Where does the money for the budget come from in times of deficit?

February 6, 2006 8:47 AM

This may seem profoundly easy to some of you, but I'm perplexed.

So I see that The President is asking for $2.77 trillion dollars for a budget. My question is this - if we're in a deficit where does the money come from? Yes, I know we all pay taxes and that sort but still - wouldn't that go to pay the current deficit?

posted by heartquake to law & government (20 comments total)

The Bureau of the Public Debt borrows the money in the form of Treasury bills, notes, and bonds.
posted by grouse at 8:49 AM on February 6, 2006

They borrow it from you. Ever buy a savings bond?
posted by duck at 8:54 AM on February 6, 2006

First of all, be sure you understand the difference between "debt" and "deficit". Debt is the total money owed. Deficit is the shortfall for a given period of time. Therefore, if I make $50K this year, but spend $54K, I have a $4K deficit for this year. My debt, meanwhile, would be that $4K plus whatever I already owed on my mortgage and credit cards.
posted by orange swan at 8:54 AM on February 6, 2006

Thank you very much smart people :)
posted by heartquake at 9:02 AM on February 6, 2006

they either print the money ... or print ious promising to print the money at a later date

as long as people believe the money's worth something, it works
posted by pyramid termite at 9:22 AM on February 6, 2006

BTW, a lot of that borrowed money will also come from other countries - China, etc. [Which puts us in a very precarious position...]
posted by lilboo at 9:25 AM on February 6, 2006

they either print the money

These days, the Federal Reserve prints money, not the Treasury.
posted by grouse at 9:29 AM on February 6, 2006

These days, the Federal Reserve prints money, not the Treasury.

a classic case of the right hand paying no attention to what the left is doing ...
posted by pyramid termite at 9:35 AM on February 6, 2006

China is by far the biggest backer of American debt as lilboo suggested.
posted by JJ86 at 9:55 AM on February 6, 2006

Mostly, they hold auctions where they sell newly-created Treasury bonds. They spend the money thus raised, and are in debt to the buyers of the bonds. Lots of people buy these, all over the world. Some large and growing portion of the buyers are indeed foreign central banks of countries that seem to have nothing better to do with all their money, such as Japan and China.
posted by sfenders at 10:20 AM on February 6, 2006

"China is by far the biggest backer of American debt"

This is actually not true...Japan owns nearly three times as much US debt as China...and whether that puts us in a precarious position is not clear. In a sense, our economic interests are aligned. For the cases where the owner of the debt is a clear ally, understanding the risks is easy. China is a much tougher call.
posted by cyclopz at 12:17 PM on February 6, 2006

BTW, a lot of that borrowed money will also come from other countries ... Which puts us in a very precarious position...

Not really. When you're purchasing a Treasury Bond, you're essentially making a bet that the U.S. government will come through for you. You're betting that the US of A is going to continue to be the most financially stable resource in the world and the safest place to put your yen, yuan, euros, etc.

So, you have a vested interest in making sure the U.S. doesn't go tits up like a Third World nation. This may mean that you continue a pattern of favorable trade with the U.S. (because you need the US to pay you back somehow), or that you don't undertake significant military action (because you need the US to pay you back and not say 'fuck you' with missiles).

Tons of US national debt is a Very Bad Thing. But the fact that a country like China holds a lot of the paper is a Not Terrible Thing.
posted by frogan at 1:17 PM on February 6, 2006

What I want to know is what's going to happen with the current account defecit (pdf)? The Economist has published many good articles related to it (login required, so I won't bother linking), but I'm still quite perplexed. Are we (Americans) in deep shit or what? Buy gold?
posted by MarkO at 1:41 PM on February 6, 2006

Are we (Americans) in deep shit or what?

Define "deep shit." Barring an unforeseen breakthrough, is it going to be harder on the average American? Yeah, probably a little, and moreso if you're reliant on social assistance (Social Security, medical, etc). Study hard, kids!

Are we headed for a Depression? Probably not.

Buy gold?

Oh hell no. If you're young, get an education. Then buy a conservative mix of bonds and a wide variety of index funds.
posted by frogan at 3:00 PM on February 6, 2006

If you recall the "lockbox" discussion about Social Security in the 2000 campaign, this is because Congress decided one way to help balance the budget was by borrowing from the "sacrosanct" Social Security Trust Fund. One day we'll have to repay that money from the general fund, in order to keep Social Security solvent, which is why there was another tussle about it last year, mentioned in the State of the Union address.

We don't really need to print money any more, to make more of it. The money supply is measured typically by four figures, known as M0, M1, M2, and M3. M0 is the total of all printed money. The others refer to certain amounts of money such as bank loans that are available to the economy but not as liquid.

The management of these various money supplies is the foundation of Keynesian economics, which is in conflict with other approaches circulating today and arguably in decline. In the Keynes model, deficit spending is a key tool available to governments struggling out of a recession -- but the flip side is that in the long run, deficit spending is inflationary. The job of the Federal Reserve in recent years is primarily seen as to manage the available credit, as a counterbalance of inflationary forces, trying to keep both inflation and interest rates (or at least one of them) low. This is why all the concern about the retirement of Alan Greenspan, who has by all accounts been masterful (or perhaps lucky) at that task.
posted by dhartung at 10:04 PM on February 6, 2006

I've been reading about this stuff lately, but I am no economist and I'm not sure what level of credence to give each source, but here goes:

The government is going to quit telling us the M3 value, in (I think) March. Some economists find this cause for concern.

The Iranian oil bourse is scheduled to open (I believe) March 20th or thereabouts. When/if it does open as scheduled, the option to trade oil in Euros (and possibly other currencies) rather than the current standard of US dollars, will be available. (And some posit that we really went after Saddam because he was starting to trade oil for Euros...).

If US dollars are no longer required for oil trading, then various countries can choose to reduce their US dollar reserves and switch to Euros, or whatever. This is bad for us because when they start selling that stuff, the dollar slides further and like anything, mass selling could lead to panic, etc.

A totally different thing I found is a couple mentions of the fact that the US has, in the past few days, exceeded the official debt ceiling. See here and here. I don't know whether this is truly alarming, or nothing, or what. I haven't seen anythign in the major media mentioning this, and I don't know if that means anything or not. Some of the sites I was looking at related to this are a bit too much "rah rah GOLD! ZOMG gold is the best investment evar! buy gold now!!!@#!#@" for me to view them as entirely objective, but your mileage may vary.

Take all of that with a big grain of salt, but it's some stuff that I think is germane to the topic that I am keeping in mind and looking for more information on.
posted by beth at 7:00 AM on February 7, 2006

Oh hell no. If you're young, get an education. Then buy a conservative mix of bonds and a wide variety of index funds.
posted by frogan at 5:00 PM CST on February 6

What if dollars are dumped by foreign banks, causing inflation? What if demand for federal reserve bonds slows, forcing interest rate hikes in order to finance our national debt--that's very bad for bonds. With the coming retirement of the baby boom generation, could this be the perfect storm?

I'm not considering buying gold, buy I'm definitely considering inflation-protected bonds.
posted by MarkO at 10:04 AM on February 7, 2006

>this is because Congress decided one way to help balance the budget was by borrowing from the "sacrosanct" Social Security Trust Fund

Do not believe this for a moment. There is no Social Security Trust Fund, there never was, and Social Security funds were never "sancrosanct". Al Gore's idea of a "lockbox" was the most idiotic phrase ever uttered by a politician - and that is saying something.

If you were to entrust your money to a bank, and if that bank were to take your money and put it in a locked box, safe for when you ask to have it returned, why that would be safe, but it would also be stupid. Money needs to exercise, to keep strong.
posted by megatherium at 8:21 PM on February 7, 2006

Do not believe this for a moment. There is no Social Security Trust Fund, there never was

Also, 2+2=5. Do not believe those who say it is 4 for a moment. Despite all evidence to the contrary, 2+2=4 is a ridiculous liberal myth.

Al Gore's idea of a "lockbox" was the most idiotic phrase ever uttered by a politician

A word coined by the Republicans.
posted by grouse at 1:08 AM on February 8, 2006

I doubt that the Democrats have a monopoly on idiotic ideas.
posted by megatherium at 8:10 PM on February 10, 2006