I keep reading that the national debt is so high and growing all the time. Who do we owe this money to? Can’t we just blow it off and let the lender file for bankrupcy? If we owe so much, why do ‘they’ keep loaning to us?
The treasury sells bills, notes and bonds every two weeks.
Ok. I shall take it that this is the United States we are talking about…
FIrst let me clairify something. The US government couldn’t run if we didn’t have a debt… We’ll thats not really true yet it is how it is.
The US spends money that it <i>expects</i> to get in taxes next year. To actually get this money the US borrows money from banks. The banks agree to lend this money because (for the most part) it WILL be returned with interest. These loans are in the form of government bonds and the like. Now keep in mind that these bonds don’t get redeemed for a few years. So while we may owe bank Abda 1 million dollars, the due date to pay it isn’t all at once. It might be 20,000 tommorrow and 50,000 next year.
Interesting note is that this is part of the reason the US is a world power. It has the ability to say “Ok, we’ll buy ourselves a new army now… and pay it off in about 20 years with interest and then we’ll get it all back because of the increase in the economy!”
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Generally, ourselves. As trustno1 pointed out, the government sells bonds and other securities. Remember the last time you went to the bank and bought a $25 savings bond for someone as a gift? Congratulations! The government now owes $25 to whomever you gave the bond to.
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Aside from the moral issues involved with not paying back loans, the ecomony would collapse if the Feds defaulted on the national debt.
Because people still buy bonds and other securities.
Zev Steinhardt
The money is owed to the people of the United States and to other investors who hold United States Savings Bonds, Treasury Bills, and other notes. If we blow it off and let them go bankrupt, many retirees will have their life savings destroyed, many investment funds will go under, no one will ever lend the U.S. money again, the U.S. will be seized by a depression that makes 1929 look like a bump in the road, followed by the rest of the world as the most powerful, stable, and secure economy on Earth goes down the tubes, and people everywhere will be forced into poverty that cannot be relieved by government programs because the U.S. can’t borrow the money any more.
People keep lending the U.S. money because the interest rates are decent, because the investment is absolutely secure (i.e., the U.S. is good for it because we don’t do idiotic things like defaulting on the national debt), and because they don’t dare do otherwise.
Ok so much for the national debt, but how about the US trade deficit then (if you don’t mind the hijack), which in 2002 alone amounted to a staggering $435.2 billion, or 5% of the BNP. This always results in much wringing of hands and gnashing of teeth by financial commentators here in Denmark. Is this a bomb under our collective future financial well-being, or is it really or little concern?
Also I heard a financial commentator on the radio claim that in 1985, after Regan’s experiment of lowering taxes failed to create the necessary extra growth in the economy. The rest of the world had to jump in and buy US dollars, which he claimed in effect amounted to other nations paying off your national debt. What about that? Is he (the radio commentator) a communist lying bastard, or is there something about that?
Mind you, Danish national radio and TV is often, what you would call, extreme left wing, socialist bordering on communist – so I’m holding for the latter.
The trade deficit is something else altogether. It exists because foreign goods are cheaper than domestic goods. If American buyers would buy American without regard to price, or American workers would take a pay cut, or stockholders accept a smaller profit, the trade deficit would go away. But it isn’t a “debt” that is owed to anyone; it is an imbalance between the amount to goods imported versus exported.
It does? Why? I would have thought Denmark would be happy about it. It means that we’re buying more stuff from overseas than people overseas are buying from us. Perchance some of what we are buying is from Denmark–you know, Viking helmets or wooden shoes or something.
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The relevant accusation would be that foreigners are subsidizing our trade deficit, not paying off our national debt. The only way that a country can sustain a trade deficit over time is either through a net foreign investment inflow or foreign central bank intervention in currency markets. Otherwise your currency depreciates, making imports less competitive, and exports more competitive, until the trade deficit goes away.
Our net foreign investment inflow is very real–foreigners invest more in America than Americans do overseas. But it’s voluntary. People like to invest here because our economy kicks butt. (Relatively, anyway.) However, I do believe that on certain occasions the United States has asked foreign central banks to intervene and prop up the dollar during times when it was depreciating. I’m no expert on this. It may well have happened in 1985. But if it did, it was an aberration–the normal pattern is that foreigners voluntarily subsidize our trade deficit via investment. And it has little to do with our national debt.
The worry is that the deficit is a disaster waiting to happen, and the size of the US economy means that if the US sinks, we would all sink. But you’re saying there’s no need to fret. But increasing foreign investments means an increasing size of your economy is owned by non-us investors – is that not a possible problem in itself?
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:rolleyes: Viking helmets are obviously made of sturdier material than cowboy hats, so I can see how you would need more Viking hats:rolleyes:
About 16% of US Federal debt is held by foreigners. See
Federal Debt Held by Foreign & International Investors
Federal Government Debt: Total Public Debt
It is very interesting to compare the Federal Government: Personal Income Tax Receipts with the U.S. Government Income Payments on Foreign Assets in U.S.. How much out of every tax dollar you pay is going to pay interest? How much of this is being sent to Danish dentists, so they can buy the stuff that would otherwise be sold to you?
In Canada, about 20% of federal revenue goes to make interest payments. Pay $1 tax, get 80 cents in services.
The trade deficit is balanced by investments … when you pay a foreigner $1, he can either keep it, or sell it to a longer term investor in exchange for money he can spend (in this case, Danish Kroner). Whoever winds up holding the money then gets to make a determination of what he wants to do with it … spend it on goods made in America? Bonds? Stocks? Chocolate factories in Pennsylvania? Beachfront property in California? These decisions give foreigners something of a say in how American things are priced that you might not wish them to have … how comfortable are you with the idea that your mortgage rate is determined by the whims of a Danish dentist?
It is fairly uncommon for sovereign nations to repudiate debt owed in their own currencies - it is much more usual for them to instruct their Central Bank to “print” the money. Then you get hyperinflation … think Germany in the 1920’s … and what happened next.
Are you sure that the Danish commentator said that foreigners “paid off” the U.S.'s debt?
Although he ran primarily on a platform of fiscal responsibility, denouncing his predecessor Jimmy Carter for having run up the national debt, Reagan’s administration ran up the largest deficits in U.S. history. When Reagan left office the national debt was roughly four times what it had been when he came into office; his administration had bugeted and spent roughly three times as much money that it didn’t take in from taxes as all previous administrations since the founding of the republic combined. Debt had become far and away America’s biggest export.
When Reagan was first elected, the U.S. was the world’s largest creditor. By the end of his second term the U.S. was far and away the world’s largest debtor. What investors–including foreign investors, especially from such places as Great Britain, Japan and Denmark–did when they bought bonds and T-bills was enable the U.S. government to continue servicing the debt it had already run up. Unable to pay the interest on its existing debt through taxes, the U.S. government sold more bonds and T-bills so that it would have the money to continue paying its interest obligations.
Yes, the U.S. could voluntarily default on its debt obligations. It would, thereby, plunge countless individuals and institutions, including some foreign governments, into bankruptcy, put the world economy into chaos, and forever destroys its credibility both at home and abroad.
Well, yes and no. During the 1980’s there was a lot of concern that the Japanese were “buying up our country”. Their bubble burst in 1989. During the 1990’s, the trade deficit/capital inflow continued, but Americans generally stopped worrying about it, because (a) the inflow was coming from many different countries, as opposed to primarily from Japan; and (b) the economy boomed, so who cared?
Since 2000, our economy has limped, but the capital inflow has surged again, to about $400 billion per year. If this keeps up much longer it might become a concern again. It might be worthwhile to open up a GD thread, “Can the United States sustain its huge trade deficits?” For GQ purposes, I’d just emphasize that the deficit/inflow is the result of billions of individual choices–we buy your stuff, you invest in our companies–and not the result of some nefarious government plot.
THe original question was about the national debt. Each year in which the U.S. government fails to balance its budget and has to borrow money to operate, it runs at a deficit. The cumulative sum of these federal deficits which have not been paid off is the national debt.
“Trade deficits” arise when the U.S., on balance, imports more than it exports. The nature and size of these deficits are an important economic issue, but they are a seperate issue from the federal deficit.
Doesn’t this seem like a self-perpetuating cycle to you? What I mean is, if the government is unable to pay debts through taxes alone then they have to sell more bonds and T-bills. From what I understand, selling bonds, etc is the same as me taking out a loan from my bank. So the government would put itself further and further into debt just to pay the ever increasing interest bills. Is there something I’m missing here in this apparently flawed economic system? Also, how can we be considered one of the most stable countries economically when we are unable to keep up with interest payments (not to mention required government services)? I guess it would be BECAUSE of those required services that we are unable to pay the bills but that just reiterates my point further.
What your missing is the size of the deficit relative to the economy. The projected deficit for 2004 is 2.8% of GDP. This is very much in line with historical averages. Considering this is coming off a recession this is a pretty low percentage. In 1983 the percentage was 6% and in 1992 it was 4.7%. The recessions were worse back then so the deficits were bigger. Through a combination of economic growth and tighter spending the deficit could be eliminated pretty quickly if there was the political will to do so.
It is troubling to many that the interest payments on the debt are as large as they are, somewhere around $300 billion a year. One reason commonly given for paying down the debt when we had surpluses (rather than having a tax cut) was that it would reduce interest payments, thereby allowing the government to shift that money into paying for services. This would stabilize or even shrink the overall budget and keep taxes level or possibly reduce them. Going deeper into debt would have the opposite effect.
Whether paying down the debt is a good idea or not is for GD. As it stands, however, the US is stable for reasons already given. It would take an enormous catastrophe to make the US renege on its interest payments and such a catastrophe would undoubtedly take down the world economy in any case. As a solid source of interest - tax-free, too - US bonds are a good investment for almost everyone.
Whether we should go further into debt is also a GD subject. Historically, economists have argued that government debt has a stimulating effect on the economy. I’ve seen other opinions today, but I’ve seen no groundswell of economists saying that the good of the economy depends on lowering the debt during what is a weak economy.
Right now, the debt is indeed a self-perpetuating cycle. It does not have to be in the future. How (or if) we break the cycle will be (or should be) a major factor in the coming presidential campaign, because every statement that involves spending, programs, defense, taxes, or the economy will be indirectly a statement on the cycle.
Thanks for clearing that up for me Exapno. I knew I could count on someone to give me a answer in plain english without a lot of technical jargon. 
I was wondering if you could elaborate on one thing though. How exactly does government debt stimulate the economy? Seems to me like it would have the opposite effect.
Because all money spent by the government ends up in someone’s pocket.
Didn’t H. Ross Perot say that 75% of the National Debt were loans/notes/bills/bonds/etc. payable in 5 years?
I wouldn’t put to much faith in anything Ross Perot said. That guy was crazy.