How does the Deficit and debt work exactly?

[Stiganator]

I don't get it. Where is this money coming from? Why do we keep spending without paying of the principle?


The clock says $8,352,441,519,065.20

That is sort of a lot.


Budgets 2003-2006.

 

[EagleKeeper]

IOUs

Have you ever heard of Government bond sales?

 

[Bowfinger]

We're also borrowing much of it from countries like China.

 

[Engineer]

Originally posted by: EagleKeeper
IOUs

Have you ever heard of Government bond sales?

T-bills paying pretty good rates (state tax free) right now!

 

[conehead433]

It's pretty simple, Bush and company along with his oil buddies are stealing from you, your kids and their children and they know they won't be the ones having to repay.

 

[dullard]

Be careful with your words, many people confuse deficit and debt. I wasn't sure from your deficit title and debt post that you too might be confusing them.

The government sells bonds. A bond is a loan. Someone gives the government a chunk of cash. In return the government promisses to pay it back + interest later. When that time comes, the government just sells another bond to pay the principal and another one to pay the interest.

While $8 trillion is a lot, you do need to keep it in perspective. This graph helps here. If we had no debt, then we currently could get a permanent 9% tax cut. While that is significant, a 9% cut isn't massive. To keep this thread political, what happened to that straight dropping line starting in the middle of year 2000?

Why do we keep spending without paying the principal? Because that is what Americans do. They finance their current spending addiction with credit cards and home equity loans. The government is the same, especially Republicans in the last ~50 years.

 

[LegendKiller]

Originally posted by: dullard
Be careful with your words, many people confuse deficit and debt. I wasn't sure from your deficit title and debt post that you too might be confusing them.

The government sells bonds. A bond is a loan. Someone gives the government a chunk of cash. In return the government promisses to pay it back + interest later. When that time comes, the government just sells another bond to pay the principal and another one to pay the interest.

While $8 trillion is a lot, you do need to keep it in perspective. This graph helps here. If we had no debt, then we currently could get a permanent 9% tax cut. While that is significant, a 9% cut isn't massive. To keep this thread political, what happened to that straight dropping line starting in the middle of year 2000?

Why do we keep spending without paying the principal? Because that is what Americans do. They finance their current spending addiction with credit cards and home equity loans. The government is the same, especially Republicans in the last ~50 years.

9% is huge, considering that would be at least a 25% cut for anybody and as much as a 50-60% cut for most Americans.

That is a decent explanation without getting too much into partisan blame.

 

[techs]

Originally posted by: dullard
Be careful with your words, many people confuse deficit and debt. I wasn't sure from your deficit title and debt post that you too might be confusing them.

The government sells bonds. A bond is a loan. Someone gives the government a chunk of cash. In return the government promisses to pay it back + interest later. When that time comes, the government just sells another bond to pay the principal and another one to pay the interest.

While $8 trillion is a lot, you do need to keep it in perspective. This graph helps here. If we had no debt, then we currently could get a permanent 9% tax cut. While that is significant, a 9% cut isn't massive. To keep this thread political, what happened to that straight dropping line starting in the middle of year 2000?

Why do we keep spending without paying the principal? Because that is what Americans do. They finance their current spending addiction with credit cards and home equity loans. The government is the same, especially Republicans in the last ~50 years.

Hey, Dullard, living up to your name today, aren't you.
The graph you show that seems to indicate we are paying less today on interest on the debt is EXTREMELY deceptive. We are paying the lowest INTEREST on the debt EVER. And this translates into low payments now. Lets not forget the Fed rate was at something like 1.5 percent for most of the graph. It is now risen to like 4.5 percent. If the graph had been extended for say two more years it would go straight up.
Didn't you stop and THINK that with the debt exploding a graph that shows we are paying less didn't make any sense and there must be other factors?
And the 9 percent tax cut we would get on paying off the debt immediately is HUGE.
NO ONE who earns less than 100,000 a year got anything like a 9 percent cut from Bushes huge tax cuts.
In fact if interest rates rise (as they do for countries in debt) we will shortly be paying (in 10 years) 20 percent of our taxed money to pay off the debt.
And 5 years after that 25 percent.

 

[dullard]

Originally posted by: LegendKiller
9% is huge, considering that would be at least a 25% cut for anybody and as much as a 50-60% cut for most Americans.

Please tell me how the heck you came up with 50%-60%?

The government collects ~1.70T from people (income tax + payroll tax + other taxes on personal items). The remaining income is corporate income tax and borrowing.

The governemtn spends ~0.16T on interest.

If we didn't pay interest, we could collect only ~1.54T from people (assuming we didn't change corporate income tax). 1.54/1.70 = 0.905. We'd get a total 9.5% tax cut. So how the heck does everyone get a 25% cut, most get a 50%-60% cut and have it all add up to a total 9.5% cut?

 

[dullard]

Originally posted by: techs
The graph you show that seems to indicate we are paying less today on interest on the debt is EXTREMELY deceptive. We are paying the lowest INTEREST on the debt EVER. And this translates into low payments now. Lets not forget the Fed rate was at something like 1.5 percent for most of the graph. It is now risen to like 4.5 percent. If the graph had been extended for say two more years it would go straight up.

Did you stop to think that bonds are long term? The government has many bonds from decades ago that are still active and are still at a high interest rate. Did you forget that when you average a few low interest rate loans with many, many high interest rate loans that the average interest rate is still high?

I'm all for a zero debt government. All I said was that 9% less tax isn't a life or death situation for most people. If it were 90% it would be completely different. Suppose you personally are paying $5000 a year in taxes. If that 9% were given back to everyone, you'd get $450 a year. Yes, that would be very pleasant. But I doubt that $450 a year would be life or death to you.

 

[LegendKiller]

NM, I was thinking of it on a total basis. IE, if I paid in 18% and got 9% back, then thats a 50% cut...

I just didn't see how you were putting it, not a huge deal.

 

[dullard]

Originally posted by: LegendKiller
NM, I was thinking of it on a total basis. IE, if I paid in 18% and got 9% back, then thats a 50% cut...

I just didn't see how you were putting it, not a huge deal.

Ok, thanks for clearing that up to me. You'd get back 9% of that 18%. Or, you'd get a 0.91*18% = 16.6% new tax rate. Yes, that would be very nice, and yes I would support most temporary tax raises/spending cuts to get us to that point. But going from 18% to 16.6% isn't a huge difference.

 

[piasabird]

The problem is that the more we raise taxes, the more the government wants to spend. So I say we just start laying off government workers. If you want the government to spend less, what services and benefits are you willing to do without? Take some of the people out of prison and let them clean the streets as a chain gang. Maybe we should start a barter system. We give the poor a place to live and then they are required to perform the servic and then they get a bag of rice. As long as they stay busy they eat. If people were hungry we would not need to hire immigrants.

 

[jwhitakr]

Originally posted by: dullard

Why do we keep spending without paying the principal? Because that is what Americans do. They finance their current spending addiction with credit cards and home equity loans. The government is the same, especially Republicans in the last ~50 years.

Hi - I'm a long time reader in Politics & News, first time poster...

One comment that leads me to a question - many Americans do in fact overspend and put themselves into debt, just as the federal government has continued to do. In a short time period, however, a person who continues to spend more and more moneywithout paying back the principal will be denied any additional credit.

Why is it that the federal government has continued to grant itself additional credit, and we Americans (I live in the U.S.) who are essentially loaning the money to the government, do not recognize that as a serious problem?

 

[dullard]

Originally posted by: jwhitakr
Why is it that the federal government has continued to grant itself additional credit, and we Americans (I live in the U.S.) who are essentially loaning the money to the government, do not recognize that as a serious problem?

Because in its entire history the US has never defaulted on a loan. It has the most perfect credit history possible.

You are right in theory though. Eventually, if spending gets out of control, then the US could borrow more than it can pay. At that point, if the US defaults, all hell will break loose. Interest rates will soar and some people will stop buying US bonds. But we aren't there yet. We aren't even close yet. The US income (GDP) keeps getting nice raises nearly every month. If you are loaning to someone who gets a raise each month and always pays off its bills, why would you worry?

 

[Engineer]

Originally posted by: dullard

Originally posted by: jwhitakr
Why is it that the federal government has continued to grant itself additional credit, and we Americans (I live in the U.S.) who are essentially loaning the money to the government, do not recognize that as a serious problem?

Because in its entire history the US has never defaulted on a loan. It has the most perfect credit history possible.

You are right in theory though. Eventually, if spending gets out of control, then the US could borrow more than it can pay. At that point, if the US defaults, all hell will break loose. Interest rates will soar and some people will stop buying US bonds. But we aren't there yet. We aren't even close yet. The US income (GDP) keeps getting nice raises nearly every month. If you are loaning to someone who gets a raise each month and always pays off its bills, why would you worry?

I tend to agree that there isn't much reason to worry...YET. However, at some point, when you're mounting more debt (as a percentage growth) than your economy is growing, you'll fall behind. That's been the trend over the last 25 years. Is is a problem yet? No and I understand that other countries are burried deeper in debt than we are. Also, as in real ife, even if your debt is larger than your income, as long as you can make the "payments", it doesn't matter. Miss a payment however, and the bill collection office is after your ass!!!

 

[ntdz]

Originally posted by: Bowfinger
We're also borrowing much of it from countries like China.

China owns $250 billion of our $8 trillion of debt...That's like 3%

 

[jwhitakr]

Originally posted by: Engineer

Originally posted by: dullard

Because in its entire history the US has never defaulted on a loan. It has the most perfect credit history possible.

You are right in theory though. Eventually, if spending gets out of control, then the US could borrow more than it can pay. At that point, if the US defaults, all hell will break loose. Interest rates will soar and some people will stop buying US bonds. But we aren't there yet. We aren't even close yet. The US income (GDP) keeps getting nice raises nearly every month. If you are loaning to someone who gets a raise each month and always pays off its bills, why would you worry?

I tend to agree that there isn't much reason to worry...YET. However, at some point, when you're mounting more debt (as a percentage growth) than your economy is growing, you'll fall behind. That's been the trend over the last 25 years. Is is a problem yet? No and I understand that other countries are burried deeper in debt than we are. Also, as in real ife, even if your debt is larger than your income, as long as you can make the "payments", it doesn't matter. Miss a payment however, and the bill collection office is after your ass!!!

Thanks for the helpful replies. I believe I understand both of your guys' points. Perhaps I am oversimplifying things, but I don't necessarily agree that we should be unconcerned. I think this is something that we should be concerned with because, as Engineer pointed out, we're headed in the wrong direction.

For example let's take scenario #1: Assume I have good credit and I also have a large mortgage on my house which is quite a bit larger than my current yearly income. To pay off that mortgage I use my income to pay the monthly mortgage payments. Even though I am getting yearly raises, I don't spend more money on new cars, new boat, etc. using my credit. I pay off the monthly mortgage and the amount of money I owe decreases. Therefore, my debt reduces and I continue to have good credit. Eventually I am able to pay off my debt.

Now let's take scenario #2: Assume I have good credit and I also have a large mortgage on my house which is quite a bit bigger than my yearly income. To pay off that mortgage I use my income to pay the monthly mortgage payments. Now, instead of exercising restraint with my income, I decide to buy a new car every year. Each year I have to borrow more money to pay for my new cars. For a few years I am able to pay off the monthly mortgage, plus the money I owe on my new cars, but the amount of money I owe increases. Therefore, my debt increases and eventually I will not be able to make all of my payments because my additional spending exceeds the additional money that I am making.

As a person who is loaning the federal government money, I am concerned because I understand the current situation in the U.S. to be very similar to scenario #2. If we don't need to worry yet, at what point do we need to start worrying? (Assuming that I do not want to screw my children, or my children's children, etc. with a gargantuan amount of debt).

 

[dullard]

Originally posted by: jwhitakr
As a person who is loaning the federal government money, I am concerned because I understand the current situation in the U.S. to be very similar to scenario #2. If we don't need to worry yet, at what point do we need to start worrying? (Assuming that I do not want to screw my children, or my children's children, etc. with a gargantuan amount of debt).

To help determine if we are #1 or #2, try graphs like this one. Twice in history we have been worse off: the post-great depression era, and the Reagan/Bush I era. We made it out of those two eras just fine. The current trend is going the wrong way - up on that graph. Yes, going up on that graph in good economic times is worrysome. What will happen when the GDP falls and the spending stays the same? Yikes, that is a horrible thought. But, still, overall we are not in the panic zone yet (lets say 100% on that graph for an arbitrary cutoff point).

I would like that graph to fall in good times, and raise in bad times. That way the government debt stays constant over any ~10 year period.

 

[Engineer]

Originally posted by: dullard

Originally posted by: jwhitakr
As a person who is loaning the federal government money, I am concerned because I understand the current situation in the U.S. to be very similar to scenario #2. If we don't need to worry yet, at what point do we need to start worrying? (Assuming that I do not want to screw my children, or my children's children, etc. with a gargantuan amount of debt).

To help determine if we are #1 or #2, try graphs like this one. Twice in history we have been worse off: the great depression era, and the Reagan/Bush I era. We made it out of those two eras just fine. The current trend is going the wrong way - up on that graph. Yes, going up on that graph in good economic times is worrysome. What will happen when the GDP falls and the spending stays the same? Yikes, that is a horrible thought. But, still, overall we are not in the panic zone yet (lets say 100% on that graph for an arbitrary cutoff point).

I would like that graph to fall in good times, and raise in bad times. That way the government debt stays constant over any ~10 year period.

Dang graph always goes up during a war! :shocked:

 

[dullard]

Originally posted by: Engineer
Dang graph always goes up during a war! :shocked:

Wars are damn expensive. But the cold war really wasn't a war. Vietnam and Korea didn't have much impact either.

 

[imported_Tango]

Originally posted by: Engineer

Originally posted by: dullard

Originally posted by: jwhitakr
Why is it that the federal government has continued to grant itself additional credit, and we Americans (I live in the U.S.) who are essentially loaning the money to the government, do not recognize that as a serious problem?

Because in its entire history the US has never defaulted on a loan. It has the most perfect credit history possible.

You are right in theory though. Eventually, if spending gets out of control, then the US could borrow more than it can pay. At that point, if the US defaults, all hell will break loose. Interest rates will soar and some people will stop buying US bonds. But we aren't there yet. We aren't even close yet. The US income (GDP) keeps getting nice raises nearly every month. If you are loaning to someone who gets a raise each month and always pays off its bills, why would you worry?

I tend to agree that there isn't much reason to worry...YET. However, at some point, when you're mounting more debt (as a percentage growth) than your economy is growing, you'll fall behind. That's been the trend over the last 25 years. Is is a problem yet? No and I understand that other countries are burried deeper in debt than we are. Also, as in real ife, even if your debt is larger than your income, as long as you can make the "payments", it doesn't matter. Miss a payment however, and the bill collection office is after your ass!!!

The US will never default. Most of its debt is hold by his citizens, wich is the only insurance investors have against sovereign defaults. Defaulting is actually a pretty good economic policy. You get the cash, you use it, and then you don't pay back. Defaulting countries DO NOT face any kind of retaliation for this. There are a million papers published in the last decade about why countries don't default more often... and the only answer is: because most of their debts are held by their citizens. The ones with debt held abroad DO default, most notable examples in recent times being Russia and Argentina. If you don't pay back foreign investors, they'll get over it. If you don't pay back your own people they will come to your office and set it on fire. It actually happened in Colombia. When they started thinking about a sovereign default as a possibility, the army sent a tank in front of the central bank building.
On the other hand, most of Argentina's debt was held in foreigners portfolios, they defaulted and 3 years later Argentinian bonds are already hot on international markets. People want high yields and support the necessary risks.

Now, back to US debt and deficit: the problem is not the dimension of them, it's what they are supporting. If you create deficit due to increased investing and expansionary monetary policy, then it can be fine. You would expect those investements to pay you back in the future with a proportionally big growth. If you run a deficit to pay for defense and war expenses, then it's very unlikely that the growth (if any) you will generate in the future directly coming from that deficit will be proportionate to the accumulated debt. It's not how much you borrow, it's what you do with the money you are borrowing.

Deficit now must be met by surplus in the future. It can come from many things, but eventually you will need to pay you debt back. If your borrowing was smart, it's going to be easy, if not it's going to be harder. Most of the world's financial community think the US government is not using these funds in a very smart way, and that's why so much money is flowing out of the US markets and going to emerging markets, Euro-zone or defensive positions (commodities, metals). Of course they might be wrong. But in the financial markets we all prefer to be safe than sorry.

 

[db]

Originally posted by: dullard
Why do we keep spending without paying the principal? Because that is what Americans do. They finance their current spending addiction with credit cards and home equity loans.

Like someone else put it: "...treat their homes like giant ATM machines."