I am not generally a dense person, but the only class I ever got a grade as low as a D+ in was Economics. Thus, I have trouble understanding this bit that Dennis Miller did in his last stand up show, where he said something like, “Why do we need to pay the national debt? Who’s going to make us? Anyone who tries, why can’t we just blow them off?” This is very much a paraphrase, but the gist of the thought was, as the world’s biggest superpower, who is going to “make” us pay the national debt? What, if anything, will happen if we just… don’t pay it? Are there consequences for the economy and how does that effect individual Americans? The global economy?
I am looking for factual answers here, not opinions on why the debt is so high or whose fault it is. Please use small words, though. Economics is one of those sciences that I can barely wrap my head around, but I feel think this is an issue I should comprehend. Thanks for fighting my ignorance.
Yes, we need to pay it. If we don’t, no one would ever lend us money ever again.
You know how people say the US Savings bonds are one of the safest investments in the world? When you buy a bond, you’re just loaning the seller some money. If people lost faith in those bonds, they would stop buying them, and the US would be unable to borrow. Then all immediate spending would have to be met with huge tax increases, which would ruin the economy and have devastating ripple effects through the entire world.
How? This is the kind of question I’d like to learn the answer to. How is the national debt connected to privately traded stocks? I’m not doubting that it’s true, but I cannot quite figure out how this works.
Plus, if we owe the national debt to ourselves, as iamthewalrus said, how do we pay ourselves back? Just when the bonds come due? Can’t we just hand over the money we get from the new bonds to pay off the old ones, ala Social Security?
I hope I don’t sound too stupid with these questions… this is not my forte.
When the American public watches several trillion dollars of its savings vanish, they’ll presumably decide to spend less. Since spending by American consumers is where most companies on the exchange, directly or indirectly, make thier $$, presumably the value of those companies will fall.
You got it. When bonds come due, the gov’t just takes out more bonds to pay them off. Also note that they loose money everytime they do this, since they have to pay interest when the bonds come due. This interest is currently our gov’t 4th largest expenditure after defense, SS, and Medicare/Medicaid.
All financial markets are tied together in one giant web and the federal government is one very important part of it. Imagine all these entities borrowing and paying money back from one another in a huge system of dependencies. Now imagine that the largest player simply stops paying back what it owes to the other entities. The whole thing rapidly falls apart and money stops moving. The stock market is part of that web and is dependent on money invested in treasury bills and other things through direct connections.
For paragraph number 2, I see you are the one that brainstormed much of this system. That really is what happens. The U.S. government borrows money to pay back money it owes and then goes above and beyond that. It is like a pyramid scheme and has the same inherent weaknesses that all of them do.
Certain Latin American countries defaulted on their debt in the 1930s.
One would think that nobody would lend to them again. But, as it happened, people did. At substantially higher rates of interest.
Similarly, if the US decided to repeal the 14th amendment and skip an interest payment or 2, bondholders would notice and demand more compensation for future loans (that is, long-term interest rates would rise on government debt).
Separately, higher interest rates tend to encourage investors to shift funds away from the stocks and towards bonds. Less demand for stocks causes stock prices to fall.
Finally, remember that banks, firms, pension funds, mutual funds and 401Ks all own government debt to varying extents. If the government surprised us with a default tomorrow, some who lacked the funds that they thought they had could be pushed into bankruptsy.
If you mean pay it down to zero then I think the answer is no. If you mean to pay bonds as they come due then absolutely. If the federal government is looked upon as a type of public utility then running a debt to provide for future expansion in population and infrastructure isn’t out of line. All public utilities do it. Running up a debt to pay for present expenses is not good, and that’s what we are doing now.
Government debts are seldom paid down to zero. They are continually refinanced by selling new bonds to pay off the maturing ones. The trick is to not let the debt get so large that the interest payments become an onerous part of the annual budget.
Actually, if you passed a law taxing interest on government debt at 99%, you could accomplish pretty much the same effect as default. The value of the bonds would drop and you could buy them back for a song.
So I don’t think it would be as simple as telling Japan or the EU we aren’t paying them. Most of it is owed to US citizens. I don’t know what would happen if we didn’t pay it though.