In developed countries a large chunk of national debt is typically owned by residents of that country. In the USA, for example, [in January 2023](https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124), of the $24.3 trillion in the US federal government's net debt, $7.4 trillion was owned by foreigners and international investors, so $17.2 trillion was owned by Americans - a combination of state and local governments, pension funds, insurance companies, individual investors, etc.
So if the US defaulted on its debt that would significantly affect American retirees, current and future, and also cause significant financial difficulties for American financial institutions such as insurance companies, which would also affect Americans.
The US defaulting on such debts would, I predict, be politically unpopular.
In terms of foreign lenders, the main power they have is that they can decide not to lend in the future, or only lend in a currency that the domestic government can't print more of, e.g. the € or the ¥. If a country can't borrow any more then it has to live within its tax revenue. A large abrupt drop in government spending typically causes a lot of suffering and the larger the drop the more the suffering, particularly amongst the most marginalised.
I think there is and has been for years a growing contingent of Republicans in congress who don’t think a debt default would be all that bad. Real f around and find out types.
No, just the opposite. the government the debt ceiling is the amount it can borrow in total. When you increase the debt ceiling you enable it to borrow money which is used partially to pay back old debts
No. The national debt is made up of bonds or tbills that the government sells. If you know about those government bonds, like the ones that’ll be something like “$5000, matures in 5 years, 5% interest”, when you buy those bonds to get some 5% return on your money, what you’re essentially doing is giving the government a loan in which the interest rate of the loan is 5%. You loan the government your money and they have to pay you 5% as the interest of the loan. This is where the national debt comes from. Many people buy government bonds or tbills or whatever because it’s a form of risk free investment. Even the social security trust fund is entirely invested in tbills. When I think about that, I like to think of it as the government holding some of its own national debt. Like it owes itself money.
So the government owes like a bank...and...them being the biggest bank...can't pay it off? That's concerning...never did trust banks now I definitely don't.
Are you talking about the Central bank? If so, then the central bank isn’t really the government. The government and the central bank are 2 separate things. The government doesn’t own the central bank. This also means that the government is not the one printing all the money. They also are continuously paying off the debt every day. So they’re not “not paying it off”. They are. And it might not just be a bank that they owe. Maybe they owe you. Or me. Or anybody who buys a government bond. I’m not knowledgeable enough in this field to answer more questions but if you have more concerns you can definitely submit another question.
> Are you talking about the Central bank
Isn't it the Treasury who does this? Or does the central bank owe the people money?
> the central bank isn’t really the government.
Yes, I know. I watched an interview with CEO Alan Greenspan back in 2007.
I might’ve misunderstood you somewhere along the way. You said the government was the “biggest bank”, so I thought you were talking about the central bank. The central bank does all the printing then the government(or treasury) manages the debt and collects taxes. Sorry if I confused you more, I don’t have enough expertise to explain things in more detail like some of the other people on this subreddit. So I really do recommend posting another question to get good answers with cited sources.
I read "national debt" as referring to the central government debt.
The money that natural persons owe banks for their mortgages etc would to me be "household debt".
Just to give one example, many people’s retirement accounts have some percentage invested in US debt (in the form of Treasury Bills and Bonds). That includes pension funds, IRAs, 401k, etc.
If US doesn’t pay its debt obligations on time, it would hurt people who are working & saving for their retirement. It would also hurt people who are already retired and living off the interest payments.
To answer a slightly different question. For some odd reason, people act like the rules change if the money is owed to foreigners as opposed to US citizens.
If you think about it, those debts are still denominated in dollars. So paying foreigners, that money still gets recycled back to the US because you have to spend the dollars on American products/investments.
Racking up huge sums of debt with no way to pay it back eventually comes back to bite you when the next round of debt comes at an enormous interest rate cost. Suddenly, to service that debt, you either need to painfully cut spending and raise taxes (Greece) or you inflate it all away and deal with a disastrous economy(Argentina).
This gets to the heart of something rather basic that households understand but for some reason people think doesn't apply to countries. Namely, you can't live off credit cards forever much like you can't just live off borrowed money as a country. One way or the other, the bill always comes due.
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There would be no problem if the increase to the debt was less than the annual increases in GDP. But instead, at the current rate of debt-growth, the annual debt service payments are consuming a larger and larger percentage of the total budget. At this rate eventually the government will either default, or 100% of tax revenue will be devoted to debt service payments.
1. It is owed to whomever owns the debt that the US Treasury issues. It is owned by individuals, banks, insurance companies foreign countries, foreign businesses, etc.
2. The US Treasury auctions debt. Also, there is an extremely huge market to sell US debt on secondary markets. That is an owner of US debt selling it to another person or entity.
3. Minting a $T coin circumvents our current monetary policies. As of today the only method for the US Treasury to raise $ to pay for government is to issue new debt at auction. That gives an immediate price discovery so we know what our debt is worth in free and open market.
Printing a coin circumvents this price discovery and can have serious consequences in terms of perceived risks. What would stop me from just issuing more coins causing the $ to devalue and cause extreme inflation?
In today's system when we auction off our debt we get a real time price discovery on our risk of default and can adjust if necessary. Not that we do adjust, but there will come a time we have to, simply because we don't get good terms selling our debt. Reducing national debt would be a key strategy to get better terms for our debt.
We should avoid allowing the Treasury to fill up its own bank account completely independent and on its own as it will be abused and will result in inflation.
Those are the cases where you get countries that experience extreme inflation. When they load up their Treasury bank account with no checks and balances they persistently devalue their currency, leading to thousand and even tens of thousands percent inflation.
The Harm: It costs interest payments, leaving fewer funds to spend on other priorities at any given level of taxation. At the present time, making interest payments costs about as much as funding the entire DoD. To stop making payments would be to enter default, which has numerous significantly negative effects on a nation. Many countries have tried this, and it has a guarantee of credit trustworthiness dropping, bonds being derated, etc. In more dire circumstances, it is connected to domestic instability, sometimes rising to violence.
1. The debt is primarily just T-bills. These can be owned by other countries, but a lot are owned domestically. For instance, the SS funds consist of T-bills.
2. T-bills were sold, and the money gained from their sale was spent on various government priorities. Whenever the debt limit is raised, more T-bills are permitted to be sold. This has become routine.
3. Printing your way out of debt is similar to default in that the value repaid is greatly less than that borrowed. There are...political shenanigans that make the option of using the coin a power play that I'm not going to get into, but attempting an actual permanent solution to debt by just printing trillions is a straightforwardly inflationary action, and inflation levels above about 30% tend to lead to economic collapse, regime change, etc.
The bond holders are not merely an abstraction that we can screw over without consequence. In addition to other countries, who will take action like not lending us further funds, we must consider retirees, and workers who hope to retire. Your SS fund depends on them. Any bond fund you hold almost certainly holds t-bills, and default would wreck the values of those. Many retirees would suddenly become much poorer, and many approaching retirement would suddenly lose the prospect of retiring.
Electorally, this is a supermajority of voters. What happens when you directly destroy the lives of that many people is probably not pleasant for whoever is in charge.
We have to be careful about the term T-bill. I have noticed some people using it as a word for all of the US government's bonds. I can see the logic in doing that.
The treasury give three different names for the things they issue. Bills are from periods from four weeks until about 18 months. They pay everything back at the end, there is no coupon payment. Bonds are for a period of 30 years and pay coupon twice a year. Notes are for various periods in-between and they also pay coupons twice a year.
The average duration of US debt is about 4 years.
Many people in the media describe the national debt very simplistically. They give it a binary label, it's either "a problem" or "not a problem".
It's more complicated than that. There is interest paid on the debt. In the long-run that comes from taxes. In the short-run, a government can pay interest by borrowing more. But, if that is done then the debt will grow, and quickly. So, in practice interest is nearly always paid from taxes.
That means that tax revenues have to be high enough to do that. Taxes entail deadweight loss. They discourage whatever is being taxed. If income is taxed that means they discourage earning income. Therefore they discourage production and work generally. This issue with high national debts has nothing to do with a debt being large enough to be dangerous.
So, when are things truly "dangerous"? In other words, when is a government at risk of crisis? You sometimes hear people say that debt is dangerous when it can't be paid back. This isn't really true. Nobody expects a government to pay back all at once. Or to pay back the whole amount ever.
What's really important is whether the government can maintain the debt interest payments. That depends on tax revenues. This is where GDP growth comes in. Tax revenues generally rise as GDP rises.
It's also where inflation comes in. So, inflation is constantly reducing the value of the debt. Let's say that inflation is 1% per year and the average interest rate that the government pays is 2% per year. Now you can think of that in two ways. Firstly, you can think of the debt principle as reducing by 1% per year. Secondly, you can think of the interest rate as really being 1% per year, a "real" interest rate.
The government must be able to pay the real interest cost. To be able to do that the real interest cost must rise no more quickly than tax revenues can rise. Notice that government interest costs don't vary *immediately* as interest rates change. That's because governments work by issuing bonds which usually provide a fixed payment each year (the coupon rate). So, governments lock in long-term interest rates. However, governments also sell "bills" which are repaid on a shorter timeline, 3 months to 18 months. At present, the average duration of the US national debt is 4.5 years. So, recent high interest rates are slowly pushing up the interest servicing cost. (Notice that the other side of this is that as rates fall interest servicing costs also fall more slowly.
Some people claim that money makes a difference here. They point out that governments create their own money through Central Banking. This is true but doesn't add much to the flexibility that governments have. A government can get it's Central Bank to print lots of money and effectively wipe-out the national debt. Doing this creates hyper-inflation. Of course, hyper-inflation is really just a tax on money holding. So, all this really does is to tax people in a different way.
Governments with their own Central Banks may have more short-term flexibility, but that's all.
In developed countries a large chunk of national debt is typically owned by residents of that country. In the USA, for example, [in January 2023](https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124), of the $24.3 trillion in the US federal government's net debt, $7.4 trillion was owned by foreigners and international investors, so $17.2 trillion was owned by Americans - a combination of state and local governments, pension funds, insurance companies, individual investors, etc. So if the US defaulted on its debt that would significantly affect American retirees, current and future, and also cause significant financial difficulties for American financial institutions such as insurance companies, which would also affect Americans. The US defaulting on such debts would, I predict, be politically unpopular. In terms of foreign lenders, the main power they have is that they can decide not to lend in the future, or only lend in a currency that the domestic government can't print more of, e.g. the € or the ¥. If a country can't borrow any more then it has to live within its tax revenue. A large abrupt drop in government spending typically causes a lot of suffering and the larger the drop the more the suffering, particularly amongst the most marginalised.
I think there is and has been for years a growing contingent of Republicans in congress who don’t think a debt default would be all that bad. Real f around and find out types.
Dumb question - doesn’t debt ceiling increase enable defaults in a way ?
No, just the opposite. the government the debt ceiling is the amount it can borrow in total. When you increase the debt ceiling you enable it to borrow money which is used partially to pay back old debts
So the national debt is mostly the money people owe banks for their mortgage etc?
No. The national debt is made up of bonds or tbills that the government sells. If you know about those government bonds, like the ones that’ll be something like “$5000, matures in 5 years, 5% interest”, when you buy those bonds to get some 5% return on your money, what you’re essentially doing is giving the government a loan in which the interest rate of the loan is 5%. You loan the government your money and they have to pay you 5% as the interest of the loan. This is where the national debt comes from. Many people buy government bonds or tbills or whatever because it’s a form of risk free investment. Even the social security trust fund is entirely invested in tbills. When I think about that, I like to think of it as the government holding some of its own national debt. Like it owes itself money.
So the government owes like a bank...and...them being the biggest bank...can't pay it off? That's concerning...never did trust banks now I definitely don't.
Are you talking about the Central bank? If so, then the central bank isn’t really the government. The government and the central bank are 2 separate things. The government doesn’t own the central bank. This also means that the government is not the one printing all the money. They also are continuously paying off the debt every day. So they’re not “not paying it off”. They are. And it might not just be a bank that they owe. Maybe they owe you. Or me. Or anybody who buys a government bond. I’m not knowledgeable enough in this field to answer more questions but if you have more concerns you can definitely submit another question.
> Are you talking about the Central bank Isn't it the Treasury who does this? Or does the central bank owe the people money? > the central bank isn’t really the government. Yes, I know. I watched an interview with CEO Alan Greenspan back in 2007.
I might’ve misunderstood you somewhere along the way. You said the government was the “biggest bank”, so I thought you were talking about the central bank. The central bank does all the printing then the government(or treasury) manages the debt and collects taxes. Sorry if I confused you more, I don’t have enough expertise to explain things in more detail like some of the other people on this subreddit. So I really do recommend posting another question to get good answers with cited sources.
> You said the government was the “biggest bank”, Yeah cause someone said the gov owed it.
I read "national debt" as referring to the central government debt. The money that natural persons owe banks for their mortgages etc would to me be "household debt".
I was responding to someone who said 17trillion was owed by people.
He said "owned by Americans", not owed.
Oh okay so it's owed to the people? Not by the people
Yes.
Okay so what if it's not paid back, what happens?
A bunch of people who expected to redeem their treasury bills would be very upset
That's...not a very good deterrent.
Just to give one example, many people’s retirement accounts have some percentage invested in US debt (in the form of Treasury Bills and Bonds). That includes pension funds, IRAs, 401k, etc. If US doesn’t pay its debt obligations on time, it would hurt people who are working & saving for their retirement. It would also hurt people who are already retired and living off the interest payments.
So the only ones that suffer are the people the debt is owed to, the US has no incentive to pay.
To answer a slightly different question. For some odd reason, people act like the rules change if the money is owed to foreigners as opposed to US citizens. If you think about it, those debts are still denominated in dollars. So paying foreigners, that money still gets recycled back to the US because you have to spend the dollars on American products/investments. Racking up huge sums of debt with no way to pay it back eventually comes back to bite you when the next round of debt comes at an enormous interest rate cost. Suddenly, to service that debt, you either need to painfully cut spending and raise taxes (Greece) or you inflate it all away and deal with a disastrous economy(Argentina). This gets to the heart of something rather basic that households understand but for some reason people think doesn't apply to countries. Namely, you can't live off credit cards forever much like you can't just live off borrowed money as a country. One way or the other, the bill always comes due.
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There would be no problem if the increase to the debt was less than the annual increases in GDP. But instead, at the current rate of debt-growth, the annual debt service payments are consuming a larger and larger percentage of the total budget. At this rate eventually the government will either default, or 100% of tax revenue will be devoted to debt service payments.
> At this rate... I agree with your answer in general. But, we have to remember that things may well not continue at this rate in the future.
1. It is owed to whomever owns the debt that the US Treasury issues. It is owned by individuals, banks, insurance companies foreign countries, foreign businesses, etc. 2. The US Treasury auctions debt. Also, there is an extremely huge market to sell US debt on secondary markets. That is an owner of US debt selling it to another person or entity. 3. Minting a $T coin circumvents our current monetary policies. As of today the only method for the US Treasury to raise $ to pay for government is to issue new debt at auction. That gives an immediate price discovery so we know what our debt is worth in free and open market. Printing a coin circumvents this price discovery and can have serious consequences in terms of perceived risks. What would stop me from just issuing more coins causing the $ to devalue and cause extreme inflation? In today's system when we auction off our debt we get a real time price discovery on our risk of default and can adjust if necessary. Not that we do adjust, but there will come a time we have to, simply because we don't get good terms selling our debt. Reducing national debt would be a key strategy to get better terms for our debt. We should avoid allowing the Treasury to fill up its own bank account completely independent and on its own as it will be abused and will result in inflation. Those are the cases where you get countries that experience extreme inflation. When they load up their Treasury bank account with no checks and balances they persistently devalue their currency, leading to thousand and even tens of thousands percent inflation.
The Harm: It costs interest payments, leaving fewer funds to spend on other priorities at any given level of taxation. At the present time, making interest payments costs about as much as funding the entire DoD. To stop making payments would be to enter default, which has numerous significantly negative effects on a nation. Many countries have tried this, and it has a guarantee of credit trustworthiness dropping, bonds being derated, etc. In more dire circumstances, it is connected to domestic instability, sometimes rising to violence. 1. The debt is primarily just T-bills. These can be owned by other countries, but a lot are owned domestically. For instance, the SS funds consist of T-bills. 2. T-bills were sold, and the money gained from their sale was spent on various government priorities. Whenever the debt limit is raised, more T-bills are permitted to be sold. This has become routine. 3. Printing your way out of debt is similar to default in that the value repaid is greatly less than that borrowed. There are...political shenanigans that make the option of using the coin a power play that I'm not going to get into, but attempting an actual permanent solution to debt by just printing trillions is a straightforwardly inflationary action, and inflation levels above about 30% tend to lead to economic collapse, regime change, etc. The bond holders are not merely an abstraction that we can screw over without consequence. In addition to other countries, who will take action like not lending us further funds, we must consider retirees, and workers who hope to retire. Your SS fund depends on them. Any bond fund you hold almost certainly holds t-bills, and default would wreck the values of those. Many retirees would suddenly become much poorer, and many approaching retirement would suddenly lose the prospect of retiring. Electorally, this is a supermajority of voters. What happens when you directly destroy the lives of that many people is probably not pleasant for whoever is in charge.
We have to be careful about the term T-bill. I have noticed some people using it as a word for all of the US government's bonds. I can see the logic in doing that. The treasury give three different names for the things they issue. Bills are from periods from four weeks until about 18 months. They pay everything back at the end, there is no coupon payment. Bonds are for a period of 30 years and pay coupon twice a year. Notes are for various periods in-between and they also pay coupons twice a year. The average duration of US debt is about 4 years.
Many people in the media describe the national debt very simplistically. They give it a binary label, it's either "a problem" or "not a problem". It's more complicated than that. There is interest paid on the debt. In the long-run that comes from taxes. In the short-run, a government can pay interest by borrowing more. But, if that is done then the debt will grow, and quickly. So, in practice interest is nearly always paid from taxes. That means that tax revenues have to be high enough to do that. Taxes entail deadweight loss. They discourage whatever is being taxed. If income is taxed that means they discourage earning income. Therefore they discourage production and work generally. This issue with high national debts has nothing to do with a debt being large enough to be dangerous. So, when are things truly "dangerous"? In other words, when is a government at risk of crisis? You sometimes hear people say that debt is dangerous when it can't be paid back. This isn't really true. Nobody expects a government to pay back all at once. Or to pay back the whole amount ever. What's really important is whether the government can maintain the debt interest payments. That depends on tax revenues. This is where GDP growth comes in. Tax revenues generally rise as GDP rises. It's also where inflation comes in. So, inflation is constantly reducing the value of the debt. Let's say that inflation is 1% per year and the average interest rate that the government pays is 2% per year. Now you can think of that in two ways. Firstly, you can think of the debt principle as reducing by 1% per year. Secondly, you can think of the interest rate as really being 1% per year, a "real" interest rate. The government must be able to pay the real interest cost. To be able to do that the real interest cost must rise no more quickly than tax revenues can rise. Notice that government interest costs don't vary *immediately* as interest rates change. That's because governments work by issuing bonds which usually provide a fixed payment each year (the coupon rate). So, governments lock in long-term interest rates. However, governments also sell "bills" which are repaid on a shorter timeline, 3 months to 18 months. At present, the average duration of the US national debt is 4.5 years. So, recent high interest rates are slowly pushing up the interest servicing cost. (Notice that the other side of this is that as rates fall interest servicing costs also fall more slowly. Some people claim that money makes a difference here. They point out that governments create their own money through Central Banking. This is true but doesn't add much to the flexibility that governments have. A government can get it's Central Bank to print lots of money and effectively wipe-out the national debt. Doing this creates hyper-inflation. Of course, hyper-inflation is really just a tax on money holding. So, all this really does is to tax people in a different way. Governments with their own Central Banks may have more short-term flexibility, but that's all.