Please excuse my ignorance here, but what is the real deal with our National Debt? I mean, who the hell do we actually “owe” money to? Or is it just money that the country spent that we didn’t have?
All I know is that I keep hearing that our debt is like, a ridiculously high number.
Whenever the US government spends more than it collects via taxes (or other income) it makes up the difference by selling treasury bonds. Essentially, people buy these bonds now and the government promises to redeem them for a higher amount in the future. It’s the combined sum of the money that will have to be paid out to redeem these bonds that constitutes the national debt.
Our national debt is in the form of bonds such as T-bills which are sold to investors. They get a guaranteed rate of return and the government gets to spend their money now. Some of the debt is owed to foreign nationals who like the security.
So, Most of what we owe – we owe us. Neat, huh? (Or at least it used to be “most”. What with today’s markets, does anyone really know?)
So who actually owns the T-bills/bonds? I realize that anybody with a few dollars can probably buy one, but does anyone know the demographics of who actually did/does buy them? Is paying off the national debt just another way of benefitting primarily the rich?
I don’t know the answer to that, but notice that if the rich hold them, then that means that in the past the rich paid for all of the things our government paid for. It’s not like it’s some bizzare tax break or subsidy, bonds are just loans. They used to be considered patriotic, not just a financial tool
Simplistic but here’s a stab:
No you don’t owe the money you owe. You owe it to whoever bought the bonds and the bonds out there on the money markets for anyone looking for a secure, fixed return, long-term investment. Any individual, any nationality, IIRC.
IMHO, Ronald Reagan was the last President to go banana’s and borrow rather a lot. The Debt Clock gives an idea of why a balanced budget has been a good idea in recent years:
http://www.brillig.com/debt_clock/ - says the US Government has borrowed just over $20,000 on behalf of every single citizen. The interest paid on that comes out of your taxes now, the capital sum is another matter.
Problem is: Unless a country pays back what it can when it can during the ‘upcycle’, the interest it is obligated to continue to pay on the borrowed money begins to seriously impinge on policy during when a downturn comes (when the tax collected is less and the interest becomes a bigger slice of the whole pie).
Then when a downturn looks likely, Presidents are minded to reduce taxes and increase Federal expenditure (which means borrowing more money) in order to stimulate growth.
Do they still give the speeches in schools about getting Savings Bonds? That’s a form of government bond, as are T-Bills and a lot of other financial instruments.
If you have a bond mutual fund, odds are good it has some sort of U.S. government “obligations” stuffed in it somewhere.
Well, people who want absolute security, such as retirees, tend to own government bonds.
Also, IANAE (I am not an economist), but if the government failed to redeem its own bonds, it is my understanding that it would set off an economic meltdown.
The US government is always paying off the bonds as they mature. As robby said there would be big problems if government stoped paying off the bonds.
As for paying off the bonds only benefiting the rich that is true today. But they were loaning money at about the lowest interest rate you can get without tax benefits and next time the government wants money for social programs with most directly benefit the poor the government will not be able to get the money.
OK. First off, not paying the bonds is a very bad idea. Default on the debt and paying the debt are opposites.
The US Treasury Bond is the most secure financial investment ever. No one ever lost a dime owning one. That means when someone has money that absolutely must not be lost, they tend to invest heavily in US Treasury Bonds. That is a good thing for the US, and a good thing for the investor, as well.
Paying off the bonds is a regular thing, we do it all the time. The reason the National Debt is so large is that we keep selling more of them (a phenomenon called “roll over”) as we redeem the old ones. The actual practices of bond marketing are based on a three hundred-year-old financial model that includes making certain very large banks very rich, and letting them handle the individual marketing concerns. That practice is probably not beneficial to the country any more, but changing it would require politicians ignoring the rich bankers’ advice. It ain’t happening.
Now about paying off the debt. It would be a good thing. The money the government borrows is part of the market for money in general. There are lots of people, and businesses, and even governments with money that they have to keep invested. Some (and a significant part, in fact) of that investment is in US Treasury Bonds. If we sell fewer of them, the interest we have to pay to make them a desirable instrument will be less. Less interest creates less debt. Paying off the debt entirely would force the market to find new areas of investment. It would also reduce the cost of government in precisely the same way that not living on your credit card reduces your personal cost of living.
The extra money looking for investment would also cause additional investment in other areas, such as corporate bonds, mortgage trusts, and other long term debt markets, and the stock markets here and abroad. It would not be a good thing to entirely eliminate the US Treasury bond as an instrument of debt and investment. The very strong security and trust that the world has in it is unique in history, and inherently valuable by itself. Maintaining that reputation is a good investment for the American people.
Yes, the rich tend to have more investments than the poor, because the rich don’t have to spend all their money on food, shelter, and other necessities. And every year, the government has to pay interest on those investments. The net effect is that a lot of taxpayer money gets funneled to rich investors.
So, you ask, how does paying off the debt affect this? When the government starts paying off the debt, the investors get their capital back. So yeah, some money goes to them. But it was their money in the first place, and because of inflation that capital is worth less now than it was when the government received the money. But the really good part is that the government can stop paying those rich investors millions of dollars in interest.
So, the effect of paying off the debt is that it sends less taxpayer money to the rich.
What’s really sad is that Bush wants a tax cut. Instead of using our huge budget surplus to start getting out of debt (which even the simplest of financial advisors could tell you is a good thing) he wants to give a big bonus to the rich. Harrumph.
In addition to safety, interest on treasuries is also exempt from state income tax. This makes T-bills an attractive thing to do with short-term cash for many people (T-bills are short maturing government securities, as in “90 day T-bills”).
And it’s not just the rich that have treasuries. If nothing else, many people now have to choose how money is invested in 401K plans on their behalf, and may be investing in mutual funds on their own. Many fund managers will have a certain portion of the fund’s assets in government securities, even if the main thrust of the fund is, say, growth stocks. Some funds, of course, may invest in government securities as their primary purpose.
Oh, and it isn’t only the FEDERAL government that this applies to, of course. You might note at the state and local level that “bond issues” are discussed to pay for new roads, schools, parks, etc. If you live in CA, they might turn up on your ballot as referendums. That means the government is going to go get a loan to do something. And you, as an investor, can hold THAT paper too, either directly or through a mutual fund.
As I understand it, the various bonds and such that are backed by the government all have specific dates on which the government must redeem them. Bush’s 1.6 trillion dollar tax cut is based on a 10-year surplus projection (the accuracy of which is open to debate, but this is not the place) and that surplus will also cover all of the 2 trillion dollars in debt that will come due over the next decade. Some people have proposed paying back additional debt ahead of schedule, but the bonds specify penalties to be paid by the government in that case. I haven’t seen any independent, factual analysis of Bush’s budget to verify that it really meets the above description.
The government has never defaulted on a security because it doesn’t have to, nor does any other government, really. It is always possible for a government to inflate the currency (“printing more dollars”) so that the face values of the obligations are met, even though their value is decreased. That can easily get out of control as the government treads water ever faster to avoid default, but the result is catastrophic anyway - look at Weimar Germany or today’s Turkey for examples of inflationary central bank practices that got out of their control.
I would disagree with the earlier statement that “no one ever lost a dime investing in the US government” - yes, they have, by way of inflation. That problem hasn’t been gone for long enough that everyone has forgotten it can happen.
BTW, a lot of information you probably didn’t want to know about the distribution of treasury debt as of December, 1999 may be found here. To satisfy a mild curiosity you might scan through to find the two pie charts which will tell you the distribution of bonds vs. notes vs. bills, and the breakdown of types of investors. About 1/3 of marketable treasuries are held by foreign investors.