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Background Info on Debt

Post on: 5 Апрель, 2015 No Comment

This is another post in response to a student request. Here are some links that provide background information about the U.S. national debt.

First, the definitive sources:

zfacts.com/p/1195.html several other links and pages explaining some misconceptions

Overall, anybody researching or thinking about the U.S. national debt, should keep in mind that theres a LOT of nonsense circulating about U.S. government debt. To correct these misconceptions, keep in mind the following:

Debt is the accumulation of past deficits, if those deficits were financed with borrowing. Deficits are the difference between government money-in and money-out. Money-in is Taxes. Money-out is GovSpending + GovTransfers. If money-out exceeds money-in, you have a deficit.
Deficits do not necessarily have to be financed by borrowing, but the U.S. government has long voluntarily followed a policy of borrowing each year to cover the deficit, although it doesnt necessarily do so month-by-month. The alternative to borrowing to finance a deficit in a modern system is to issue checks to pay for spending and let the central bank (Federal Reserve) create bank reserves when the checks are cashed.
Any analogy between a households finances and the national government is false. There is no such valid comparison.
As long as a national government issues its own currency, that currency is not fixed in value (convertible) to anything else (other currency or gold), and the government borrows in its own currency, then it cannot default or go bankrupt or insolvent unless it voluntarily chooses to do so to screw the bondholders. This applies to US, Australia, Japan, UK, Canada, etc, but not to countries inside the eurozone they dont have their own currency.
National deficits, and hence debt, almost always goes up during a war. Vietnam war was a bit of exception.
When comparing debt levels between different years/eras, it is critical to adjust for:

inflation use real dollars or constant x year dollars if looking at the debt in dollars
size of population and the economy. The best measure of the relative size of the debt is: debt-to-GDP ratio.

Three things that really balloon the size of deficits and hence debt levels:

War

Depression or recession since tax receipts are generally based on economic activity (income tax), anything that slows the economy slows tax collection and raises the deficit.

Major income tax cut programs when combined with major new spending intiatives. This was rare in early US history, but big in Reagan years and Bush II years.

One thing that really reduces deficits and hence, slows the growth of debt:

a growing economy, especially as it nears full employment (explains Clinton years)

Government bonds/debt is NOT a burden on children or grandchildren. It does not have to be paid back. If the borrowed money is spent on things that improve or stimulate econonic growth, then the children and grandchildren inherit a larger, more productive economy that can pay for the debt interest.

Government bonds are not really like household debt or corporate debt, or even state-government debt. The best way to think about government bonds is that they are just like currency except they pay interest.

It is possible to have too little national debt. Banks in particular need to have a certain amount of government bonds among their assets because they provide a liquid asset. In recent years, the Australian government, when running a series of surpluses was asked by the banking community to issue new bonds anyway.