figments of its own imagination?
Isn’t the US paying billions and billions of dollars of interest on those debts? Billions and billions as in $ 317,668,964,902.31 for 2002.
http://www.publicdebt.treas.gov/opd/opdint.htm - amount of interest paid for debt
http://www.brillig.com/debt_clock/ - how much the debt is right now.
It doesn’t make a big difference, but it does make a difference.
If a country simply produces extra currency to pay off debts taken in its own currency, it will massively devalue the currency, and that will have profound effects on its economy, not to mention its credit rating.
If a country tries to produce extra currency to pay off debts taken in another nations currency, it won’t work at all, because producing the extra currency will only lower the exchange rate.
Obviously, if a country just refuses to pay its debts it will be in big trouble internationally, and with the IMF.
So if a country continues to hold a debt and honor the due interest payments, it must get that money from somewhere and that means more taxes.
So in essence, when a goverment assumes a debt it is gambling that the money it borrows can be used to grow the nation. This growth will in turn mean more tax revenue, which will be used to pay the interest, and hopefully the principle.
So in this way, the debt is very much like the debt that a corporation might take on.
So as long as a country continues to be able to pay off the interest on its loans its creditors will likely be willing to loan more. So it need not actually pay all the interest on its loans, as long as the creditors have faith in the country. In this way a deficit turns into a debt.
But with a large nation like the US, the only limit on the amount of debt it can assume is the amount of capital available for lending, the credit supply. In essence, the US government can continue to borrow as much capital as it wants to. The only upshot is that that capital is tied up in the US government, and not available for venture. So by increasing the national debt, or running a deficit, the US government is deciding where more capital will be invested in the short term (through government contracts) but if it does not recoup its investment through higher tax revenue, it will be deciding where less capital will be invested in the future, when most of the budget goes towards paying the interest on its debts.
The problem with national debt is similar to personal debt. If you let if keep growing and growing, eventually you will be financial trouble. If you keep the debt as a “safe” ratio to your income, OK and sometimes preferred. That’s how a lot of business operate. As long as they can make more money than the cost of borrowing the money, they are ahead. Why tie up your own cash? If you have debt with a plan to decrease it over time, it’s a good thing. Same example of companies borrowing money above. Or, on a personal level, a home mortage.
The problem US faces is the debt keep growing bigger and bigger with no plans to decrease it. Yes, the government can print more, but then each dollar is worth less unless US’s worth grows; similar to companies just printing and issuing more stocks.
Jim
To the extent that the debt is held by foreigners, interest rates will be determined in accordance with their decisions to buy, sell or hold their positions.
Capital is scarce. Any money lent to the government (by way of holding bonds) cannot be lent elsewhere. This is the “crowding-out” effect and is harmful to capital investment by business.
The crowding-out effect will also increase interest rates in general, which is harmful to business. Higher interest rates also encourage what is known as a rentier economy: someone with a little capital might decide he can live very well on the proceeds of his investment, therefore not work, therefore deprive the rest of society of the fruits of his labours.
“Fiat money” (where the government raises money to spend by selling bonds, which are bought by the central bank: essentially, the central banks calls the private banks and tells them ‘Hey - you’ve got another billion on deposit with us, deposited for this account of Uncle Sam’) will give rise to inflation. The classic example of this is the Weimar Republic in Germany in the 'twenties, which paid its war reparations with freshly printed money. The mark collapsed, people’s savings were wiped out, at one point people were being paid hourly so they could spend their wages before prices went up again … the resultant misery and confusion helped Hitler attain power.
This has also happened to lesser extents in Yugoslavia after its partition (I have a friend who immigrated to Canada afterwards - at one point he was being paid daily), and in Russia after its collapse (this took longer and never reached such extremes). The result of this is people’s savings getting wiped out - an appealing idea to some, but to poor old Gran’ma who saved all her life so she could have extra consumption in retirement … not so good.
The basic problem is that the economy’s output is relatively stable, no matter how many dollars are in circulation. More dollars in the economy simply means more dollars to buy a dozen eggs.
When the government wants to spend money, there are exactly three ways to get it:[ul]
[li]Tax the money[/li][li]Borrow the money[/li][li]Print the money[/ul][/li]Each of the three will introduce its own distortions (both desireable and otherwise) into an otherwise laissez-faire economy. The national debt represents the sum of past decisions to borrow and, as noted with “crowding out” has introduced its own distortions into the equation.
In Canada, for instance, 24 cents of every dollar I pay in Federal Tax goes to pay interest on the debt: that is, I pay $1 and get 76 cents worth of services. In the meantime, the fact that people can invest in risk-free government debt to their heart’s content means just so much more competition I have to face in funding my mortgage.
All the above is not to say all government debt is bad. I was a little disappointed when the Treasure stopped issuing 30-year bonds - seems to me that the determination of a risk-free thirty-year rate is something of a valuable government service - but at the rate things are going they’ll be back before long. There’s also the question of Keynesian pump-priming - that is, borrow money when times are bad and pay it back when things are better - but somehow the politicians are better at the former job than the latter!