Someone educate me on the national debt?

[Zeze]

I never quite paid attention to this, but it's been getting me curious lately as it's all over the news. I thought I'd tap this ATOT wisdom once again.

USA has a national debt of 16 trillion- $50K per every person in USA. What does this exactly mean? If we owe THAT much, how does the country still operate?

To whom do we owe this money? The majority is China yes? How much is 16 trillion USD to China? They don't want their money back?

Also Japan has 12 trillion USD in national debt. That's 230% of Japan's GDP, highest ratio in the world (US is 70%). How does has the economy not assploded yet?

I try to look at things in simple ways. The creditors don't want their $$ back?

 

[OverVolt]

Take from right pocket, put in left pocket, borrow from left pocket against what was taken from the right pocket. Something like that. Repeat until balance sheets are several times world GDP over. /sarcasm

 

[Farang]

it's a pretty complex economic question that I still don't fully understand. My way of thinking about it is that national debt is normal and not like personal debt.. there is no set time it must be paid off. Especially in the case of the U.S. because we are the economic/military power of the world, with the most stable political system, so our Treasury bonds are always going to be the safest bet.

That said, there is a point (it seems economists believe this to be a few decades from now) where our spending rates will create a debt-to-GDP ratio that is so high that it creates huge inefficiencies in the economy, by distorting the money supply too much, so our economy will tank. Austerity will have to kick in, making the situation even worse.

If anyone is a trained economist that can let me know if I'm right or way wrong that'd be great

 

[dud]

http://www.imdb.com/title/tt1954955/

 

[OverVolt]

Bonds can be traded on an open market before they are redeemed right? So China could just dump the bonds but it would cause them to fall in value because they'd be dumping a large supply of bonds into the market so it is in their best interest not to do so, right?

Japan mostly sells bonds to itself.

The fed buys bonds and makes them scarce. Our bonds are seen as credit worthy, that we will redeem the full value and not default on the obligation even if it means we have to print money to meet that obligation. That somehow makes people feel better about holding the bonds. Not sure how a partial default and bond holders only get 70% face value is any different from printing money and the money you get when you redeem the bond is diluted by 130%, but apparently its a jedi mind trick or something that makes the world go around.

 

[Farang]

Bonds can be traded on an open market before they are redeemed right? So China could just dump the bonds but it would cause them to fall in value because they'd be dumping a large supply of bonds into the market so it is in their best interest not to do so, right?

Japan mostly sells bonds to itself.

The fed buys bonds and makes them scarce. Our bonds are seen as credit worthy, that we will redeem the full value and not default on the obligation even if it means we have to print money to meet that obligation. That somehow makes people feel better about holding the bonds.

China holds ~8% of our debt. The effect is them dumping our bonds would probably be a recession in the U.S. because of the drop in value of treasury bonds. This would reduce consumer demand and collapse the Chinese economy, which depends on American consumer spending.

The reason other people buy our bonds is because it's the safest place in the world to park money. That might account for a higher percentage of foreign ownership, though Americans still own the majority

 

[Zivic]

OP, just think about it like this... it is so large that it will never be paid off. in politician's eyes, it is a fictitious number that has no real world relevance.

to put it into perspective, I was watching "what is the earth worth" and all the estimated gold on earth - all that was ever mined, and all that will ever be mined couldn't pay off our national debt.

I guess as long as our economy stays strong enough to service the debt I think most would say we are "OK", but only time will tell.

 

[Zeze]

China holds ~8% of our debt. The effect is them dumping our bonds would probably be a recession in the U.S. because of the drop in value of treasury bonds. This would reduce consumer demand and collapse the Chinese economy, which depends on American consumer spending.

The reason other people buy our bonds is because it's the safest place in the world to park money. That might account for a higher percentage of foreign ownership, though Americans still own the majority

Who do we owe the rest of 92% debt to? Is China the biggest at 8%?

Also why do people buy bonds? They're craptacular returns that barely beat inflation. You're better off at any decent savings bank.

 

[OverVolt]

Yea we pay the interest with borrowed money. Hillbilly finance 101. So long as people are willing to lend I guess we'll just end up pulling a Donald Trump on the national debt.

 

[blackdogdeek]

I thought it was like this:

1. US Gov needs money to do stuff
2. US Gov sells bonds to raise money (basically a loan)
3. At some future date, bond holders get their money back plus interest
4. US Gov hopes they make enough money later on to pay off what they owe

 

[Zivic]

Who do we owe the rest of 92% debt to? Is China the biggest at 8%?

Also why do people buy bonds? They're craptacular returns that barely beat inflation. You're better off at any decent savings bank.

we owe a good chunk to ourselves

 

[Farang]

Who do we owe the rest of 92% debt to? Is China the biggest at 8%?

Also why do people buy bonds? They're craptacular returns that barely beat inflation. You're better off at any decent savings bank.

I think China is the biggest.. maybe Japan.

You have to think larger scale. A bank is only guaranteed to $100,000, so if you have to park millions of dollars, bonds are the safest. That is also why they offer the least return. Think of it as the gov't taking advantage of their political stability and economic/military power.

 

[OverVolt]

Who do we owe the rest of 92% debt to? Is China the biggest at 8%?

Also why do people buy bonds? They're craptacular returns that barely beat inflation. You're better off at any decent savings bank.

I think they are kind of crammed down the banks throats. They have to loan money out backed by bonds if they want to lend it out fractionally. Like $100k in bonds backing $900k in loans out to the public. Bonds are seen as "risk free."

So say you make $900k in house loans, if there is a default you can sell the house and are unlikely to incur a loss larger than $100k in aggregate.

Things that can go wrong is losing more than $100k, or the bond tanking in value, or worse case scenario the Government goes totally belly up, like Greece, and you made loans backed by Greek bonds. Any losses on those loans and you are now deep in the red, plus you lose the ability to keep lending until you raise money for more bonds. Then ANY losses on the loans makes the bank insolvent. One bank reeling from losses makes the others pull back lending, making say, house prices plummet because no one can get a loan, making it likely that they take huge losses, etc. If the bank starts to go under people will start to pull their deposits before the bank is unable to meet its obligations as well.

Super-interdependent-leveraged-banks

 

[MaxPayne63]

How the US economy works, in three simple steps:

Step 1) Print money. Hire some ivy league economists to come up with an intellectual sounding term for it, such as 'quantitative easing.'
Step 2) Laugh at the nations of the world that actually produce commodities. Since those commodities are generally purchased using dollars the US exports a lot of its inflation overseas.
Step 3) Hope the music doesn't stop.

 

[Farang]

How the US economy works, in three simple steps:

Step 1) Print money. Hire some ivy league economists to come up with an intellectual sounding term for it, such as 'quantitative easing.'
Step 2) Laugh at the nations of the world that actually produce commodities. Since those commodities are generally purchased using dollars the US exports a lot of its inflation overseas.
Step 3) Hope the music doesn't stop.

This is something I want to look in to. It looks like having the safest place for money (Treasury bonds) allows us to tax the world. Sort of like if I sold you magic beans (dollars), and then told you I was in charge of how much those beans would be worth (inflation/money supply). So our system, though sound, relies on us maintaining economic and military superiority (as well as political stability) and explains our huge defense budget

 

[Apple Of Sodom]

Who do we owe the rest of 92% debt to? Is China the biggest at 8%?

Also why do people buy bonds? They're craptacular returns that barely beat inflation. You're better off at any decent savings bank.

We owe a lot to ourselves. For example, they raid social security for money and now we owe ourselves that money. For SOME of our debt, not all of it, it is like taking money from your savings account and putting it into checking then saying "Alright savings account, I owe you a bunch of money."

Of course we then look in our checking account and go HOLY SHIT I HAVE SO MUCH MONEY and spend it. We still owe money to our savings account but that money was transferred to checking and now it is gone.

http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm

According to that website about $6 trillion is owned by foreigners and the rest is owed back to us, the American People. When Baby Boomers get shafted with social security payments it is due to surplus spending and raiding things like social security. What will we do? Cut benefits and raise taxes.

 

[T_Yamamoto]

This will soon turn political when the hooligans get out of p&n again.

 

[SKORPI0]

The U.S. Debt and How It Got So Big

What the U.S. Debt Is:

The U.S. national debt the sum of all outstanding debt owed by the Federal Government, and is now more than $16 trillion. Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds. The rest is owed by the government to itself, and is held as Government Account securities. Most of this is owed to Social Security and other trust funds, which were running surpluses. These securities are a promise to repay these funds when Baby Boomers retire over the next 20 years. (Source: U.S. Treasury, Debt to the Penny; Debt FAQ)

What is the U.S. National Debt Clock

[FONT=verdana,arial,helvetica]U.S. N[/FONT][FONT=verdana,arial,helvetica]ATIONAL[/FONT] [FONT=verdana,arial,helvetica]D[/FONT][FONT=verdana,arial,helvetica]EBT[/FONT] [FONT=verdana,arial,helvetica]C[/FONT][FONT=verdana,arial,helvetica]LOCK[/FONT]

[FONT=verdana,arial,helvetica]The Outstanding Public Debt as of 06 Dec 2012 at 12:24:02 AM GMT is:
[/FONT]

[FONT=verdana,arial,helvetica]
The estimated population of the United States is 313,998,231
so each citizen's share of this debt is $52,074.56.[/FONT]
[FONT=verdana,arial,helvetica] The National Debt has continued to increase an average of
$3.88 billion per day since September 28, 2007![/FONT]

 

[hans030390]

I've found Paul Krugman's books, especially his latest, to provide valuable insight into these matters...contributors to the debt over time, what it actually means for the country (and why it should not be our primary focus at this time...jobs first), and what we should do about it.

 

[BladeVenom]

and the deficit keeps growing. Obama has been far worse than Bush.

 

[djnsmith7]

The amount the U.S. Govt. pays in interest per month is probably close to 1/4 of all active AT members' annual salaries combined (if not more). Scary stuff.

 

[Aluvus]

If we owe THAT much, how does the country still operate?

Because people continue to loan us money. They do that because we are able to continue servicing our public debts: we make the interest payments, and when people try to redeem a bond they are able to do so. And because they believe that we will continue to be able to service our debts.

To whom do we owe this money? The majority is China yes?

It's already been mentioned, but it bears repeating: only a relatively small (though substantial) fraction of the debt is held by China. The media seems to wildly distort this point.

How much is 16 trillion USD to China? They don't want their money back?

16 trillion USD is more than twice China's annual GDP, according to World Bank figures via Google.

Many forms of debt (notably government bonds) have a maturity period, creating an effective penalty for redeeming them early. The alternative is to sell them to a third party, if you can find someone willing to buy the amount you want to sell.

Also Japan has 12 trillion USD in national debt. That's 230% of Japan's GDP, highest ratio in the world (US is 70%). How does has the economy not assploded yet?

Japan's economy has been in pretty rough shape for the last few decades, in part due to their large public debt (also a banking boom/bust, some very short-lived governments, natural disasters, an aging population...). As long as you don't actually go into default, high levels of debt can be a drag on your economy without completely tearing it apart.

I try to look at things in simple ways. The creditors don't want their $$ back?

Suppose you buy a house. You take out a pretty substantial loan; maybe even one quite a bit above your annual income. Yet as long as you are able to make the payments (and as long as the bank believes that you will continue to be able to), the bank is happy and so are you. In fact, you may find that other creditors are quite willing to lend you even more money.

There's a lot more to it (I've ignored inflation, for a start), but this is analogy is a decent starting point.

 

[theevilsharpie]

USA has a national debt of 16 trillion- $50K per every person in USA. What does this exactly mean?

The federal government has $16 trillion in liabilities on its balance sheet. These include things like treasury bills, pensions, etc.

To whom do we owe this money?

Various institutions. Check the graph up above.

The majority is China yes?

No.

How much is 16 trillion USD to China?

$16 trillion USD to China is $16 trillion USD. I know that sounds kinda Zen, but the USD only has value because it can ultimately be spent in the US.

They don't want their money back?

No. China is buying US bonds to keep the value of their currency artificially low, so that their exports are cheaper.

If we owe THAT much, how does the country still operate?

Also Japan has 12 trillion USD in national debt. That's 230% of Japan's GDP, highest ratio in the world (US is 70%). How does has the economy not assploded yet?

I try to look at things in simple ways. The creditors don't want their $$ back?

This is a complex question, but the short answer is that the US (and similarly developed and stable nations) can sustain large debt loads because we have a stable and diversified economy, and we have an excellent reputation with investors. In other words, people willingly invest in the US because they know we will pay them back with interest. In fact, US bonds and treasury bills are considered one of the safest investments out there, and during times of uncertainty in the market, investors will pull out of riskier investments (e.g., stocks, commercial bonds, etc.) and put their money into US T-bills.

 

[Paratus]

and the deficit keeps growing. Obama has been far worse than Bush.

 

[Aluvus]

and the deficit keeps growing. Obama has been far worse than Bush.

The deficit has pretty consistently fallen (chart is in nominal dollars, hence the seemingly explosive growth over time) since the end of fiscal year 2009, though it is still quite large. FY2009 was the last (pseudo-)budget to originate from a G.W. Bush request.

The deficits since FY2009 have been so much higher in large part due to stimulus spending and the Bush-era tax cuts. Though of course defense spending and Social Security/other entitlements are major parts of the overall deficit, as are the generally low taxes that Americans enjoy. To say that the deficit is solely Obama's fault (or that the deficit under Bush was solely his fault) is a gross oversimplification.

The amount the U.S. Govt. pays in interest per month is probably close to 1/4 of all active AT members' annual salaries combined (if not more). Scary stuff.

This is an interesting thought experiment. To put some rough math to it:

The highest annual interest expense reported by Treasury was $454 billion in 2011. If we divide this evenly among 12 months, that's around $38 billion.

The AT forums main page claims about 8,500 "active" members right now.

The Census Bureau reports the median US income 2006-2010 was $52,000. Of course we all know all ATers are multimillionaires, but for the moment let's try the median figure. And make the huge simplifying assumption that, on average, it's representative of the AT population.

So 1/4 * 8500 members * $52000/member = "only" $110.5 million

So using the same assumptions, how much would the average ATer have to make for this to work out?

1/4 * 8500 members * $x/member = $38 billion
x = 4 * 38 billion / 8500

x = $18 million!