USA National Debt: Will it ever matter?

Federal Deficit and National Debt: Will it ever matter?

I don’t understand the national debt and deficit. Will it ever come back to bite us in the butt?

The USA spends more money then it has every year. Congress and the federal government just keep on doing it and people keep warning that it is bad. But what will ever happen?

It sure seems like our federal government doesn’t think anything bad will ever happen because of the debt… Can anyone default on our “loans?” Who do we owe money to? And what bad scenarios are possible as a result of this enormous debt?

it can matter, but not all dedt is the dept you think of.

for example, if you put 5000 dollars in a bank the bank now is in debt 5000 dollars to you, this odviously does not hurt they bank.

sort of off topic, but I know there will come along people that can explain national debt better than someone that just took eco 101 and 102, but thats my addition: not all debt is the same inherently bad stuff you may think of as debt.

Vastly oversimplified, we owe money to all the people, institutions, and countries who loan us money, mostly through the purchase of treasury bonds. These bonds pay very high rates of interest and are very stable, because nobody expects the U.S. to default on its debt.

The real problem in the short term is that close to $300 billion of the annual budget now goes to paying just the interest on this debt. That’s $300 billion that could go toward other programs or into people’s pockets via tax cuts.

That’s why there has been such an uproar over the Bush tax cuts. It’s one thing to cut taxes when the budget is in surplus and the debt can be paid down. It’s quite another to cut taxes when the budget is in deficit. Anything beyond that simple statement is a matter for GD.

Another oversimplification: The US dollar could lose value to the point where it is no longer accepted for goods and services.

Wait - i’m confused here. Why would the dollar lose value? because the treasury has to print more to pay off the debts driving the value down? or some other reason?
I should’ve paid more attention in econ 110…

Scotcho

Exapno Mapcase,

US treasury bonds pay a low rate of interest compared to other bonds.

We still have to pay off that debt. That 300 Billion mentioned above is 300 Billion that could be used for other things. Or left in taxpayers pockets. So yes it matters – currently for about $300 Billion dollars (for perspective, Bush is asking ~1/4 of that for the latest Iraq funding).

To be clear, that ±$300 billion is debt service that is paid each year on the total amount of government debt. The $300B can be equated to just paying the minimum on your credit card bills each month (or year, as the case may be).

Many economists believe that high deficits (where government spending exceeds tax revenues) and large debts (the total amount of money owed by the US, measuring in trillions - around $3.5, but too lazy to open another browser window at the moment) lead to higher interest rates over the long term- that means higher rates on all lending, from credit cards to home mortgages.

The reason why high debt leads to higher interest rates is complex, but I guess the simplest explanation is that when Uncle Sam looks for credit, the law of supply and demand holds that the price of credit will increase. (More or less, we need to convince people, mostly foreign institutions, to buy more government bonds by making the bonds more profitable).

So, back to the OP. Do deficits and debt matter? Yes, there are 300 billion reasons why they matter a lot right now.

Could they matter a lot more in the future? Yes, but people disagree on when the “future” begins.

What I should have said was that treasury bonds have for the past couple of years paid a rate of interest that was both high in historic terms and a very good yield compared to losing money in stocks.

But, yes, overall the price you pay for the stability and certainty of treasury bonds is a lower yield than other types of bonds.

Yeah it matters. Under our previous Conservative government, Canada ran up debts to the point where 35 cents out of every tax dollar you paid went to service debt. Which means you are paying through the nose and get nothing in return. We fixed the problem over the past few years, but I think that’s exactly what Bush is trying to do here. Create a bankrupcy situation. Lower peoples’ expectations of government. If no matter what you spend, you get nothing back, then why bother with social services, etc. “Just give up” will be the line, hook, and sinker.

Bye.

It always matters.

It is no different for a country, company, or individual.

Spend more than you have, and you will become worthless.

If you spend more than you make, you end up bankrupt sooner or later. If you borrow in order to spend more than you make, then the interests payments that you have to pay each month will get larger and larger.

It will be a disaster when interest rates increase. The interest payments we now pay on our federal debt is the largest component of our federal budget, and that is with record low interest rates. If interest rates go back up over 10%, all of your income taxes will not be enough to pay the annual interest payments.

At that time, the United STates will not be able to pay the interest on all of its loans(all the extra money it is printing and all the US treasuries that it has to issue to cover the loans. At that time, gold will skyrocket in price, the dollar will tumble and maybe become worthless, inflation will skyrocket, those on fixed incomes who foolishly dont own any gold will not have enough money to pay their monthly bills which will be multiplied in price.

Our current federal budget deficit, is spending $480 billion dollars a year more than what our revenues are. Our balance of trade is another $40 billion deficit each month. That is a trillion dollars a year that we are spending that we dont have. If interest rates go back up to 10%, figure out yourself how much interest we will have to pay for each trillion that we owe. Furthermore, there is no end in sight, even bush says that he sees no end to federal budget deficits of hundreds of billions a year, and there is no end to balance of trade deficits , in fact, they are getting much worse each year as we produce less and less manufactured goods and high tech in this country. Its a time bomb with a short fuse.

OK, Susanann, now I’m confused. I was not aware that the majority of US debt was of variable interest rates. True, if interest rates do go back up to 10%, then any borrowing by the gov from that point will be at that rate, but all previous debt is paid at the much lower rate that it was borrowed at. Am I missing something?

hmm…nope. Still don’t get it.

I think this will be much easier to understand in 20 years after either the US has “gone bankrupt” or not.

But please keep explaining it and I will keep trying to understand.

True, but we have to refinance our old treasuries each and every month at current rates. All U.S. treasuries have a due date. Treasuries are sold in 30 day, 1, 2, 5, 10 year maturities, etc. When those old bonds expire, that entire debt must be paid. Treasuries are continually expiring each month from various years in the past.

If we are not having a budget surplus(in fact we have a $480 billion deficit) then we must borrow to pay off the treaury, and if we have deficit spending we must borrow at the going rate to pay off the expiring treasury.

If no one wants to loan more money to the United States, then it will default, since it cant borrow the money to pay off the expiring debt, and since it has no money.

It is like borrowing more and more money from more and more credit cards to pay off the old balances you have on old credit cards, at variable rates. You keep borrowing more and more at higher and higher rates to pay the monthly amout due from other cards. Sooner or later, you wont be able to get enough new credit cards to pay the monthly balances on the old ones, and then if you are spending more than you make each month, you wont have any cash to pay the bills either.

Borrowing a trillion extra dollars each year, will get you into trouble, even if people will keep lending you money, your interest payments keep going up. If interest rates rise, you get into deep trouble much faster.

As a Canadian, I think this is one of the scariest issues on our (southern) horizon: if the US dollar implodes, for sure Canada will be caught in the disturbance.

Canada? Actually, the entire financially-connected part of the world will go down if the dollar goes. Back in that brief, shining moment when the USA had a Federal budget surplus, there was the beginning of a panic in the world of high finance. Why was there a panic possible? Because the possiblity now existed that the USA might actually STOP ISSUING new bonds! That’s right, uncounted fatcats were in a tizzy that the USA would stop digging itself further and further into debt because they had made their careers of parasitism.

So does anyone think the shyt will actually hit the fan on this issue any time soon?