Why is the National Debt so bad?

[Atrail]

Here is the National Debt breakdown in 1998.
LINK

 

[Random Variable]

Isn't currency a form of debt?

 

[Dragnov]

I never understood the national defecit. If we owe so much money, how come no one is demanding it back... like now?

 

[Random Variable]

<< I never understood the national defecit. If we owe so much money, how come no one is demanding it back... like now? >>


Because most of it is owed to the U.S. Federal Reserve, not any foreign country.

 

[asabour]

<< Come on guys, can we get back to the question at hand? I'm curious too on why it's bad/good. >>



I agree, I've gotten some half-answers and many side answers, but nothing that hits it on the nose. Anyone?

 

[Atrail]

Heres your answer!

Its good and its bad.

There are all kinds of political and financial benfits derived from our debt.

But spending can get out of control and who foots the bill for it.

Me and you.

 

[Dragnov]

<<

<< I never understood the national defecit. If we owe so much money, how come no one is demanding it back... like now? >>


Because most of it is owed to the U.S. Federal Reserve, not any foreign country. >>



Well according to that chart a big hunk of it (almsot 25%) is owed to foreign countries. Isn't this similar to a ponzi scheme which supposedly always fail, just like social security?

 

[Mrburns2007]

Reagan (and congress...) increase the debt by about 2 trillion dollars but hey that was to win the cold war without firing a nuke so that was worth it. When he left office it was around 2.8 trillion dollars.

Today the debt is 6 trillion dollars....

 

[glenn1]

<< Why is the National Debt so bad? >>



It's not good or bad, in and of itself. Governmental debt, just like personal debt, can serve useful functions. Apart from giving the government the ability to be more flexible in its outlays/expenditures, it also serves a useful function in providing a safe and liquid capital exchange medium in the financial markets.

Just as with personal debt, the way to judge whether a certain level of debt is "good" or "bad" depends on a couple of factors (both of which are somewhat objective), the purposes to which the deficit spending is put to use, and the relative size of the debt load compared to inflows (in personal finance terms, debt vs. income, for the government, debt vs. GDP).

 

[Dave]

The "National Debt" is mostly owed to ourselves. For instance, the Social Security Administration holds US Treasury Notes and Bonds that will return the original sum of cash that the SSA turned over to the Federal Government, plus interest. Also, most retirement funds, like those that form the foundation of 401Ks as well as public employee retirement funds hold US Treasury Bonds and Notes.

If there were zero national debt these funds would probably have to buy (invest in) the bonds and notes of other governments, such as Germany, Britain, Japan and Korea in order to have a balanced portfolio of investments! I think that I would rather have that portion of my retirement invested in US gov paper than those of the previously mentioned countries!

According to some articles that I read sometime back, Britain holds a substantial amount of US Bonds and Notes, as well as the Netherlands, Japan etc. Remember, the US always makes good on its debts so it is a globally desirable debt instrument.

My take on the "National Debt" is that too much is not good, because it competes with the private debt market and basically could suck up funds needed for building businesses/commerce. But it really depends on what the debt is incurred for; is the cash used for productive purposes ... like building better roads and airports etc. or is it "wasted" on nonproductive pork? I think that we do both with our government borrowings.

I would also like to mention that the ratio of total size of the "National Debt" to that of our national economy has been DROPPING markedly over the last several years. This is a very good sign! If only increases in spending can be restrained (not stopped!) we will do fine. Its like increases in your wages outrunning the total amount that you owe on things like your home mortgage. Although I am personally a "debt-a-phobic" I don't view the "National Debt" as it now stands as any great problem. We just need the economy to keep growing faster than the debt.

Out

 

[asabour]

<< Heres your answer!

Its good and its bad.

There are all kinds of political and financial benfits derived from our debt.

But spending can get out of control and who foots the bill for it.

Me and you.

>>



What kind of benefits? And why is it so bad? I hear people say this all the time w/o ever hearing a real answer! UGHH!!

 

[Random Variable]

<<

<<

<< I never understood the national defecit. If we owe so much money, how come no one is demanding it back... like now? >>


Because most of it is owed to the U.S. Federal Reserve, not any foreign country. >>



Well according to that chart a big hunk of it (almsot 25%) is owed to foreign countries. Isn't this similar to a ponzi scheme which supposedly always fail, just like social security? >>


I don't think that "foreign and international" necessarily means money that is owed to other governments.

EDIT: But the web site seems to suggest that.

 

[Mister T]

<<

<< Why is the National Debt so bad? >>



It's not good or bad, in and of itself. Governmental debt, just like personal debt, can serve useful functions. Apart from giving the government the ability to be more flexible in its outlays/expenditures, it also serves a useful function in providing a safe and liquid capital exchange medium in the financial markets.

Just as with personal debt, the way to judge whether a certain level of debt is "good" or "bad" depends on a couple of factors (both of which are somewhat objective), the purposes to which the deficit spending is put to use, and the relative size of the debt load compared to inflows (in personal finance terms, debt vs. income, for the government, debt vs. GDP). >>



Congrats on the first intelligent post of this thread.

 

[glenn1]

<< What kind of benefits? >>



Let's take our current situation for an example. The U.S. is projected to run a small deficit this year. Part of that reflects lower tax receipts (due mainly to the economic contraction), and part of it is higher outlays for items such as defense.

Let's just say the government had a policy of NEVER incurring debt or running a deficit. Does the idea of waiting for a few years to go after Al-Qaeda and other terrorists sound like a good idea, just so that we can pay the costs for that in cash rather than going a bit into the hole now? In this case, one makes the objective judgement that our national defense is a higher priority than a balanced or surplus budget, and funds get spent accordingly.

 

[ElFenix]

<< I never understood the national defecit. If we owe so much money, how come no one is demanding it back... like now? >>

a part of it is always being demanded back, bonds come due all the time. and the US always pays. its not like a bank run where everyone runs in and demands their money at the same time (a situation no bank can handle). and the US gov't can always print more money to cover debt. though thats not a good idea (look where its gotten other countries that do it all the time... argentina, brazil, etc).

 

[wfbberzerker]

<< What kind of benefits? And why is it so bad? I hear people say this all the time w/o ever hearing a real answer! UGHH!! >>

the reason you dont hear a real answer is because its so damnd complicated its nearly impossible to come up with a straight answer

 

[glenn1]

Please substitute the word "subjective" for "objective" in my previous two posts

 

[Mister T]

Before asking the question of why the national debt is good or bad, I hope people understand the fundamental difference of what is stock(equity) and what is debt. And how is debt used by people, and corporations. The concepts of risk-free rate of return, optimal capital structure, efficient markets, and the pricing of mortgages.... this is not an easy question to answer

 

[CocaCola5]

The idea is the increased gov. spending will help spur business. So as long as this makes more income(tax), its great.

 

[HOWITIS]

<< if it wasnt for those, we wouldnt have any debt >>



you made my day, learn some history we've been in debt for almost a 100 years. (since ww1)

 

[asabour]

<<

<< What kind of benefits? And why is it so bad? I hear people say this all the time w/o ever hearing a real answer! UGHH!! >>

the reason you dont hear a real answer is because its so damnd complicated its nearly impossible to come up with a straight answer >>



heh, you're right. I've read a few of these "intelligent" posts, and while I understand some of it, most of it goes right over my head. But I was having an arguement in one of my classes last year (in my high school) about why we should lower taxes, and when someone asked my why not pay all of the debt instead of lowering taxes, I couldn't give them an answer. I remember saying "because there are some benefits to the debt", and when asked "what", I stood there looking like an idiot. So, if anyone can explain this, why not pay off as much debt as possible before lowering taxes? On the other hand, why should we pay off the debt? If you can try to phrase these in terms I can understand that would be appreciated.

 

[Yomicron]

hey check it out, the debt *officially* surpassed 6 trillion dollars just a few days ago.

Link

 

[HendrixFan]

To answer the original question without politicking (or at least Ill try), the national debt is bad because of interest. The national debt is almost exclusively money that the US owes its citizens in the form of US Bonds. When someone comes to cash the bond (collect on the debt), we just turn around and sell the bond to someone else.

The problem with this cycle is the interest that the bond purchaser recieves comes out of the pockets of taxpayers. In theory, the debt never has to be paid off because we can always resell the bonds. But the snag is the interest.

Currently, about 1/3 of the US budget goes to interest on the national debt (interest on the government bonds). If the national debt gets paid off in full, there would be no interest on the national debt (obviously). So 1/3 of all government expenditures would be cut.

The Republicans can cut 1/3 of taxes, something that is a dream to them. The Democrats wouldnt have to worry about that ruining their precious spending at all. (How is that for objective?)

Cut taxes without cutting spending, everyone is happy. Everyone pays 1/3 less taxes (yes, I know taxes arent proportional). Instead of some $2 trillion dollar tax cut over a 10 year period, we would have 10s of trillions of dollars cut over an infinite amount of time.

 

[glenn1]

<< So, if anyone can explain this, why not pay off as much debt as possible before lowering taxes? On the other hand, why should we pay off the debt? If you can try to phrase these in terms I can understand that would be appreciated. >>



The idea behind "good debt" is that by incurring costs now, it will lead to a higher payoff in adjusted terms later on, or that the need is great enough to justify the deficit spending in the here and now. Let me give you a couple of examples to demonstrate the principle to you.

Example 1: You're 22 years old, and have a choice to make. You've finished your undergraduate program, and are working a so-so job which pays the bills, but you want to go to medical school to become a doctor, but can't afford tuition. As a doctor, you'd make a significantly higher salary than you do now, but you have to go to school first before you can become a doctor. You are trying to decide whether to stay in your current job and pay off your current college loans, or take the plunge into medical school (knowing that you'll have to borrow more money to do so).

This would be an example of deficit spending, with the intent being to spend a bit more now, to earn a lot more later.

Example 2: You're 23, and medical school didn't work out. You have no job, and no cash in the bank as you spent what you had on medical school tuition. You have no food in the 'fridge, but you do have a credit card. You are trying to decide whether to borrow money by buying groceries with your credit card (deficit spending) or starve to death.

This would be an example of emergency/contigiency deficit spending.

 

[PlatinumGold]

has anyone ever considered the alternative?? the worst form of government is a government that ends up with a surplus each year. even deficit spending is better because at least it's moving money.

gross deficit spending which our government has been guilty of can be detrimental, but lets examine that too.

debt will only be a problem if we are called on it. truth is we never will be. like most national debts (brazil etc etc) ours will simply be forgiven by the world because if it isn't. if US is truly declared bankrupt, then no more imports (to US) and all other countries will go broke. we are trade deficit w/ almost every country.

the problem of US debt from the worlds perspective is THEY CANNOT HOLD THE US ACCOUNTABLE.