I don't get debt.
January 17, 2007 8:27 AM Subscribe
Why is the U.S. allowed to have a debt of $8,681,815,012,958.68 (according to the U.S. National Debt Clock)?
From reading the Debt Clock FAQ, I understand that “the largest slice of the pie, over 40%, is owed to the Federal Reserve Bank and to other government accounts; that is, this part of the Debt is owed by one part of the government to another. The remaining 60% of the Debt, roughly $3.3 trillion, is privately held.”
Three trillion does not seem like an insignificant number. Is the U.S. expected to pay this back? Is anyone going to be held accountable? Who is going to hold the U.S. accountable?
Since the debt is only growing, would I be wrong to assume that no one is getting paid back?
(this is inspired by the IMF question earlier today, if other countries need to be “aided” with their debt, why not us?)
From reading the Debt Clock FAQ, I understand that “the largest slice of the pie, over 40%, is owed to the Federal Reserve Bank and to other government accounts; that is, this part of the Debt is owed by one part of the government to another. The remaining 60% of the Debt, roughly $3.3 trillion, is privately held.”
Three trillion does not seem like an insignificant number. Is the U.S. expected to pay this back? Is anyone going to be held accountable? Who is going to hold the U.S. accountable?
Since the debt is only growing, would I be wrong to assume that no one is getting paid back?
(this is inspired by the IMF question earlier today, if other countries need to be “aided” with their debt, why not us?)
People are given loans if the creditors believe the people will be able to pay it back. Corporations are given loans if the creditors believe the corporations will be able to pay it back. Governments are given loans if the creditors believe the governments will be able to pay it back.
Yes, the US is expected to pay it back. And it's not like "$3.3 trillion, privately held" is a single loan. It's the sum of numerous loans from numerous people and organizations. Even if the overall debt is growing, the individual loans are being paid back.
In 2006, I finished paying off my student loans. I also took out an auto loan. My overall debt increased in 2006, but that doesn't mean I wasn't paying back any of the individual loans which made up my debt.
posted by DevilsAdvocate at 8:35 AM on January 17, 2007
Yes, the US is expected to pay it back. And it's not like "$3.3 trillion, privately held" is a single loan. It's the sum of numerous loans from numerous people and organizations. Even if the overall debt is growing, the individual loans are being paid back.
In 2006, I finished paying off my student loans. I also took out an auto loan. My overall debt increased in 2006, but that doesn't mean I wasn't paying back any of the individual loans which made up my debt.
posted by DevilsAdvocate at 8:35 AM on January 17, 2007
They are most definitely getting paid back. The debt is in the form of all of those x-month T-Bills and x-year bonds, which the government has never defaulted on.
The problem is that the government is paying them back in part by issuing new debt , i.e. borrowing from one person to pay a debt to another.
There are a few ways to pay it back, but the basic idea is we probably have to spend less and not lower taxes for a looooong time to do that.
posted by Pastabagel at 8:37 AM on January 17, 2007
The problem is that the government is paying them back in part by issuing new debt , i.e. borrowing from one person to pay a debt to another.
There are a few ways to pay it back, but the basic idea is we probably have to spend less and not lower taxes for a looooong time to do that.
posted by Pastabagel at 8:37 AM on January 17, 2007
Every developed and developing nations have debts. I won't go into specifics, but being in debt is a good thing because it encourages the economy to work so the country can pay them back. In our case, however, 8 trillion is quite a bit. I won't go into politics as to how much the war has set us back...this amount is accumulating and the interest is accumulating faster. Now i am not making you feel better, but since you asked, it's the sons and daughters of the baby boomers that will be accountable for this debt. The recent legislation that passed by the democrats(first legislation since the new congress took over I believe) is allowing us to pay as you go, as in, instead of paying the entire amount at once ten years from now which may include the interest accumulated till then, we pay off the debt little by little so we're not paying hundreds of millions of interest at the end.
As far as privately held debt, I am not sure about the exact figures, but if you roughly divide it up by the population, while babies and old people don't get in debt, it comes out to be 10,000 bucks a person. There are student loans up to the neck for some of our generation(babyboomers' children).
ok, going back to the beginning, the debt we owe to another country...I believe this amount includes the trade deficit which they count as debt. which is an ongoing issue for decades, actually. Because of this debt, we are going over seas to force other countries to buy our goods when they don't need it, just so we can make up for the debt. The demand for cheaper goods is high in the states, so we buy, for example, tons of Chinese goods, but the Chinese don't need or can't afford our goods...so we tell they to buy our tobacco and sell'em for cheap when China probably has richer resources than we do(since we've been using our resources to develop for the past couple of centuries).
The point is, we HAVE to pay the debt, and they do not disappear. It's bad not to be in debt because it puts us in a bad position with other countries, but at the same time, it's bad for us to be in 8.5 trillion dollars in debt, especially the majority of the debt wasn't caused by 300million people.
Hope I didn't confuse you.
posted by icollectpurses at 8:48 AM on January 17, 2007
As far as privately held debt, I am not sure about the exact figures, but if you roughly divide it up by the population, while babies and old people don't get in debt, it comes out to be 10,000 bucks a person. There are student loans up to the neck for some of our generation(babyboomers' children).
ok, going back to the beginning, the debt we owe to another country...I believe this amount includes the trade deficit which they count as debt. which is an ongoing issue for decades, actually. Because of this debt, we are going over seas to force other countries to buy our goods when they don't need it, just so we can make up for the debt. The demand for cheaper goods is high in the states, so we buy, for example, tons of Chinese goods, but the Chinese don't need or can't afford our goods...so we tell they to buy our tobacco and sell'em for cheap when China probably has richer resources than we do(since we've been using our resources to develop for the past couple of centuries).
The point is, we HAVE to pay the debt, and they do not disappear. It's bad not to be in debt because it puts us in a bad position with other countries, but at the same time, it's bad for us to be in 8.5 trillion dollars in debt, especially the majority of the debt wasn't caused by 300million people.
Hope I didn't confuse you.
posted by icollectpurses at 8:48 AM on January 17, 2007
There are also countries that are paying us back on loans. I'm not sure what the amount is of these outstanding loans but maybe it is enough to balance out the debts we have?
I remember hearing last month that Britain finally finished paying their WW2 debt to us.
posted by JJ86 at 8:51 AM on January 17, 2007
I remember hearing last month that Britain finally finished paying their WW2 debt to us.
posted by JJ86 at 8:51 AM on January 17, 2007
China holds a ton of of our debt, which we must pay back. If they ever suspect that we will not be able to pay them back, and they decide to cash in their treasury bonds immediately, we'll be in really big trouble. Our economy would tank and we'd sink into a depression. The only reason individuals and foreign governments buy our bonds is because there is an expectation that when the bonds mature, the gov't will be able to meet its obligations and pay up. If people lose faith, and no longer trust that the government can pay up, no bonds will be sold and that means that the gov't won't have any money to finance itself or pay back it's creditors.
posted by HotPatatta at 9:00 AM on January 17, 2007
posted by HotPatatta at 9:00 AM on January 17, 2007
I just wanted to point out that this statement
I understand that “the largest slice of the pie, over 40%, is owed to the Federal Reserve Bank and to other government accounts; that is, this part of the Debt is owed by one part of the government to another.
is not entirely true. The Federal Reserve Bank is actually several banks some of which are privately held. Try to find all of the owners, I bet you can't!
posted by crewshell at 9:14 AM on January 17, 2007
I understand that “the largest slice of the pie, over 40%, is owed to the Federal Reserve Bank and to other government accounts; that is, this part of the Debt is owed by one part of the government to another.
is not entirely true. The Federal Reserve Bank is actually several banks some of which are privately held. Try to find all of the owners, I bet you can't!
posted by crewshell at 9:14 AM on January 17, 2007
If they ever suspect that we will not be able to pay them back, and they decide to cash in their treasury bonds immediately, we'll be in really big trouble. Our economy would tank and we'd sink into a depression.
Not attempting to steal the question, but why would this cause us to tank and go into a depression? Is there any precedent for this occurring? I'm not doubting or meaning to debate, but I've heard this will be the outcome if China collects before, but I've never heard the specifics why it would actually destroy the USA.
posted by jmd82 at 9:16 AM on January 17, 2007
Not attempting to steal the question, but why would this cause us to tank and go into a depression? Is there any precedent for this occurring? I'm not doubting or meaning to debate, but I've heard this will be the outcome if China collects before, but I've never heard the specifics why it would actually destroy the USA.
posted by jmd82 at 9:16 AM on January 17, 2007
The only reason individuals and foreign governments buy our bonds is because there is an expectation that when the bonds mature, the gov't will be able to meet its obligations and pay up.
The belief that US bonds are not going to default is certainly a necessary condition for foreign central banks to buy them up, but it's not really much of a reason for them to do so, given their yield and the expected decline of the US dollar. The most talked-about reason for China buying up US dollar assets is to keep their currency from rising vs. the dollar and everyone else who pegs their currency to the dollar, so that they can continue to export more and more stuff.
why would this cause us to tank and go into a depression?
If the foreign holders of US bonds stopped buying so many of them (actually selling wouldn't be necessary to cause some major disruptions), the first effect would be that US interest rates would rise, which would probably be harmful to its economy. But whatever the mechanism, it would force the US as a whole to stop spending so much more than its income.
posted by sfenders at 9:24 AM on January 17, 2007
The belief that US bonds are not going to default is certainly a necessary condition for foreign central banks to buy them up, but it's not really much of a reason for them to do so, given their yield and the expected decline of the US dollar. The most talked-about reason for China buying up US dollar assets is to keep their currency from rising vs. the dollar and everyone else who pegs their currency to the dollar, so that they can continue to export more and more stuff.
why would this cause us to tank and go into a depression?
If the foreign holders of US bonds stopped buying so many of them (actually selling wouldn't be necessary to cause some major disruptions), the first effect would be that US interest rates would rise, which would probably be harmful to its economy. But whatever the mechanism, it would force the US as a whole to stop spending so much more than its income.
posted by sfenders at 9:24 AM on January 17, 2007
Why is the U.S. allowed to have such a huge debt? It's simple, really. The United States is (although by not quite as large a margin in the last twenty-odd years) the world's biggest consumer nation. The U.S. consumes products from all over the world, and without American consumption, the entire global economy would collapse. The Chinese economy is built almost entirely upon sales to the U.S. This is why the crushing debt levels are ignored and why debts are not called in. It was already pointed out that the U.S. government makes all of its interest payments on time by borrowing more.
Rising stars like China and the E.U. are starting to build economic arrangements separate from the United States. If they can build an expansive enough system outside of U.S. control, they can pull the plug on the U.S. by calling in all of the loans.
This is not likely to happen any time soon.
posted by gaiamark at 9:27 AM on January 17, 2007
Rising stars like China and the E.U. are starting to build economic arrangements separate from the United States. If they can build an expansive enough system outside of U.S. control, they can pull the plug on the U.S. by calling in all of the loans.
This is not likely to happen any time soon.
posted by gaiamark at 9:27 AM on January 17, 2007
Response by poster: Ok, so the CIA Factbook shows that many countries have debts nearly as big, the U.K. at 7 trillion and Germany at 3 trillion.
We're all just shuffling it around. Like rearranging the deck chairs on the Titanic. Or playing musical chairs on the Titanic. Or something.
And as long as everyone is willing to play along we'll be fine?
posted by bobobox at 9:34 AM on January 17, 2007
We're all just shuffling it around. Like rearranging the deck chairs on the Titanic. Or playing musical chairs on the Titanic. Or something.
And as long as everyone is willing to play along we'll be fine?
posted by bobobox at 9:34 AM on January 17, 2007
The Gov, unlike us, can print money any time it wants. It COULD, technically, expand the money supply, which ONLY it controls and pay it all off at once.
What would this do?
It would flood the economy with dollars, but no new products or services, hence, the dollars would be worth less. That's kind of how inflation occurs. That is also one reason that the Feds control the growth in the money supply, which is called monetary policy.
The debt is guaranteed with the "full faith and credit of the US Government", and all that really means is that they will pay it back in dollars some day.
The destruction wrought by such an act as printing enough money to pay it off would probably be large, if I can be guilty of galactic understatement. Money works because we all agree to pretend it means something. It is a balloon filled with the air of confidence.
Wierd thing... if I borrow money for an enterprise, I employ it to make more and that is the engine that allows me to retire it. If the Feds borrow money, and they use it to stimulate the economy to produce more revenue ACCOMPANIED BY A CORRESPONDING INCREASE IN AVAILABLE GOODS AND SERVICES, they make more money to retire the debt WITHOUT DEFLATING THE VALUE OF THE DOLLAR.
The question is... is the money that the government borrows employed in such a fashion? In several senses, I think the answer is NO. Buying weapons, weapon systems, wars, etc. (admittedly a legitimate function of government) adds nothing to the amount of available goods and services. Investing the same money in industry, etc. DOES, either immediately or in the future. This is the source of a dichotomy called 'guns or butter', which occupies the time of lots of economists.
All that said, I find the monster of national debt impossible to completely grasp. There is soooo much knowledge required to understand it, I wonder if anyone really does?
posted by FauxScot at 9:53 AM on January 17, 2007 [1 favorite]
What would this do?
It would flood the economy with dollars, but no new products or services, hence, the dollars would be worth less. That's kind of how inflation occurs. That is also one reason that the Feds control the growth in the money supply, which is called monetary policy.
The debt is guaranteed with the "full faith and credit of the US Government", and all that really means is that they will pay it back in dollars some day.
The destruction wrought by such an act as printing enough money to pay it off would probably be large, if I can be guilty of galactic understatement. Money works because we all agree to pretend it means something. It is a balloon filled with the air of confidence.
Wierd thing... if I borrow money for an enterprise, I employ it to make more and that is the engine that allows me to retire it. If the Feds borrow money, and they use it to stimulate the economy to produce more revenue ACCOMPANIED BY A CORRESPONDING INCREASE IN AVAILABLE GOODS AND SERVICES, they make more money to retire the debt WITHOUT DEFLATING THE VALUE OF THE DOLLAR.
The question is... is the money that the government borrows employed in such a fashion? In several senses, I think the answer is NO. Buying weapons, weapon systems, wars, etc. (admittedly a legitimate function of government) adds nothing to the amount of available goods and services. Investing the same money in industry, etc. DOES, either immediately or in the future. This is the source of a dichotomy called 'guns or butter', which occupies the time of lots of economists.
All that said, I find the monster of national debt impossible to completely grasp. There is soooo much knowledge required to understand it, I wonder if anyone really does?
posted by FauxScot at 9:53 AM on January 17, 2007 [1 favorite]
And as long as everyone is willing to play along we'll be fine?
For a while, yes, but eventually things will have to change. Either there will be a gradual adjustment to something more normal or else something bad will happen. It may go on for many years before we find out how it ends. But it certainly will end eventually.
The Vice Chairman of the Federal Reserve Board had this to say:
Although views differ as to when a correction will take place, nearly all agree that the current trajectory of the U.S. current account deficit is unsustainable. This consensus reflects the simple logic that the deficit is causing the net indebtedness of the U.S. economy to rise more rapidly than U.S. income. [[...]] If current account deficits continue to boost the negative international investment position, eventually the cost of servicing that position, which so far has been quite modest, would rise to an unsustainable level.
...
Some of the developments that may have supported the expansion of the U.S. current account deficit might reverse themselves--foreign domestic demand could recover [[the rest of the world could start spending like Americans]], U.S. private saving rates could rise [[or Americans could stop spending so much money]]. And some of the factors that boosted the U.S. trade deficit, such as higher productivity growth or financial innovations that support greater spending, may show up more fully in foreign economies [[maybe "mortgage equity withdrawal" will catch on in Asia]]. Notably, all of these developments would take time to restrain the deficit, and any one of them, by itself, might have only a small effect. A final possibility is that, as U.S. deficits widen and foreign claims on the United States mount, actions by investors to re-balance their accumulation of assets could lead to changes in exchange rates [[perhaps some inflation in the US would help]], interest rates, and other asset prices that might contribute to a reversal of the deficit.
Being the Vice Chairman, he was pretty optimistic about the Fed's ability to make it all work out okay. Watch out for those adjustments.
posted by sfenders at 10:29 AM on January 17, 2007
For a while, yes, but eventually things will have to change. Either there will be a gradual adjustment to something more normal or else something bad will happen. It may go on for many years before we find out how it ends. But it certainly will end eventually.
The Vice Chairman of the Federal Reserve Board had this to say:
Although views differ as to when a correction will take place, nearly all agree that the current trajectory of the U.S. current account deficit is unsustainable. This consensus reflects the simple logic that the deficit is causing the net indebtedness of the U.S. economy to rise more rapidly than U.S. income. [[...]] If current account deficits continue to boost the negative international investment position, eventually the cost of servicing that position, which so far has been quite modest, would rise to an unsustainable level.
...
Some of the developments that may have supported the expansion of the U.S. current account deficit might reverse themselves--foreign domestic demand could recover [[the rest of the world could start spending like Americans]], U.S. private saving rates could rise [[or Americans could stop spending so much money]]. And some of the factors that boosted the U.S. trade deficit, such as higher productivity growth or financial innovations that support greater spending, may show up more fully in foreign economies [[maybe "mortgage equity withdrawal" will catch on in Asia]]. Notably, all of these developments would take time to restrain the deficit, and any one of them, by itself, might have only a small effect. A final possibility is that, as U.S. deficits widen and foreign claims on the United States mount, actions by investors to re-balance their accumulation of assets could lead to changes in exchange rates [[perhaps some inflation in the US would help]], interest rates, and other asset prices that might contribute to a reversal of the deficit.
Being the Vice Chairman, he was pretty optimistic about the Fed's ability to make it all work out okay. Watch out for those adjustments.
posted by sfenders at 10:29 AM on January 17, 2007
I don't really get it either, and part of the problem is that the "answer" depends on who you ask...
article 1...
article 2...
article 3...
Even when they agree, they disagree. It's a mess. I was looking for a particularly good (to me) article by some economist that explained debt policy as a valid practice of "borrowing on the future" but I can't find it. Anyway it all boils down to whether you're an optimist or a pessimist, I think. I personally like the concept of functional finance, which renders the size of the national debt moot. But I'm not an economist, and even if I were, I wouldn't be able to predict the future.
posted by Chris4d at 10:44 AM on January 17, 2007
article 1...
article 2...
article 3...
Even when they agree, they disagree. It's a mess. I was looking for a particularly good (to me) article by some economist that explained debt policy as a valid practice of "borrowing on the future" but I can't find it. Anyway it all boils down to whether you're an optimist or a pessimist, I think. I personally like the concept of functional finance, which renders the size of the national debt moot. But I'm not an economist, and even if I were, I wouldn't be able to predict the future.
posted by Chris4d at 10:44 AM on January 17, 2007
The spending of the nation mirrors the spending of it's citizens...
it's no ironic mistake that the average person is in personal debt about equivalent to their share of the national debt. (which is around $30k i believe)
posted by emptyinside at 11:03 AM on January 17, 2007 [1 favorite]
it's no ironic mistake that the average person is in personal debt about equivalent to their share of the national debt. (which is around $30k i believe)
posted by emptyinside at 11:03 AM on January 17, 2007 [1 favorite]
The Federal Reserve Bank is actually several banks some of which are privately held. Try to find all of the owners, I bet you can't!
Been hitting the trilateral memos again?
posted by Kwantsar at 12:13 PM on January 17, 2007
Been hitting the trilateral memos again?
posted by Kwantsar at 12:13 PM on January 17, 2007
congress authorizes the debt limit, and periodically reauthorizes higher debt limits.
your question reminded me of a classic op-ed written by herbert stein, an economist in the nixon administration, who recommended that just this one time, the u.s. should default on all its debt and start anew, promising never to do it again. the op-ed was published on an april 1.
posted by bruce at 1:02 PM on January 17, 2007
your question reminded me of a classic op-ed written by herbert stein, an economist in the nixon administration, who recommended that just this one time, the u.s. should default on all its debt and start anew, promising never to do it again. the op-ed was published on an april 1.
posted by bruce at 1:02 PM on January 17, 2007
It's worth knowing that in order to issue debt, in the form of Treasury notes, bills, and bonds, the Treasury has to find a buyer for those notes, bills and bonds.
The Treasury might say, "If you give me $1 today, I will give you $1 back in 2016." No one steps up at the auction of that security. So instead, they say "If you give me $1 today, I will give you $1.63 in 2016." (That boils down to a 5 per cent per annum interest rate.) Some person thinks to herself, hey, that's a pretty good deal. So she hands over her $1. Suddenly the Treasury possesses $1 that it did not possess before; and it has accrued $1.63 of (future) debt, payable in 2016.
Now if you think that's irresponsible of the U.S., let's look around the world. Russia does the same sort of thing. But because of the perceived lack of stability of Russia's ruble and Russia's government, they have to offer 2.83 rubles in 2016 (11% interest) to come away with 1 ruble today.
And yet, people still flock to the US Treasury, not the Russian Central Bank, because the securities the US Treasury offers are perceived to be the safest and most stable haven for money that exists in the world today.
The Treasury, in theory, hands that dollar over to a US Gov't that spends that money in ways that serve to grow our economy. Therefore, the debt, while growing in absolute terms, will shrink in real value over time owing to inflation. It will also come to make up a smaller percentage of GDP, as the GDP expands.
In theory the US could repudiate all their debt and say to foreigners and domestic investors, "You want it? We're armed; come and get it from Fort Knox - if you think you can." The result of this is unknown, but it would ruin the United States and probably the rest of the world along with it, as international credit disappeared overnight.
The real way that the world would hold the US to account would be to refuse to buy Treasuries at their current rate, forcing the rates on T's to go up in order to find buyers. Since the U.S. has never defaulted even once on a Treasury payment, and doesn't look to be in danger of doing so, the market simply does not permit this to occur at this time. Frankly, even if the United States started inflating its currency right now to pay down its debt (as some above have suggested) the worldwide inflation that resulted might well allow US Treasuries to remain the most secure investment around for quite some time.
posted by ikkyu2 at 1:28 PM on January 17, 2007 [1 favorite]
The Treasury might say, "If you give me $1 today, I will give you $1 back in 2016." No one steps up at the auction of that security. So instead, they say "If you give me $1 today, I will give you $1.63 in 2016." (That boils down to a 5 per cent per annum interest rate.) Some person thinks to herself, hey, that's a pretty good deal. So she hands over her $1. Suddenly the Treasury possesses $1 that it did not possess before; and it has accrued $1.63 of (future) debt, payable in 2016.
Now if you think that's irresponsible of the U.S., let's look around the world. Russia does the same sort of thing. But because of the perceived lack of stability of Russia's ruble and Russia's government, they have to offer 2.83 rubles in 2016 (11% interest) to come away with 1 ruble today.
And yet, people still flock to the US Treasury, not the Russian Central Bank, because the securities the US Treasury offers are perceived to be the safest and most stable haven for money that exists in the world today.
The Treasury, in theory, hands that dollar over to a US Gov't that spends that money in ways that serve to grow our economy. Therefore, the debt, while growing in absolute terms, will shrink in real value over time owing to inflation. It will also come to make up a smaller percentage of GDP, as the GDP expands.
In theory the US could repudiate all their debt and say to foreigners and domestic investors, "You want it? We're armed; come and get it from Fort Knox - if you think you can." The result of this is unknown, but it would ruin the United States and probably the rest of the world along with it, as international credit disappeared overnight.
The real way that the world would hold the US to account would be to refuse to buy Treasuries at their current rate, forcing the rates on T's to go up in order to find buyers. Since the U.S. has never defaulted even once on a Treasury payment, and doesn't look to be in danger of doing so, the market simply does not permit this to occur at this time. Frankly, even if the United States started inflating its currency right now to pay down its debt (as some above have suggested) the worldwide inflation that resulted might well allow US Treasuries to remain the most secure investment around for quite some time.
posted by ikkyu2 at 1:28 PM on January 17, 2007 [1 favorite]
The US defaulting on its debt is not an impossibility, but quite unlikely. T-Bills are still used as the baseline for investment (that is you always want to earn more than the t-bill). Russia defaulted, so it is not unheard of for a large nation to default on its debts.
Debt is largely built on trust. The fact that the US has so much debt and is currently issuing more debt is very indicative of the trust the world has in the US economy.
As pointed out other nation's have larger debt to earning ratios than we have. Not really that big of a deal. A bond is basically a contract between the holder and the government. The holder gives up his right for repayment until a specific date and the government issues interest at a fixed rate. The holder cannot contractually demand anything back unless the government has acted in bad faith in the contract. In reality you can't really demand everything back at once. If that were the case we'd never get anything done.
I do agree that debt is not necessarily bad. And debt at 6% (or whatever the prevailing bond rate is), is pretty good. Our markets are making somewhere around 28% average a year.
posted by geoff. at 1:37 PM on January 17, 2007
Debt is largely built on trust. The fact that the US has so much debt and is currently issuing more debt is very indicative of the trust the world has in the US economy.
As pointed out other nation's have larger debt to earning ratios than we have. Not really that big of a deal. A bond is basically a contract between the holder and the government. The holder gives up his right for repayment until a specific date and the government issues interest at a fixed rate. The holder cannot contractually demand anything back unless the government has acted in bad faith in the contract. In reality you can't really demand everything back at once. If that were the case we'd never get anything done.
I do agree that debt is not necessarily bad. And debt at 6% (or whatever the prevailing bond rate is), is pretty good. Our markets are making somewhere around 28% average a year.
posted by geoff. at 1:37 PM on January 17, 2007
That is not to say that in theory, US bonds could be greatly "over-valued" (that is in a bubble like environment of unsustainable growth). How do you know when the markets enter into a bubble? When the bubble collapses.
posted by geoff. at 1:44 PM on January 17, 2007
posted by geoff. at 1:44 PM on January 17, 2007
I have some sympathy for what you guys are saying, but where'd you get these numbers from?
ikkyu2: Therefore, the debt, while growing in absolute terms, will shrink in real value over time owing to inflation. It will also come to make up a smaller percentage of GDP, as the GDP expands.
Will it? It's not right now. If there is a problem with US public debt it's not so much that there's too much of it now, though there is quite lot, but that it's growing faster than GDP lately, so that unless something changes there will be a lot more of it in the future. Y'know, those social security and medicare things everyone was talking about last year. There are of course more immediate problems to worry about.
geoff: Our markets are making somewhere around 28% average a year.
Pretty good! Which market is that? US financial markets had a great year least year, but still didn't come close to that on average as far as I know.
posted by sfenders at 2:40 PM on January 17, 2007
ikkyu2: Therefore, the debt, while growing in absolute terms, will shrink in real value over time owing to inflation. It will also come to make up a smaller percentage of GDP, as the GDP expands.
Will it? It's not right now. If there is a problem with US public debt it's not so much that there's too much of it now, though there is quite lot, but that it's growing faster than GDP lately, so that unless something changes there will be a lot more of it in the future. Y'know, those social security and medicare things everyone was talking about last year. There are of course more immediate problems to worry about.
geoff: Our markets are making somewhere around 28% average a year.
Pretty good! Which market is that? US financial markets had a great year least year, but still didn't come close to that on average as far as I know.
posted by sfenders at 2:40 PM on January 17, 2007
Debt is historically quite high as a percentage of ability to pay (proxied by GDP).
Of note from the graph is WWs I & II, the New Deal, the Reagan defence spending boom and the speed with which Bush undid Clinton's attempt to get debt under control.
posted by TrashyRambo at 5:21 PM on January 17, 2007
Of note from the graph is WWs I & II, the New Deal, the Reagan defence spending boom and the speed with which Bush undid Clinton's attempt to get debt under control.
posted by TrashyRambo at 5:21 PM on January 17, 2007
sfenders: My imaginary market in my imaginary world.
I do not know where I pulled that figure. It would be fair to say, going by large index funds, the return would be around 12-14% average? I believe that is Vanguard's Index Fund rate since it began. The point being is that bonds are an incredibly safe investment, or at least viewed that way by the market.
posted by geoff. at 7:01 PM on January 17, 2007
I do not know where I pulled that figure. It would be fair to say, going by large index funds, the return would be around 12-14% average? I believe that is Vanguard's Index Fund rate since it began. The point being is that bonds are an incredibly safe investment, or at least viewed that way by the market.
posted by geoff. at 7:01 PM on January 17, 2007
sfenders: you dragged my comment out from behind the words "in theory," which means, "this is how it's supposed to work."
Debt can outgrow GDP for a while, just not forever. It did the same thing in the Reagan years; then during the Clinton administration it shrank significantly compared to GDP. Only people with a very short memory look at the current situation and holler out, "The sky is falling!"
It's obvious to everyone who's paying attention that the SSI and Medicare promises that were made are going to be broken; now the sidelines are just arguing about how. I made an FPP about this very issue not long ago.
posted by ikkyu2 at 11:28 PM on January 17, 2007
Debt can outgrow GDP for a while, just not forever. It did the same thing in the Reagan years; then during the Clinton administration it shrank significantly compared to GDP. Only people with a very short memory look at the current situation and holler out, "The sky is falling!"
It's obvious to everyone who's paying attention that the SSI and Medicare promises that were made are going to be broken; now the sidelines are just arguing about how. I made an FPP about this very issue not long ago.
posted by ikkyu2 at 11:28 PM on January 17, 2007
Best answer: I didn't see anyone else mention this, so here goes.
The real reason the US gov't is able to finance so much debt is because the US is enjoying the privilege of having its currency be the world's
reserve currency.
And apparently the reason for that goes all the way back to post-WWII and an international system of financial practices called the Bretton-Woods agreement(cue the Trilateralists, Bilderbergers, CFR, etc). Since the US was the strongest western nation left standing after WWII, the countries devastated by WWII needed to rally around the US' strength in order to regain their own stability. This appears to have had the inadvertent effect of making the US into somewhat of an empire, if not in name, at least in wealth and power.
Since the US currency got to be the reserve currency of other nation's currencies, and since the US had the major influence on the elaborate policy of establishing international exchange rates, it ended up allowing the US economy to gain control over the world economy.
So the Treasury can print bonds, the Fed can print money, give it to the Treasury in exchange for the bonds, the Treasury can spend the money, it makes its way into the overall money supply, and the gov't can pay its immediate bills. Nobody will ever not buy Treasury bonds because the nations of the world will continue to give the US the equivalent of interest free loans by holding onto whatever the Fed prints, since all their currency exchange rates are tied to the value of the US currency as it inflates/deflates. It's certainly much more complex than that, but that's the gist of it.
Isn't it an ingenius scheme? What a great time to be American!
Of course the gov't has to eventually pay the interest on those bonds, but it can just sell more bonds later on to cover it. It sure is a good thing that the US is still so dominant and is not at risk at all from other countries colluding to undermine this arrangement. And I for one am glad that our military is powerful enough to be able to stop those bad countries from trying to send us to the poor house. If we need to send in the cruise missiles to open up their markets to our companies, then so be it.
Yeah, the circular absurdity seems to mask some fatal flaw which will eventually cause the global economic clockwork to collapse. Or at least go back to normal (whatever that was). Some nice property in Montana suddenly seems quite nice...
posted by archae at 12:57 AM on January 18, 2007 [1 favorite]
The real reason the US gov't is able to finance so much debt is because the US is enjoying the privilege of having its currency be the world's
reserve currency.
And apparently the reason for that goes all the way back to post-WWII and an international system of financial practices called the Bretton-Woods agreement(cue the Trilateralists, Bilderbergers, CFR, etc). Since the US was the strongest western nation left standing after WWII, the countries devastated by WWII needed to rally around the US' strength in order to regain their own stability. This appears to have had the inadvertent effect of making the US into somewhat of an empire, if not in name, at least in wealth and power.
Since the US currency got to be the reserve currency of other nation's currencies, and since the US had the major influence on the elaborate policy of establishing international exchange rates, it ended up allowing the US economy to gain control over the world economy.
So the Treasury can print bonds, the Fed can print money, give it to the Treasury in exchange for the bonds, the Treasury can spend the money, it makes its way into the overall money supply, and the gov't can pay its immediate bills. Nobody will ever not buy Treasury bonds because the nations of the world will continue to give the US the equivalent of interest free loans by holding onto whatever the Fed prints, since all their currency exchange rates are tied to the value of the US currency as it inflates/deflates. It's certainly much more complex than that, but that's the gist of it.
Isn't it an ingenius scheme? What a great time to be American!
Of course the gov't has to eventually pay the interest on those bonds, but it can just sell more bonds later on to cover it. It sure is a good thing that the US is still so dominant and is not at risk at all from other countries colluding to undermine this arrangement. And I for one am glad that our military is powerful enough to be able to stop those bad countries from trying to send us to the poor house. If we need to send in the cruise missiles to open up their markets to our companies, then so be it.
Yeah, the circular absurdity seems to mask some fatal flaw which will eventually cause the global economic clockwork to collapse. Or at least go back to normal (whatever that was). Some nice property in Montana suddenly seems quite nice...
posted by archae at 12:57 AM on January 18, 2007 [1 favorite]
you dragged my comment out from behind the words "in theory," which means, "this is how it's supposed to work.
Sorry about that. I thought you were talking about a theory purporting to describe how things actually do work.
posted by sfenders at 4:44 AM on January 18, 2007
Sorry about that. I thought you were talking about a theory purporting to describe how things actually do work.
posted by sfenders at 4:44 AM on January 18, 2007
If they can build an expansive enough system outside of U.S. control, they can pull the plug on the U.S. by calling in all of the loans.
-----
That is not how bonds work. You can sell a bond at the market rate if there is a buyer, but you can't force a repayment of the principal before the maturity date. The government that issued the bond can suspend interest payments at any time. Given this imbalance of power, purchasing a particular government's bonds indicates a great deal of faith in their willingness and ability to repay them.
----
I'm sorry, I'm not an economist. You're right. What I should have written is that if they can build an expansive enough system outside of U.S. control, they can pull the plug on the U.S. by not investing more and waiting for all current accounts to be paid off. But again, as has been mentioned previously, this is not likely to happen any time soon, because the entire world system is still dependent upon the U.S. treasury.
posted by gaiamark at 4:52 AM on January 18, 2007
-----
That is not how bonds work. You can sell a bond at the market rate if there is a buyer, but you can't force a repayment of the principal before the maturity date. The government that issued the bond can suspend interest payments at any time. Given this imbalance of power, purchasing a particular government's bonds indicates a great deal of faith in their willingness and ability to repay them.
----
I'm sorry, I'm not an economist. You're right. What I should have written is that if they can build an expansive enough system outside of U.S. control, they can pull the plug on the U.S. by not investing more and waiting for all current accounts to be paid off. But again, as has been mentioned previously, this is not likely to happen any time soon, because the entire world system is still dependent upon the U.S. treasury.
posted by gaiamark at 4:52 AM on January 18, 2007
bobobox: Government debt is not the same as external debt as defined by that CIA link. UK Public (aka government) debt is around US$1.1billion, as confirmed by the CIA Factbook and the UK ONS
More meaningful is to compare public debt as a percentage of GDP, as this is more strongly related to the ability to pay it back.
archae is quite correct in identifying the US privileged position as the controller of the reserve currency being a factor in the ability of the US Fed to literally print money. However the poor management of this over the past few years is why there's a push to trade oil in Euros and why several creditor countries are converting their reserves into Euros.
While it's very unlikely for the US to default based on the huge amount of the world's productive work being done there, the logical impact would be for the currency to slide.
posted by quiet at 5:39 AM on January 20, 2007
More meaningful is to compare public debt as a percentage of GDP, as this is more strongly related to the ability to pay it back.
archae is quite correct in identifying the US privileged position as the controller of the reserve currency being a factor in the ability of the US Fed to literally print money. However the poor management of this over the past few years is why there's a push to trade oil in Euros and why several creditor countries are converting their reserves into Euros.
While it's very unlikely for the US to default based on the huge amount of the world's productive work being done there, the logical impact would be for the currency to slide.
posted by quiet at 5:39 AM on January 20, 2007
I thought you were talking about a theory purporting to describe how things actually do work.
No, you have to understand how something's supposed to work before you can understand how it's broken.
posted by ikkyu2 at 1:34 AM on January 21, 2007
No, you have to understand how something's supposed to work before you can understand how it's broken.
posted by ikkyu2 at 1:34 AM on January 21, 2007
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posted by cschneid at 8:34 AM on January 17, 2007