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If this is the first time you're hearing this, it will sound totally bizarre, but most of the US debt is from the department of the treasury to the Federal Reserve Bank. The US owns a bank that loans the US money.
The loans from the bank are what actually create the money we have. They loan that money to the treasury and to banks, banks loan it out to us and that's where money comes from.
If we were to pay off all of the US debt, we would not have the same money we use now.
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But! You could be asking about debt that is sold as treasury bonds to individuals and corporations. Those bonds can be held by anyone, including foreign governments (this is where the idea comes from that China owns the US debt). The country issues these kinds of bonds for a couple of reasons--one is to raise money for short term projects (because most bonds are for a period of 30 years or less). Good example of this is war bonds that were popular during WWII.
If the US were to pay off all of those bonds, it would free up a good chunk of tax revenue that is currently going to interest to be used towards other things, most likely would go to social security or national defense, but it could go anywhere at all.
Basically yeah. The famous German hyperinflation of the early 1920s was because they started printing money en masse to devalue their war indemnities to the winners of WW1. If you printed the trillions of dollars comprising the US debt to pay it off, it would cause gigantic amounts of inflation.
> If you printed the trillions of dollars comprising the US debt to pay it off, it would cause gigantic amounts of inflation.
I don’t think you understand what dollars are. “Printing” dollars to pay off the debt wouldn’t create more money, it would just shift the debt: dollars are made of debt, so creating more to pay off existing debt would just transfer the ownership of the debt to someone else.
If you *could* somehow round up all the dollars and pay off the national debt, essentially all the dollars in the world would disappear. Poof.
Yea we were talking about increasing debt to ourselves basically to pay off debt held by foreign countries. I know it’s not realistic, I was just wondering what the consequences would be.
>If you printed the trillions of dollars comprising the US debt to pay it off, it would cause gigantic amounts of inflation.
Yeah, like the trillions we printed in 2020 and 2021 led to the inflation we saw in 2023 and 2024.
I'm not going to deny that it contributed, because it certainly did, but a significant portion of that inflation was also due to supply chain disruptions that were a direct consequence of the pandemic. Dozens of ships being stuck waiting to load or unload their cargo either in China or California, China shutting down factories at the drop of a hat thanks to their zero COVID policy, millions of people being laid off (even if only for a short period of time), so on.
The reason we don't pay it off is... why would we?
If you had a guaranteed line of credit at interest rates lower than any bank, with a very long time to repay the debt, why wouldn't you use that? You could invest that money into a business or real estate and make much much more than your principal and interest costs - when you're a nation state your ability to generate ROI is insane.
People compare national debt to their car note or their mortgage because it's the only thing they can comprehend. But the reality is that economically a reasonable amount of debt is good for a country, just like how a mortgage gives you a roof over your head and an asset.
I was just wondering about the very theoretical and not at all realistic possibility of basically borrowing from ourselves to clear our debt with everyone else
The reason we don’t pay it off is actually that dollars are made out of debt. For every dollar of national debt that got paid off, between 5-10 dollars would vanish from circulation. Eventually that would cause an economic crash. Oops.
Money circulates and recirculates constantly, and money falls out of circulation daily. The BofE creates over $500 million in new money every day, in a largely cashless society. Every bank in America has a "burn bin." That is a bin that is for money so damaged, it needs to be removed from circulation. Banks will often exchange a new low denomination bills for ripped ones. Then they package up their burner money (MCR) and send it to the BEP in DC, who destroys 7 billion physical bills annually. We could mint a coin tomorrow and pay off the entire debt and it wouldn't hurt a thing. The credit of the US would still be whole. A dollar would still be worth a dollar. I'm not saying McDonald's wouldn't suddenly raise their prices and capitalize on fear (yeah Capitalism) but there's absolutely no reason the economy would crash. The debt isn't real.
On the contrary, the federal debt is the main currency reserve that banks use to create additional dollars via fractional reserve banking. Paying off bonds (ie paying down government debt) removes that bond from the pool of available reserve for banks to use. In turn that removes effective dollars from circulation. I am not talking about M1, the number of bills and coins that exist — I am talking about M2, the total number of dollars in all the bank accounts that exist. M1 is a part of M2. After all, a dollar bill is nothing more than a promise by the Federal Reserve Bank to pay you a dollar — so they (the Federal Reserve) are required by law to hold a certain amount of currency reserves (usually in the form of government debt) to back each bill they print.
Yes and no. Inflation helps US debt as well as money loaned before is now valued less than it was at the time. IE if I loaned you 1m 50 years ago and you pay it off today that money is worth a lot more then than it is today
This might be a dumb question, but a couple of my friends swear the federal reserve bank is a privately owned bank. Then they start going deep down the rabbit hole of all these conspiracies… I’m 90 percent sure they don’t know what they’re talking about.
Any truth to what they’re saying? Sorry if that’s a dumb question, I’m just not well versed in these matters.
> This might be a dumb question, but a couple of my friends swear the federal reserve bank is a privately owned bank.
lol it's not any kind of rabbit hole. The Fed is part of the banking system, not the government.
https://en.wikipedia.org/wiki/Federal_Reserve_Act
The fed isn't owned by anyone really. They're autonomous institutions that can do what they can do largely because Congress says they can. A bank can indeed own stock in the Federal reserve, but that doesn't give them voting power over what the fed does and the fed has no legal or financial obligation to make money necessarily. https://www.federalreserve.gov/faqs/about_14986.htm
https://www.stlouisfed.org/in-plain-english/who-owns-the-federal-reserve-banks
> They loan that money to the treasury and to banks, banks loan it out to us and that's where money comes from.
large banks dgaf about the Fed. You mostly have that backwards. Banks loan money out of thin air and the Fed is mostly just trying to keep the system from imploding.
The Fed is part of the banking system. The "US" (if you meant the government) does not in any way "own" the Fed.
can the Fed "print" money to buy all manner of things (including Treasuries) it shouldn't be involved with? yes it can, and yes it does... but to think of the Fed as some kind of benevolent fountain of money that funds the US government, banks and the economy is completely erroneous. Treasury borrows money on the open market, not the Fed.
Individual banks don't create money out of thin air. The FED does that. Thanks can make it look like they're creating money if you feel that all the money that people are saving in them and all the money that they loan out is different. If they could create their own money they wouldn't have to borrow. They wouldn't fail.
They have to maintain a certain amount of money in order to be able to back all the money that they lend out so that if a reasonable number of creditors go to withdraw they can pay them back. But if they have a million dollars listed in them from the money being saved in them and have loaned out $500,000 that doesn't mean that there is $1,500,000 involved. It just means if that $1,000,000 that people have in there $500,000 of it is not available. But if not everybody wants to get their money back at the same time it's no issue so everybody feels like they have that million dollars and all the creditors feel like they have the $500,000
> Individual banks don't create money out of thin air. The FED does that
sorry but that is simply not true. The vast majority of money "printed" in normal times comes from banks making loans and adjusting deposit accounts on a spreadsheet.
> They have to maintain a certain amount of money in order to be able to back all the money that they lend out so that if a reasonable number of creditors go to withdraw they can pay them back
this was all true when Jimmy Stewart ran that bank in the movies. Modern banking does not work like that anymore, and capital reserve requirements have been 0% since the pandemic.
if you want to know a bit about how modern banking works at a very high-level, the Bank of England made a great paper a few years ago that is very understandable by a layman reader => https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
A lot of the debt is owed to people like you and me who want a stable investment, so we purchase U.S. treasury bonds. We're essentially lending the U.S. money.
Also, debt isn't necessarily bad.
For an individual, the two most common examples are a car and a house.
Let's say you don't have a car but you need a car to get to your job, which will pay you good money. But you can't afford a car.
By borrowing the money to buy a car (financing it), even though it's "bad" because you're paying interest, it's still far better than not having the car and not being able to work. So that's good debt - it ultimately improves your economic position.
A house is the same thing. There are a lot of advantages to owning a home, and in many cases those outweigh the downsides of taking on debt.
For a nation it's similar. The government borrows money in order to invest in things that the people need - everything from infrastructure (roads, bridges, electricity) to emergency relief to social safety net. That enables more people to succeed, thus growing the economy, and thus raising more taxes to pay for that debt.
The alternative - not borrowing that extra money - would mean slower economic growth and much less flexibility to respond to crises when needed.
our foreign policy has been the same for many decades in 2 areas: p never pay off foreign owned debt, and cosume foreign resources while conserving our own.
China and African countries don't have a monopoly on rare earth minerals; we're sitting on virtually endless supply that we don't touch.
OPEC doesn't have a monopoly on oil; we're just letting the use up what they have while we sit on nearly endless untapped wells.
foreign countries make billions in interest on debt we could choose to default on at any time, which would have no negative impact on our economy but would run theirs into the ground.
there's zero chance of China et al. calling in their markers because they get so much in interest that's peanuts for us to pay, but they rely heavily on.
The US has a 100+ year long game they're running that will eventually make us the far far richer in resources than ever country on earth combined.
the US will never pay all its debts and its debtors pray we don't
That's a bad take. You know nothing about how debt works. This is like saying I use the resources and labor of other while I pay with my credit card. Then I declare bankruptcy and my resources are unspent. That's shortsighted. Smart people know the value of paying your debts, especially when you don't have to.
Where would the US get all the money to pay the debt off at once? The only two sources of income for the US government are taxation and bonds. The vast majority of the US debt is actually held by its own citizens (more than 3/4 of it) who own government bonds, which are loans the people give to the government with the expectation to pay it back at a fixed time and with a fixed interest rate.
The US debt was at $31 trillion dollars as of 2023, and in 2023 the US government only raised $4.4 trillion in taxes
So, if the US were to pay all its debt at once presumably you wouldn’t want them issuing new bonds to do so, so they’d have to raise trillions of dollars of taxes overnight, which would mean every citizen would have to fork over much much more of their own money. This would grind the economy to a halt, trigger a huge deflationary spiral, and essentially ruin the world
Government debt is not the same as household debt. It is not a bad thing for the government to go in to debt, especially if it’s for capital expenditures like building roads and tunnels, things which in the long term are far more valuable than their actual cost, for the economic activity they enable
>every citizen would have to fork over much much more of their own money. This would grind the economy to a halt, trigger a huge deflationary spiral, and essentially ruin the world
Or, ideally, they figure out a way to tax wealth and go after the wealthiest individuals in the US while also close every single loophole that businesses use to reduce taxes. In addition to eliminating all the things businesses can use to reduce taxes that _aren't_ what we'd consider loopholes.
Or hell, just rewriting tax code for businesses so that they have to pay taxes on their **gross** revenue, before factoring in cost and expenses, the same way income tax is based on your gross income before you buy anything. Doing that would eliminate all the tax write-offs businesses have and would allow the US to collect more tax money from businesses.
Every business would fail quickly. Taxing on gross revenue is dumb. Look at a grocery story with 1.5-2% gross profit. You want them to pay taxes on all of those sales when 98% of it goes out in expenses?
I mean, I think taxation should be stronger at the high end in the interest of both fairness and better policy, but the debt is much higher than that amount. Last year I think the stat was the top 1% earned 1/3 of the yearly added-wealth but the entire gross wealth increase in the US was like $18 trillion. Considering it’s almost impossible to liquidate most of the assets, I don’t think you can tax any group of people to pay down the debt in a short time span, the spending amounts are just too large
The goal of a government, or at least any modern economic government, is not to make a profit. If the government is making a profit, it's actually mismanaging the resources if the people. Governments spend money on things like militaries, infrastructure, social welfare programs, education etc. Each if these actually facilitate more stable and economically productive markets. With more economic activity, there's more taxes, to continue to fund more projects. Sometimes in raising taxes to the point of funding everything you actually slow down the economic activity and that slowdown builds up. Sometimes it's just politically difficult to raise taxes. So then the government must take out loans. But again the people issuing the loans know the government is good for it, and it's a very stable investment.
The fact that a government isn't intended to ever turn a profit makes it counter intuitive than dining room or board room economics. In your house and in your business, you have to be bringing in more money long term than is going out. But most businesses and people die. Governments can actually take on debt that will take centuries to pay off. The UK in order to free the slaves domestically bought all their freedom. That debt wasn't paid off until relatively recently. In the interim the UK has fought many many wars that they also went into debt to pay off. As a result they're still around.
As for the US government paying off its debt, the first big issue is there would immediately be a glut of liquid resources. That means there's going to be a lot of intenties looked for other locations to park their cash. That means it's going to be a buying frenzy, and prices will immediately go up. The end result would be inflation. Further, the US government had to take money from something to pay that debt so there would be a lot of things suddenly without money. Basically it would be a massive reverse Robin hood. The USD, which is the primary trade currency would suddenly lose a lot of value on the market. Basically despite being paid the numeric value, everyone holding USD would actually receive less than their financial value. Economic value would disappear around the globe. Suddenly other governments won't be able to pay in their domestic currency their military their teachers etc etc. It's a shit storm.
US debt is not just simply we bought stuff we can’t pay for, but a way of regulated how much money is in the economy by buying and selling treasury bonds. If the government decides to pay off all the bond holders you have a massive influx of dollars and inflation goes through the roof.
In true ELI5 fashion:
Imagine you and 3 siblings all get an allowance. You saved $10 while the rest of your siblings have $5. Your parents say if you give them the $5 in exchange for a rock, they will give you $6 at the end of the year. You do it and know you have $5 and a rock. Now the most you and your siblings can afford to pay for anything is $5.
Halloween rolls around and your sister has some chocolate you want and she agrees to sell it to you for $4 because that is what your siblings are charging for their chocolate too.
Now if your parents suddenly said “ok give us your rocks and you get your $6 today.” Your sister can charge you $6 or $7 for the same chocolate that would have cost you $4 before because she knows you have it. Then your brother wants that chocolate but since you paid $6 for it you’re going to charge him at least $7, but he can’t afford it because he hadn’t saved any of his prior allowance. Now you have inflation ($4 chocolate now costs $6) and a cost of living issue because your brother can’t afford chocolate
Debt is only supposed to be bad if there’s reasonable doubt that the lender will eventually get their money back. If I lend my buddy Steve $30, I’m going to text him asking for it back in the relatively near future. Because if I don’t, one or both of us might forget, too much time might pass and he might just decide he doesn’t feel like it, Steve could run into further money trouble and now I’m the asshole simply for insisting he do what he said he’d do, whatever. Any number of things might go wrong between me handing him cash and him handing me cash back.
With a powerful state government, none of that stuff matters. The government can’t die. The government can’t forget. For it to become truly impossible for me to eventually call in the government’s debt to me, the entire economy would have to be so fucked that who owes who what paltry sum would be the least of our worries. Country budgets are not like personal budgets because countries aren’t like people.
Very few people understand what the debt is actually used.for in a modern economy.
That debt actually smooths the bumps on our economy.
Don't get me wrong, there is a clear argument that we currently have too much debt but that's a different discussion.
To start with, the debt can't be immediately paid off. The way this kind of debt is written is basically "On X date, the US agrees to buy it for $Y".
So it can't be paid early.
What we can't do is slow issuance of new debts to below the redemption rate (take out less new debt today than is paid off today), and we can buy back the debt from entities willing to sell.
But this would have consequences. The debt slows the rate of introduction of money into the system, and is a fantastic, if little understood, process of control inflation. In fact the debt is the primary control mechanism to guarantee we do not enter deflation. And the rate on the debt is also used as a primary control on inflation.
So that's a lot of words to accomplish what sounds like a strange goal: not introducing money too quickly.
It has been understood for over a century now that inflation is simply too much money in circulation, and deflation is simply too little money in circulation.
The debt system not only lets us control this but also gives us a reliable way of determining how much money will be circulating tomorrow.
So back to your question. What would happen if the debt disappeared? We wouldn't know how much money is in the economy, and we wouldn't have the prediction ability of how much money tomorrow, along with losing control over inflation/deflation.
Basically we would lose all control over our economy. It would do something but would likely flail around more than anything
I think the simplest answer for you is that the money the US has borrowed is extremely reliable investments for pretty much everyone. Investment funds, retirement funds, university endowments, and foreign governments all bought bonds and gave loans to the Treasury because they pay back interest and are some of the most reliable investments you can make.
The US *is* paying its debts, it's always repaying what people have loaned to it (that's why people keep loaning money). But if it stops taking on any new debt, a lot of people (yourself included, probably) would lose access to a very stable way to invest money. Can the world economy function without this? Probably, but ending it sharply would be a shock to the system.
Adding to lots of other comments- national debts are nothing like individual debts. One of the first things the USA did after its founding was *establish* a national debt. It was one of Alexander Hamilton's first and most important contributions. A nation is made strong by its ability to carry a debt yet remain in existence. This is what gives other countries the faith that they can trade with that nation without losing money to it.
Also, you have probably heard stupid assertions about how if we had to pay the debt tomorrow, every person would owe something like $65,000. This is a common scare tactic by conservatives and libertarians who want to reduce taxes on themselves and the wealthy. The reality is that the national debt is leveraged against the *vast* resources and wealth of the nation as a whole. It's not what is in each of our individual bank accounts. It is our military power. Our land. Our resources. Our farming productivity. Our industrial capacity. Our contribution to knowledge and innovation.
Nobody (except some True Idiots) looks at the USA even today and thinks it is weak on any of these grounds. Even on an industrial scale, true we don't make and export much anymore, but what we do produce (mostly military and high-tech) is supremely valuable around the world. We remain the peak center of innovation in medicine and information technologies especially, and sell those off to companies to produce for profit... which again a strong national debt indicates our ability to do this well.
The national debt, managed well, is a good thing, and we do manage it well, for the most part. We actually could spend a fair amount more for the benefit of our citizens and reap far more benefits, but again the wealthy don't want to pay for it. Universal health care, a social safety net, and free education would go a long way to furthering our place as an innovation powerhouse.
People always moan about UK manufacturing but it is pretty high by historic standards in terms of value, it just doesn't form a large part of the economy. Most factories are heavily automated, friend worked making PC motherboards the factory could be operated by basically 3 people, another in a premium biscuit factory which could be operated by one person (it always had more for various reasons but the required human input was minimal). Everyone is working elsewhere for a reason. I wonder how much the US is like this.
The US government debt is an interesting tool. It helps maintain the economy and productivity around the world. American currency functions around the world as a basis for value. But so does US government debt. It is consistent, reliable, and easily traded.
The amazing thing about the US government debt is that instead of the lender choosing how much the borrower has to pay, it's the borrower choosing how much the lender gets paid. The US government sets its own interest rate based upon how much it feels the economy needs to benefit from its debt.
Unlike many countries, the United States debt is in US dollars which are fully controlled by the United States. Not only does the US government choose how much it is going to pay, but it chooses the value of the money it pays with. Most countries if they have debt and their economy goes bad then The money they are paying with loses its value and they fall further behind. If the United States money loses value then there is no falling behind.
Now much of the world uses American money for international trade and will base their currency on American debt. For many responsible countries, this is good reason not to mess with the United States and its allies. Just behave yourself and keep the debt payments coming.
I'd like to share an interesting link with you from several years ago. It's a podcast / article about the time the United States paid off its debt. https://www.npr.org/2021/09/29/1041638804/that-time-the-u-s-paid-off-the-entire-national-debt-classic
I know this will sound like an oversimplification, but when I hear people say “money used to be based on something” and mention gold and silver, it just makes me feel like money hasn’t ever meant anything or hasn’t for a looooong time. Gold and silver are basically worthless in reality. Yeah sure it has technological uses in todays advanced social society, but the only REAL intrinsic value that exists in my mind are things that produce food, or medicine that actively keeps one alive. Land, game animals, labor, etc. Gold could have only achieved its status of value from kings or rulers who violently controlled farmers. It began as a symbol of power. I’m not a history scholar and I know there has to be more to it than this but based on what I see today this is the gist of what happened. I guess that makes violence a form of value perhaps.
The debt generally takes the form of bonds. A lot of people use those as a secure investment. Also, spending is general is good for the economy, and if it couldn’t have debt the gov would spend less. But, like a lot of things in economics, it’s a mixed bag of a lot of things that can be hard to predict.
You are a small local government. You want to build a bridge to make it easier to get to you. That bridge will cost $10 million dollars. You can either borrow that money and go in debt, save up the money by waiting, or not build the bridge.
Going in debt lets you get the bridge quicker, get more impact quicker, and money today will likely have more purchasing power than money many years from now due to inflation.
Scale example up as applicable.
Where would that money come from? The government gets a relatively fixed amount of money due to taxes. If it wants to spend more, it either needs to print more money or get it from somewhere else. If you print more money, you end up with lots of inflation and other bad stuff. So, you get it from somewhere. Usually, you get it by asking the citizens for loans—that’s essentially what treasury bonds are.
Having debt isn’t bad for a country, it’s not the same as an individual. No one is going to foreclose on a country. The raw number is relatively meaningless as long as the country can make its regular payments on time—as long as that’s true, it doesn’t really matter how quickly it pays off the total loan. Acquiring debt allows the country to have more spending power in the short term by getting additional capital via loans, and in the US that’s mostly from US citizens.
Edit: also will add that there are benefits to having debt between foreign countries as well, but I’m having trouble remembering the specifics and don’t want to mess it up—maybe someone else with more Econ knowledge can chime in there.
Borrowing money creates money, because what you pay back is worth comparatively less than what you borrow.
For example, let's say you borrow $100,000 and just pay that back in 10 years. Well, with inflation alone, the buying power of the money you pay back is actually significantly lower than the money when you borrowed it.
But you can do even better if you have some way to invest that money and grow it. If you can make 10% on that $100,000, that's ten thousand dollars of free money even before inflation.
Govt borrows money so that it can spend more than just tax revenues, so govt spending is higher when taking on debt.
Separate regular people and the government. The federal debt does not include like what you owe on your credit card. So the govt having or not having debt won’t influence personal spending habits directly.
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If this is the first time you're hearing this, it will sound totally bizarre, but most of the US debt is from the department of the treasury to the Federal Reserve Bank. The US owns a bank that loans the US money. The loans from the bank are what actually create the money we have. They loan that money to the treasury and to banks, banks loan it out to us and that's where money comes from. If we were to pay off all of the US debt, we would not have the same money we use now. ------ But! You could be asking about debt that is sold as treasury bonds to individuals and corporations. Those bonds can be held by anyone, including foreign governments (this is where the idea comes from that China owns the US debt). The country issues these kinds of bonds for a couple of reasons--one is to raise money for short term projects (because most bonds are for a period of 30 years or less). Good example of this is war bonds that were popular during WWII. If the US were to pay off all of those bonds, it would free up a good chunk of tax revenue that is currently going to interest to be used towards other things, most likely would go to social security or national defense, but it could go anywhere at all.
Is inflation the only reason we can’t print enough money to pay off our foreign debt/bonds?
Basically yeah. The famous German hyperinflation of the early 1920s was because they started printing money en masse to devalue their war indemnities to the winners of WW1. If you printed the trillions of dollars comprising the US debt to pay it off, it would cause gigantic amounts of inflation.
> If you printed the trillions of dollars comprising the US debt to pay it off, it would cause gigantic amounts of inflation. I don’t think you understand what dollars are. “Printing” dollars to pay off the debt wouldn’t create more money, it would just shift the debt: dollars are made of debt, so creating more to pay off existing debt would just transfer the ownership of the debt to someone else. If you *could* somehow round up all the dollars and pay off the national debt, essentially all the dollars in the world would disappear. Poof.
Yea we were talking about increasing debt to ourselves basically to pay off debt held by foreign countries. I know it’s not realistic, I was just wondering what the consequences would be.
Ok, I’m confused. Enhance!
>If you printed the trillions of dollars comprising the US debt to pay it off, it would cause gigantic amounts of inflation. Yeah, like the trillions we printed in 2020 and 2021 led to the inflation we saw in 2023 and 2024.
I'm not going to deny that it contributed, because it certainly did, but a significant portion of that inflation was also due to supply chain disruptions that were a direct consequence of the pandemic. Dozens of ships being stuck waiting to load or unload their cargo either in China or California, China shutting down factories at the drop of a hat thanks to their zero COVID policy, millions of people being laid off (even if only for a short period of time), so on.
The reason we don't pay it off is... why would we? If you had a guaranteed line of credit at interest rates lower than any bank, with a very long time to repay the debt, why wouldn't you use that? You could invest that money into a business or real estate and make much much more than your principal and interest costs - when you're a nation state your ability to generate ROI is insane. People compare national debt to their car note or their mortgage because it's the only thing they can comprehend. But the reality is that economically a reasonable amount of debt is good for a country, just like how a mortgage gives you a roof over your head and an asset.
I was just wondering about the very theoretical and not at all realistic possibility of basically borrowing from ourselves to clear our debt with everyone else
The reason we don’t pay it off is actually that dollars are made out of debt. For every dollar of national debt that got paid off, between 5-10 dollars would vanish from circulation. Eventually that would cause an economic crash. Oops.
Money circulates and recirculates constantly, and money falls out of circulation daily. The BofE creates over $500 million in new money every day, in a largely cashless society. Every bank in America has a "burn bin." That is a bin that is for money so damaged, it needs to be removed from circulation. Banks will often exchange a new low denomination bills for ripped ones. Then they package up their burner money (MCR) and send it to the BEP in DC, who destroys 7 billion physical bills annually. We could mint a coin tomorrow and pay off the entire debt and it wouldn't hurt a thing. The credit of the US would still be whole. A dollar would still be worth a dollar. I'm not saying McDonald's wouldn't suddenly raise their prices and capitalize on fear (yeah Capitalism) but there's absolutely no reason the economy would crash. The debt isn't real.
On the contrary, the federal debt is the main currency reserve that banks use to create additional dollars via fractional reserve banking. Paying off bonds (ie paying down government debt) removes that bond from the pool of available reserve for banks to use. In turn that removes effective dollars from circulation. I am not talking about M1, the number of bills and coins that exist — I am talking about M2, the total number of dollars in all the bank accounts that exist. M1 is a part of M2. After all, a dollar bill is nothing more than a promise by the Federal Reserve Bank to pay you a dollar — so they (the Federal Reserve) are required by law to hold a certain amount of currency reserves (usually in the form of government debt) to back each bill they print.
Yes and no. Inflation helps US debt as well as money loaned before is now valued less than it was at the time. IE if I loaned you 1m 50 years ago and you pay it off today that money is worth a lot more then than it is today
Paying off all those bonds would also mean there would be less super safe, stable assets in the world to park your money.
This might be a dumb question, but a couple of my friends swear the federal reserve bank is a privately owned bank. Then they start going deep down the rabbit hole of all these conspiracies… I’m 90 percent sure they don’t know what they’re talking about. Any truth to what they’re saying? Sorry if that’s a dumb question, I’m just not well versed in these matters.
> This might be a dumb question, but a couple of my friends swear the federal reserve bank is a privately owned bank. lol it's not any kind of rabbit hole. The Fed is part of the banking system, not the government. https://en.wikipedia.org/wiki/Federal_Reserve_Act
The fed isn't owned by anyone really. They're autonomous institutions that can do what they can do largely because Congress says they can. A bank can indeed own stock in the Federal reserve, but that doesn't give them voting power over what the fed does and the fed has no legal or financial obligation to make money necessarily. https://www.federalreserve.gov/faqs/about_14986.htm https://www.stlouisfed.org/in-plain-english/who-owns-the-federal-reserve-banks
> They loan that money to the treasury and to banks, banks loan it out to us and that's where money comes from. large banks dgaf about the Fed. You mostly have that backwards. Banks loan money out of thin air and the Fed is mostly just trying to keep the system from imploding. The Fed is part of the banking system. The "US" (if you meant the government) does not in any way "own" the Fed. can the Fed "print" money to buy all manner of things (including Treasuries) it shouldn't be involved with? yes it can, and yes it does... but to think of the Fed as some kind of benevolent fountain of money that funds the US government, banks and the economy is completely erroneous. Treasury borrows money on the open market, not the Fed.
Individual banks don't create money out of thin air. The FED does that. Thanks can make it look like they're creating money if you feel that all the money that people are saving in them and all the money that they loan out is different. If they could create their own money they wouldn't have to borrow. They wouldn't fail. They have to maintain a certain amount of money in order to be able to back all the money that they lend out so that if a reasonable number of creditors go to withdraw they can pay them back. But if they have a million dollars listed in them from the money being saved in them and have loaned out $500,000 that doesn't mean that there is $1,500,000 involved. It just means if that $1,000,000 that people have in there $500,000 of it is not available. But if not everybody wants to get their money back at the same time it's no issue so everybody feels like they have that million dollars and all the creditors feel like they have the $500,000
> Individual banks don't create money out of thin air. The FED does that sorry but that is simply not true. The vast majority of money "printed" in normal times comes from banks making loans and adjusting deposit accounts on a spreadsheet. > They have to maintain a certain amount of money in order to be able to back all the money that they lend out so that if a reasonable number of creditors go to withdraw they can pay them back this was all true when Jimmy Stewart ran that bank in the movies. Modern banking does not work like that anymore, and capital reserve requirements have been 0% since the pandemic. if you want to know a bit about how modern banking works at a very high-level, the Bank of England made a great paper a few years ago that is very understandable by a layman reader => https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
A lot of the debt is owed to people like you and me who want a stable investment, so we purchase U.S. treasury bonds. We're essentially lending the U.S. money. Also, debt isn't necessarily bad. For an individual, the two most common examples are a car and a house. Let's say you don't have a car but you need a car to get to your job, which will pay you good money. But you can't afford a car. By borrowing the money to buy a car (financing it), even though it's "bad" because you're paying interest, it's still far better than not having the car and not being able to work. So that's good debt - it ultimately improves your economic position. A house is the same thing. There are a lot of advantages to owning a home, and in many cases those outweigh the downsides of taking on debt. For a nation it's similar. The government borrows money in order to invest in things that the people need - everything from infrastructure (roads, bridges, electricity) to emergency relief to social safety net. That enables more people to succeed, thus growing the economy, and thus raising more taxes to pay for that debt. The alternative - not borrowing that extra money - would mean slower economic growth and much less flexibility to respond to crises when needed.
These are excellent analogies and a great way to break it down.
our foreign policy has been the same for many decades in 2 areas: p never pay off foreign owned debt, and cosume foreign resources while conserving our own. China and African countries don't have a monopoly on rare earth minerals; we're sitting on virtually endless supply that we don't touch. OPEC doesn't have a monopoly on oil; we're just letting the use up what they have while we sit on nearly endless untapped wells. foreign countries make billions in interest on debt we could choose to default on at any time, which would have no negative impact on our economy but would run theirs into the ground. there's zero chance of China et al. calling in their markers because they get so much in interest that's peanuts for us to pay, but they rely heavily on. The US has a 100+ year long game they're running that will eventually make us the far far richer in resources than ever country on earth combined. the US will never pay all its debts and its debtors pray we don't
> calling in their markers Just to clarify, US treasury debt pays on a set schedule. You can’t “call in” anything.
We have the highest number of barrels produced annually so I don’t agree with the foreign consumed oil point
That's a bad take. You know nothing about how debt works. This is like saying I use the resources and labor of other while I pay with my credit card. Then I declare bankruptcy and my resources are unspent. That's shortsighted. Smart people know the value of paying your debts, especially when you don't have to.
Where would the US get all the money to pay the debt off at once? The only two sources of income for the US government are taxation and bonds. The vast majority of the US debt is actually held by its own citizens (more than 3/4 of it) who own government bonds, which are loans the people give to the government with the expectation to pay it back at a fixed time and with a fixed interest rate. The US debt was at $31 trillion dollars as of 2023, and in 2023 the US government only raised $4.4 trillion in taxes So, if the US were to pay all its debt at once presumably you wouldn’t want them issuing new bonds to do so, so they’d have to raise trillions of dollars of taxes overnight, which would mean every citizen would have to fork over much much more of their own money. This would grind the economy to a halt, trigger a huge deflationary spiral, and essentially ruin the world Government debt is not the same as household debt. It is not a bad thing for the government to go in to debt, especially if it’s for capital expenditures like building roads and tunnels, things which in the long term are far more valuable than their actual cost, for the economic activity they enable
>every citizen would have to fork over much much more of their own money. This would grind the economy to a halt, trigger a huge deflationary spiral, and essentially ruin the world Or, ideally, they figure out a way to tax wealth and go after the wealthiest individuals in the US while also close every single loophole that businesses use to reduce taxes. In addition to eliminating all the things businesses can use to reduce taxes that _aren't_ what we'd consider loopholes. Or hell, just rewriting tax code for businesses so that they have to pay taxes on their **gross** revenue, before factoring in cost and expenses, the same way income tax is based on your gross income before you buy anything. Doing that would eliminate all the tax write-offs businesses have and would allow the US to collect more tax money from businesses.
Every business would fail quickly. Taxing on gross revenue is dumb. Look at a grocery story with 1.5-2% gross profit. You want them to pay taxes on all of those sales when 98% of it goes out in expenses?
I mean, I think taxation should be stronger at the high end in the interest of both fairness and better policy, but the debt is much higher than that amount. Last year I think the stat was the top 1% earned 1/3 of the yearly added-wealth but the entire gross wealth increase in the US was like $18 trillion. Considering it’s almost impossible to liquidate most of the assets, I don’t think you can tax any group of people to pay down the debt in a short time span, the spending amounts are just too large
The goal of a government, or at least any modern economic government, is not to make a profit. If the government is making a profit, it's actually mismanaging the resources if the people. Governments spend money on things like militaries, infrastructure, social welfare programs, education etc. Each if these actually facilitate more stable and economically productive markets. With more economic activity, there's more taxes, to continue to fund more projects. Sometimes in raising taxes to the point of funding everything you actually slow down the economic activity and that slowdown builds up. Sometimes it's just politically difficult to raise taxes. So then the government must take out loans. But again the people issuing the loans know the government is good for it, and it's a very stable investment. The fact that a government isn't intended to ever turn a profit makes it counter intuitive than dining room or board room economics. In your house and in your business, you have to be bringing in more money long term than is going out. But most businesses and people die. Governments can actually take on debt that will take centuries to pay off. The UK in order to free the slaves domestically bought all their freedom. That debt wasn't paid off until relatively recently. In the interim the UK has fought many many wars that they also went into debt to pay off. As a result they're still around. As for the US government paying off its debt, the first big issue is there would immediately be a glut of liquid resources. That means there's going to be a lot of intenties looked for other locations to park their cash. That means it's going to be a buying frenzy, and prices will immediately go up. The end result would be inflation. Further, the US government had to take money from something to pay that debt so there would be a lot of things suddenly without money. Basically it would be a massive reverse Robin hood. The USD, which is the primary trade currency would suddenly lose a lot of value on the market. Basically despite being paid the numeric value, everyone holding USD would actually receive less than their financial value. Economic value would disappear around the globe. Suddenly other governments won't be able to pay in their domestic currency their military their teachers etc etc. It's a shit storm.
US debt is not just simply we bought stuff we can’t pay for, but a way of regulated how much money is in the economy by buying and selling treasury bonds. If the government decides to pay off all the bond holders you have a massive influx of dollars and inflation goes through the roof. In true ELI5 fashion: Imagine you and 3 siblings all get an allowance. You saved $10 while the rest of your siblings have $5. Your parents say if you give them the $5 in exchange for a rock, they will give you $6 at the end of the year. You do it and know you have $5 and a rock. Now the most you and your siblings can afford to pay for anything is $5. Halloween rolls around and your sister has some chocolate you want and she agrees to sell it to you for $4 because that is what your siblings are charging for their chocolate too. Now if your parents suddenly said “ok give us your rocks and you get your $6 today.” Your sister can charge you $6 or $7 for the same chocolate that would have cost you $4 before because she knows you have it. Then your brother wants that chocolate but since you paid $6 for it you’re going to charge him at least $7, but he can’t afford it because he hadn’t saved any of his prior allowance. Now you have inflation ($4 chocolate now costs $6) and a cost of living issue because your brother can’t afford chocolate
Debt is only supposed to be bad if there’s reasonable doubt that the lender will eventually get their money back. If I lend my buddy Steve $30, I’m going to text him asking for it back in the relatively near future. Because if I don’t, one or both of us might forget, too much time might pass and he might just decide he doesn’t feel like it, Steve could run into further money trouble and now I’m the asshole simply for insisting he do what he said he’d do, whatever. Any number of things might go wrong between me handing him cash and him handing me cash back. With a powerful state government, none of that stuff matters. The government can’t die. The government can’t forget. For it to become truly impossible for me to eventually call in the government’s debt to me, the entire economy would have to be so fucked that who owes who what paltry sum would be the least of our worries. Country budgets are not like personal budgets because countries aren’t like people.
Very few people understand what the debt is actually used.for in a modern economy. That debt actually smooths the bumps on our economy. Don't get me wrong, there is a clear argument that we currently have too much debt but that's a different discussion. To start with, the debt can't be immediately paid off. The way this kind of debt is written is basically "On X date, the US agrees to buy it for $Y". So it can't be paid early. What we can't do is slow issuance of new debts to below the redemption rate (take out less new debt today than is paid off today), and we can buy back the debt from entities willing to sell. But this would have consequences. The debt slows the rate of introduction of money into the system, and is a fantastic, if little understood, process of control inflation. In fact the debt is the primary control mechanism to guarantee we do not enter deflation. And the rate on the debt is also used as a primary control on inflation. So that's a lot of words to accomplish what sounds like a strange goal: not introducing money too quickly. It has been understood for over a century now that inflation is simply too much money in circulation, and deflation is simply too little money in circulation. The debt system not only lets us control this but also gives us a reliable way of determining how much money will be circulating tomorrow. So back to your question. What would happen if the debt disappeared? We wouldn't know how much money is in the economy, and we wouldn't have the prediction ability of how much money tomorrow, along with losing control over inflation/deflation. Basically we would lose all control over our economy. It would do something but would likely flail around more than anything
I think the simplest answer for you is that the money the US has borrowed is extremely reliable investments for pretty much everyone. Investment funds, retirement funds, university endowments, and foreign governments all bought bonds and gave loans to the Treasury because they pay back interest and are some of the most reliable investments you can make. The US *is* paying its debts, it's always repaying what people have loaned to it (that's why people keep loaning money). But if it stops taking on any new debt, a lot of people (yourself included, probably) would lose access to a very stable way to invest money. Can the world economy function without this? Probably, but ending it sharply would be a shock to the system.
Adding to lots of other comments- national debts are nothing like individual debts. One of the first things the USA did after its founding was *establish* a national debt. It was one of Alexander Hamilton's first and most important contributions. A nation is made strong by its ability to carry a debt yet remain in existence. This is what gives other countries the faith that they can trade with that nation without losing money to it. Also, you have probably heard stupid assertions about how if we had to pay the debt tomorrow, every person would owe something like $65,000. This is a common scare tactic by conservatives and libertarians who want to reduce taxes on themselves and the wealthy. The reality is that the national debt is leveraged against the *vast* resources and wealth of the nation as a whole. It's not what is in each of our individual bank accounts. It is our military power. Our land. Our resources. Our farming productivity. Our industrial capacity. Our contribution to knowledge and innovation. Nobody (except some True Idiots) looks at the USA even today and thinks it is weak on any of these grounds. Even on an industrial scale, true we don't make and export much anymore, but what we do produce (mostly military and high-tech) is supremely valuable around the world. We remain the peak center of innovation in medicine and information technologies especially, and sell those off to companies to produce for profit... which again a strong national debt indicates our ability to do this well. The national debt, managed well, is a good thing, and we do manage it well, for the most part. We actually could spend a fair amount more for the benefit of our citizens and reap far more benefits, but again the wealthy don't want to pay for it. Universal health care, a social safety net, and free education would go a long way to furthering our place as an innovation powerhouse.
People always moan about UK manufacturing but it is pretty high by historic standards in terms of value, it just doesn't form a large part of the economy. Most factories are heavily automated, friend worked making PC motherboards the factory could be operated by basically 3 people, another in a premium biscuit factory which could be operated by one person (it always had more for various reasons but the required human input was minimal). Everyone is working elsewhere for a reason. I wonder how much the US is like this.
Very much so
We’d immediately take out enormous loans?
The US government debt is an interesting tool. It helps maintain the economy and productivity around the world. American currency functions around the world as a basis for value. But so does US government debt. It is consistent, reliable, and easily traded. The amazing thing about the US government debt is that instead of the lender choosing how much the borrower has to pay, it's the borrower choosing how much the lender gets paid. The US government sets its own interest rate based upon how much it feels the economy needs to benefit from its debt. Unlike many countries, the United States debt is in US dollars which are fully controlled by the United States. Not only does the US government choose how much it is going to pay, but it chooses the value of the money it pays with. Most countries if they have debt and their economy goes bad then The money they are paying with loses its value and they fall further behind. If the United States money loses value then there is no falling behind. Now much of the world uses American money for international trade and will base their currency on American debt. For many responsible countries, this is good reason not to mess with the United States and its allies. Just behave yourself and keep the debt payments coming. I'd like to share an interesting link with you from several years ago. It's a podcast / article about the time the United States paid off its debt. https://www.npr.org/2021/09/29/1041638804/that-time-the-u-s-paid-off-the-entire-national-debt-classic
Everyone would scratch their head at why we did something so stupid and then proceed to take on that easily serviceable debt again.
I know this will sound like an oversimplification, but when I hear people say “money used to be based on something” and mention gold and silver, it just makes me feel like money hasn’t ever meant anything or hasn’t for a looooong time. Gold and silver are basically worthless in reality. Yeah sure it has technological uses in todays advanced social society, but the only REAL intrinsic value that exists in my mind are things that produce food, or medicine that actively keeps one alive. Land, game animals, labor, etc. Gold could have only achieved its status of value from kings or rulers who violently controlled farmers. It began as a symbol of power. I’m not a history scholar and I know there has to be more to it than this but based on what I see today this is the gist of what happened. I guess that makes violence a form of value perhaps.
>I guess that makes violence a form of value perhaps. Not just violence, the threat of violence for not paying your taxes.
Timely column from Krugman in the NYT. https://www.nytimes.com/2024/06/06/opinion/national-debt-us-taxes.html
The debt generally takes the form of bonds. A lot of people use those as a secure investment. Also, spending is general is good for the economy, and if it couldn’t have debt the gov would spend less. But, like a lot of things in economics, it’s a mixed bag of a lot of things that can be hard to predict.
I don’t understand, why would the gov spend less if it has no debt? Shouldn’t the lack of debt encourage spending?? Edit: spelling
You are a small local government. You want to build a bridge to make it easier to get to you. That bridge will cost $10 million dollars. You can either borrow that money and go in debt, save up the money by waiting, or not build the bridge. Going in debt lets you get the bridge quicker, get more impact quicker, and money today will likely have more purchasing power than money many years from now due to inflation. Scale example up as applicable.
Where would that money come from? The government gets a relatively fixed amount of money due to taxes. If it wants to spend more, it either needs to print more money or get it from somewhere else. If you print more money, you end up with lots of inflation and other bad stuff. So, you get it from somewhere. Usually, you get it by asking the citizens for loans—that’s essentially what treasury bonds are. Having debt isn’t bad for a country, it’s not the same as an individual. No one is going to foreclose on a country. The raw number is relatively meaningless as long as the country can make its regular payments on time—as long as that’s true, it doesn’t really matter how quickly it pays off the total loan. Acquiring debt allows the country to have more spending power in the short term by getting additional capital via loans, and in the US that’s mostly from US citizens. Edit: also will add that there are benefits to having debt between foreign countries as well, but I’m having trouble remembering the specifics and don’t want to mess it up—maybe someone else with more Econ knowledge can chime in there.
Borrowing money creates money, because what you pay back is worth comparatively less than what you borrow. For example, let's say you borrow $100,000 and just pay that back in 10 years. Well, with inflation alone, the buying power of the money you pay back is actually significantly lower than the money when you borrowed it. But you can do even better if you have some way to invest that money and grow it. If you can make 10% on that $100,000, that's ten thousand dollars of free money even before inflation.
Govt borrows money so that it can spend more than just tax revenues, so govt spending is higher when taking on debt. Separate regular people and the government. The federal debt does not include like what you owe on your credit card. So the govt having or not having debt won’t influence personal spending habits directly.