The National Debt
Rapier7
Join Date: 2004-02-05 Member: 26108Members
Join Date: 2004-02-05 Member: 26108Members
<div class="IPBDescription">An Education</div> Whenever somebody brings up the national debt, be it a politician or a just a regular Joe on an internet forum discussing politics, they really don't know how the national debt works.
I'm here to clarify some concerns, myths, and questions about the US national debt.
First of all, I'd like to clear up a common mistake: The Budget Deficit.
Every year, Congress collects taxes and appropriates money towards various projects, be it building a new building, battleship, highway or whatever. Sometimes (most times) Congress goes over for the year and we have more expenditures than revenue. This deficit for the year is labeled as The Budget Deficit. The combination of every budget deficit for every year since the nation's existence is called the National Debt.
So, what about the Federal Debt? It keeps growing and growing, this is a problem! We have to stop it!
Actually, we don't. About one third of the national debt is invested into government trusts, securities and various other organizations that ultimately leads back to the US treasury. This carries no interest obligation. The rest of the national debt, the other two thirds is called the Net Federal Debt, which does carry an interest obligation. As of now, about 40% of the Net Federal Debt is held by foreign entities, be they corporate moguls, international bankers, or other sovereign governments. 60% is held by domestic entities, mainly rich corporate moguls.
In any case, when we come up with a deficit, where do we get the extra money to fund Federal projects? The treasury departments issues loans to be sold every other Tuesday at Wall Street. For example, if I was selling a government bond that would mature in one year and give me 10,000 USD, I could probably sell it to another for 9500. People who initially buy bonds are investment firms and corporate tycoons, but they can be sold indefinitely prior to their maturity. A bond is simply a government's promise that when the allotted time is up, the bond will "mature" and then the government has to pay you the amount of money <i>at face value</i> when it matures. Old bond debts are relieved by issuing new bonds to sell. Bonds are an extremely safe investment in the majority of circumstances, because the United States <i>has never failed to pay off a bond at face value.</i>
Some argue that this cycle is not indefinite, that there will eventually be a point where the public will no longer buy the bonds. This is extremely unlikely. Bonds are always paid when the time's up, and everybody loves a safe investment. If public confidence in the government (to the point of collapse) has eroded in which there are no buyers for the bonds (very, very unlikely), the Federal Reserve acts as the Lender of the Last Resort and buys the bonds itself. Ultimately, it is impossible for a nation like the US to get to this point. You have to remember that the majority of the debt belongs to US citizens. We owe the debt to ourselves. It always comes back to the US people, though there are concerns about how the money flows back (bond payments go out primarily to rich households).
There is another fear, that eventually the debt will go out of control and it'll get to the point where the government will become bankrupt.
This is impossible; the government can never go bankrupt. This is due to two reasons.
Taxes. The Federal Government has the ability to levy taxes, there is of course, a practical level to how high the taxes will be, but it still guarantees a source of varied incomef or the government. The Federal Government is also able to print its own money. While this can certainly lead to disastrous inflation, this is the sole reason why no sovereign government can go bankrupt, because debt is paid in their own currency, and governments have the ability to print an indefinite supply of their money.
Food for thought: The US dollar bill you hold in your hand is a liability to the Federal Government. Think of it as a mini-bond.
There are, however, two genuine concerns to the national debt. Foreign ownership and redistribution of wealth.
Foreign ownership of the US debt has grown over the years, many governments and banks hold our currency. All oil purchases are traded on the US dollar, this means every government has to have a reserve of USD in order to buy oil, an extremely coveted natural resource. As foreign ownership increases, we fall under increasing pressure from foreign governments, in a worst case scenario, the US government would be a collective of international governments. This is beyond impossibility. Eventually, foreign debt is offset (eventually) because they have our money. This means that the money has to eventually return to us in the form of demand for US exports and commodities (in order to buy a nation's goods, you have to have that nation's currency). There is no long term threat here.
The redistribution of wealth is probably the most legitimate, and problematic concern about the national debt. Bond buyers in the US are primarily (overwhemingly) rich people. The 1% which controls 80% of the wealth. Tax breaks and bonds are always most helpful to the rich, because they pay the most taxes and buy the most bonds. That means the lower income citizens' tax dollars are being given to the rich, in the form of tax breaks and bond payouts. Traditionally, this problem is offset by the many Federal relief systems that dedicate themselves to helping lower income families and households.
So, what's the immediate, real concern about our debt?
<i>To not let it get out of control.</i>
You have to put a cap on spending. Currently, the US economy is fueled by debt, we're spending too much and we're not having enough real output to back it up. Congress (and Bush) needs to bring spending back under control before public confidence (the crux of the legitimacy of every government in the world) erodes. When there's a deficit, cut back on spending, and raise taxes (I know, there is a political limit to how much taxes we can levy on the people, but it's still there). Though Bush is far from clueless, nor is all of Congress. It would take a succession of extremely stupid politicians in Congress to make the national debt an actual, immediate threat to national stability.
Spark Notes (for you lazy people):
The National debt is of no concern. Stop using it in other political arguments.
I'm here to clarify some concerns, myths, and questions about the US national debt.
First of all, I'd like to clear up a common mistake: The Budget Deficit.
Every year, Congress collects taxes and appropriates money towards various projects, be it building a new building, battleship, highway or whatever. Sometimes (most times) Congress goes over for the year and we have more expenditures than revenue. This deficit for the year is labeled as The Budget Deficit. The combination of every budget deficit for every year since the nation's existence is called the National Debt.
So, what about the Federal Debt? It keeps growing and growing, this is a problem! We have to stop it!
Actually, we don't. About one third of the national debt is invested into government trusts, securities and various other organizations that ultimately leads back to the US treasury. This carries no interest obligation. The rest of the national debt, the other two thirds is called the Net Federal Debt, which does carry an interest obligation. As of now, about 40% of the Net Federal Debt is held by foreign entities, be they corporate moguls, international bankers, or other sovereign governments. 60% is held by domestic entities, mainly rich corporate moguls.
In any case, when we come up with a deficit, where do we get the extra money to fund Federal projects? The treasury departments issues loans to be sold every other Tuesday at Wall Street. For example, if I was selling a government bond that would mature in one year and give me 10,000 USD, I could probably sell it to another for 9500. People who initially buy bonds are investment firms and corporate tycoons, but they can be sold indefinitely prior to their maturity. A bond is simply a government's promise that when the allotted time is up, the bond will "mature" and then the government has to pay you the amount of money <i>at face value</i> when it matures. Old bond debts are relieved by issuing new bonds to sell. Bonds are an extremely safe investment in the majority of circumstances, because the United States <i>has never failed to pay off a bond at face value.</i>
Some argue that this cycle is not indefinite, that there will eventually be a point where the public will no longer buy the bonds. This is extremely unlikely. Bonds are always paid when the time's up, and everybody loves a safe investment. If public confidence in the government (to the point of collapse) has eroded in which there are no buyers for the bonds (very, very unlikely), the Federal Reserve acts as the Lender of the Last Resort and buys the bonds itself. Ultimately, it is impossible for a nation like the US to get to this point. You have to remember that the majority of the debt belongs to US citizens. We owe the debt to ourselves. It always comes back to the US people, though there are concerns about how the money flows back (bond payments go out primarily to rich households).
There is another fear, that eventually the debt will go out of control and it'll get to the point where the government will become bankrupt.
This is impossible; the government can never go bankrupt. This is due to two reasons.
Taxes. The Federal Government has the ability to levy taxes, there is of course, a practical level to how high the taxes will be, but it still guarantees a source of varied incomef or the government. The Federal Government is also able to print its own money. While this can certainly lead to disastrous inflation, this is the sole reason why no sovereign government can go bankrupt, because debt is paid in their own currency, and governments have the ability to print an indefinite supply of their money.
Food for thought: The US dollar bill you hold in your hand is a liability to the Federal Government. Think of it as a mini-bond.
There are, however, two genuine concerns to the national debt. Foreign ownership and redistribution of wealth.
Foreign ownership of the US debt has grown over the years, many governments and banks hold our currency. All oil purchases are traded on the US dollar, this means every government has to have a reserve of USD in order to buy oil, an extremely coveted natural resource. As foreign ownership increases, we fall under increasing pressure from foreign governments, in a worst case scenario, the US government would be a collective of international governments. This is beyond impossibility. Eventually, foreign debt is offset (eventually) because they have our money. This means that the money has to eventually return to us in the form of demand for US exports and commodities (in order to buy a nation's goods, you have to have that nation's currency). There is no long term threat here.
The redistribution of wealth is probably the most legitimate, and problematic concern about the national debt. Bond buyers in the US are primarily (overwhemingly) rich people. The 1% which controls 80% of the wealth. Tax breaks and bonds are always most helpful to the rich, because they pay the most taxes and buy the most bonds. That means the lower income citizens' tax dollars are being given to the rich, in the form of tax breaks and bond payouts. Traditionally, this problem is offset by the many Federal relief systems that dedicate themselves to helping lower income families and households.
So, what's the immediate, real concern about our debt?
<i>To not let it get out of control.</i>
You have to put a cap on spending. Currently, the US economy is fueled by debt, we're spending too much and we're not having enough real output to back it up. Congress (and Bush) needs to bring spending back under control before public confidence (the crux of the legitimacy of every government in the world) erodes. When there's a deficit, cut back on spending, and raise taxes (I know, there is a political limit to how much taxes we can levy on the people, but it's still there). Though Bush is far from clueless, nor is all of Congress. It would take a succession of extremely stupid politicians in Congress to make the national debt an actual, immediate threat to national stability.
Spark Notes (for you lazy people):
The National debt is of no concern. Stop using it in other political arguments.
Comments
The only place where I part with you is on the redistribution of wealth.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->That means the lower income citizens' tax dollars are being given to the rich, in the form of tax breaks and bond payouts. Traditionally, this problem is offset by the many Federal relief systems that dedicate themselves to helping lower income families and households.<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
This bit I can't agree with because, from my perspective, Federal dollars taxed by income are collected on an individual basis. It is always the individual's money but politicos decide when it's in their interest to take less of it from certain groups of individuals.
Otherwise, good show <!--emo&;)--><img src='http://www.unknownworlds.com/forums/html/emoticons/wink-fix.gif' border='0' style='vertical-align:middle' alt='wink-fix.gif' /><!--endemo-->
Think of all the public institutions that are starved for funds. Education and health care are probably the biggest ones. Making an effort to pay down the debt means an investment in the future security of these programs, as less interest to pay off every year means more money to go around within the government.
Of course, there are other sides to the equation as well. Government waste is still a big problem, for instance. But chipping away at the whole budget issue from all sides would be enough to make progress, and fiduciary progress compounds.
While foreign ownership can be a bit problematic, it's already been offset for reasons already explained.
Otherwise, good show <!--emo&;)--><img src='http://www.unknownworlds.com/forums/html/emoticons/wink-fix.gif' border='0' style='vertical-align:middle' alt='wink-fix.gif' /><!--endemo--> <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
*sniffs air*
Fee Fie Foe Fum - I smell the smell of Libertarian scum!!! <!--emo&:p--><img src='http://www.unknownworlds.com/forums/html/emoticons/tounge.gif' border='0' style='vertical-align:middle' alt='tounge.gif' /><!--endemo-->
Great post Rapier, though since I know so little about the economy, I'm just going to have to take your word for it.
I have to disagree with you right there. Education is definitetly NOT starved for funds. Its starved of common sense at the STATE level on how to actually USE the funds ( imagine an elementary school having an issue with how much money is spent on paper and toner for copying papers and worksheets and stuff and then implementing a new math program that uses nothing but worksheets! ). There is plenty of money invested in education and it has increased even more since Bush came to office and it will continue to increase because people think that our education system's problems can be fixed by throwing more and more money at it... Which is an opinion completely detached from reality.
Saying healthcare needs more money is a bit wrong also. Right now the Bush administration has been chastised because their healthcare reforms are going to be TOO expensive. The problem with healthcare at the moment is, like education, the system itself ( and lawyers driving insurance rates sky high... but that's another topic ). NOTE: This does not mean I support universal health care.
So generally speaking, we cannot say the problem is that all these programs do not have enough money... In many cases they have plenty ( perhaps even too much ). The problem is that the money already invested is not invested wisely ( for education it is the fault of the states, not the feds ).
While foreign ownership can be a bit problematic, it's already been offset for reasons already explained. <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
I was referring to the foreign debt mainly, but someone makes a profit off of the lending regardless. The effects on the US as an entity and the effects on its individual citizens are not the same. I wouldn't try to justify going up to your eyeballs in credit-card debt because it helps US credit card companies either. Any sizable amount of debt is bad policy, and it's even worse to keep digging a bigger hole.
And while government waste certainly can't be eliminated, it can be mimized, but the efforts to do so are rather unimpressive thusfar (not enough people care, quite frankly).
As for education and healthcare, I was really just throwing out examples. If indeed the problem there is waste, then great, we can either spend the money on something else or return it to the public by lowering taxes.
The point rather was that the interest payments on the national debt are payed to someone, with taxes, and that less debt would result in lower interest payments, which would free up money for other things.
And it's also offset by our progressive tax system-- the wealthiest Americans who are disproportionately likely to profit off the debt (or have access to free capital <i>allowing</i> them the opportunity to profit) also have to submit a greater percentage of their income to pay off the interest incurred when they purchase securities and such from the government.
Although (and I could be wrong) to augment your description of distribution--I believe a <i>very</i> low percentage of securities are owned exclusively by American <i>individuals</i>-- the majority are held by corporations, banks (domestic and foreign), funds, pensions, etc. I could be wrong about that.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->I was referring to the foreign debt mainly, but someone makes a profit off of the lending regardless. The effects on the US as an entity and the effects on its individual citizens are not the same. I wouldn't try to justify going up to your eyeballs in credit-card debt because it helps US credit card companies either. Any sizable amount of debt is bad policy, and it's even worse to keep digging a bigger hole.
And while government waste certainly can't be eliminated, it can be mimized, but the efforts to do so are rather unimpressive thusfar (not enough people care, quite frankly).<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
<i>Precisely</i>. We need to separate the issue of the government becoming insolvent from its massive debt (not a concern) or any sort of backend redistrubution from that of its citizens' responsibility to <i>finance</i> that debt in the first place. The fact that we won't go belly up is small comfort when I'm coughing up that extra 17%* (roughly, I believe, but feel free to correct me) for the feds. So it's not entirely the redistribution which sucks; just having to pay it sucks, too.
Of course, as with all federal expenditures, we'd certainly like to pick and choose which we're on the hook for, but this one is especially irritating. It could be argued that lowering the tax rates for the upper brackets while at the same time increasing the national debt pushes even more of that interest burden onto the middle class brackets (not the poorest, who essentially only pay payroll taxes).
Either way, the interest is real money that's <i>paid out</i> to people (as rapier said, buy a treasury bond, if you'd like to see that in action), so it's got to be <i>paid by</i> someone. Which is my principal complaint.
*<span style='font-size:8pt;line-height:100%'>Not that I'm so naive to assume that the elimination of the national debt would yield an immediate 17% tax reduction, of course.</span>
While foreign ownership can be a bit problematic, it's already been offset for reasons already explained. <!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
I was referring to the foreign debt mainly, but someone makes a profit off of the lending regardless. The effects on the US as an entity and the effects on its individual citizens are not the same. I wouldn't try to justify going up to your eyeballs in credit-card debt because it helps US credit card companies either. Any sizable amount of debt is bad policy, and it's even worse to keep digging a bigger hole.
And while government waste certainly can't be eliminated, it can be mimized, but the efforts to do so are rather unimpressive thusfar (not enough people care, quite frankly).
As for education and healthcare, I was really just throwing out examples. If indeed the problem there is waste, then great, we can either spend the money on something else or return it to the public by lowering taxes.
The point rather was that the interest payments on the national debt are payed to someone, with taxes, and that less debt would result in lower interest payments, which would free up money for other things. <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
That doesn't make sense at all. The Federal Government uses the revenue from treasury bonds to fund the budget. Hence we sell bonds when there is a budget deficit, when we want to approrpriate funds to Federal programs such as public construction and defense. We intentionally sell bonds to fund for these programs, which are invariably of benefit to every US citizen.
The cycle is pretty much indefinite, we run a deficit, we get loans (in the form of selling bonds) from rich people, pay the budget at face value (hoping for future return), get more taxes, pay the loans, and the cycle continues. The problem is running debts faster than our economy is growing, this is the case for the past couple of years, which leads to the national debt becoming a burden and eroding public confidence.
We're spending too much of money that doesn't belong to us to try and boost our economy, but we're not getting equal returns (or greater), and that's the current financial crisis that the US currently faces. Granted, don't expect a meltdown of the US government, but expect harder (Depressionesque, is the fear of some) times in the future until we put up with lost consumer goods and accept higher taxes.
Ideally, perhaps, but not when you consider that there's also an invariable pork factor.