A semi-serious question

[Fangs]

I'll be the first to admit that I am not well versed in this subject, but I'm going to throw out my understanding of things and have you guys correct me / answer the questions (it's like multi-player Notepad!).

Now we all know that the U.S. is in debt. Does the U.S. ultimately owe a large part of the debt to other countries, and if so, what happens when they try to collect one it and the U.S. can't pay?

I'm sure that it is way more complicated than this, but I was just curious and don't currently have the time to Google it all.

[casingpoint]

Foreign debt holders are unsecured creditors of the U.S. We don't pay, they can lump it. However, with the kind of money we're going to need to maintain entitlement programs, watch for Spanky and His Gang to start mortgaging high dollar public assets, like Yellowstone Natl. Park and Big Bend. The Grand Canyon. The Everglades. The White House.

[The Annoyed Man]

Foreign debt holders are unsecured creditors of the U.S. We don't pay, they can lump it. However, with the kind of money we're going to need to maintain entitlement programs, watch for Spanky and His Gang to start mortgaging high dollar public assets, like Yellowstone Natl. Park and Big Bend. The Grand Canyon. The Everglades. The White House.

Or at least, trying to get other countries to help manage them...

[karder]

You sure know how to pick a complicated topic. If you or I go out and purchase a home, we then owe an X amount of dollars and make payments until our debit is repaid. The National Deficit is not so cleanly cut. In a nutshell, the National Debt has been accumulated by many years of a chronic trade deficit. This means we import more than we export, and if you spend more than you make, at some point you go bankrupt.
So what happens if we default? Well, it is bad for the economy. Investor confidence fades, capital disappears, the currency becomes devalued, the central bank is forced to raise interest rates, firms and consumers pull back hiring and spending, and the economy goes into a recession. Sound familiar?
As everyone knows, we owe a lot of money to the Chinese, but so what? China can't "make us pay". But what if we did? What if we wrote China a great big check and paid off our balance? The huge influx of cash would devalue their currency, which in turn would decrease the value of their exported goods. China cannot afford to have us pay them back in one big chunk. What they need is a controlled return on their investments here. The real answer is for our country to reverse its trade deficit. Buy American products. It is not just a slogan. We also have to start increasing our exports and start practicing fiscal responsibility in our government.
That is not happening. Just the opposite in fact. Every time I turn on the news, Mr. Obama is signing another trillion dollar bill to jump start spending, or provide healthcare, or do who knows what. The U.S. is not the only country at risk. All of you businessmen out there know that if your biggest customer goes bankrupt, you may be the next to follow. The U.S. is the biggest consumer in the world.
This is an extraordinarily simplified explanation of the problem, so there are dozens of other issues and factors, but I hope it helps.

[MojoTexas]

Buy American products. It is not just a slogan. We also have to start increasing our exports and start practicing fiscal responsibility in our government.

Easier said than done. Ever try to buy clothing made in the USA any more? It's a challenge. I *ALWAYS* go out of my way to try to buy American, but sometimes it's just not practical or possible.

The Chinese and other developing countries like Mexico and India can manufacture just about anything cheaper than the US because they have so many people willing to work for next-to-nothing wages. They don't have the "entitlement" systems of welfare, and in those countries people MUST work in order to survive. In my opinion that's what is wrong with this country...by creating a socialist system of entitlement you remove the incentive for hard work, and you are no longer competitive in a global economy.

Sigh...

[C-dub]

And then it gets even worse if we don't or are unable to pay. We lose our AAA rating and the interest rate goes UP.

[bizarrenormality]

Now we all know that the U.S. is in debt. Does the U.S. ultimately owe a large part of the debt to other countries, and if so, what happens when they try to collect one it and the U.S. can't pay?

If the debt is in USD then the US can always pay by printing more USD.

If the debt is in Yuan that's a different kettle of fish.

[flb_78]

In a nutshell, the National Debt has been accumulated by many years of a chronic trade deficit. This means we import more than we export, and if you spend more than you make, at some point you go bankrupt.

The National Debt has nothing to do with trade deficit. The National Debt is money that is borrowed by our government from foreign governments to run our government and pay for all of our "entitlements".

Trade deficit is Walmart, Target, Best Buy, Costco, Sams, and any other retailer in the USA buying goods from a foreign country for resale in the USA but nothing is being exported for resale in the foreign country. It is completely on the private side of the economy, not the government side.

Government borrowing money = National Debt
Retailers buying stuff for resale = Trade Deficit

[flb_78]

Current debt situation.

http://www.ustreas.gov/tic/mfh.txt" onclick="window.open(this.href);return false;

[marksiwel]

I'll be the first to admit that I am not well versed in this subject, but I'm going to throw out my understanding of things and have you guys correct me / answer the questions (it's like multi-player Notepad!).

Now we all know that the U.S. is in debt. Does the U.S. ultimately owe a large part of the debt to other countries, and if so, what happens when they try to collect one it and the U.S. can't pay?

I'm sure that it is way more complicated than this, but I was just curious and don't currently have the time to Google it all.

You think China is gonna Repo the USA? They can try, I'm Ready.

[Vic]

The National Debt is money that is borrowed by our government from foreign governments to run our government and pay for all of our "entitlements".

This is true, but doesn't paint the whole picture.

The effect is the same, but the method is different. Our government doesn't send an ambassador to Germany, for example, hat in hand, to ask for billions of dollars in loans. Instead, our government decides they need to spend billions or trillions of dollars that they do not have. Instead of cutting spending or raising taxes (to an extent), the government prints IOUs in the form of Treasury Bills. The government then auctions the Treasury Bills to ANYONE who want to purchase them.

The Treasury Bills represent a fixed dollar amount that is being loaned to the U.S. Government. The Treasury Bills draw interest. The interest is paid as the Treasury Bills mature. Our National Debt is the value of all of these outstanding Treasury Bills. When reading about the National Debt, you will encounter references to the "cost of servicing the debt". "Servicing the debt" means paying the interest on these Treasury Bills. Remember, the government is paying the interest, but often not paying down the debt.

In an oversimplified example, let's say that the U.S. Government needs to spend $1,000. The government has some options on where this $1,000 will come from, but most often, they choose deficit spending (spending money they do not have, or more correctly, spending the tax dollars YOU have not paid yet). The Government prints up a Treasury Bill with a face value of $1,000. They put this Treasury Bill up for auction. Whoever "wins" the auction for this Treasury Bill pays the $1,000 and gets the Treasury Bill. The holder of the Treasury Bill is entitled to collect interest on the Treasury Bill until the original $1,000 is repaid to them by the government.

Again, this example is oversimplified, but describes the overall process. The reason these are sold in an auction is that interest rates fluctuate. One Treasury Bill will not draw the same amount of interest as another Treasury Bill because the Bill's interest rate gets set when it is auctioned. Whoever is willing to buy the Treasury Bill at the lowest interest rate "wins" the auction, and purchases the Treasury Bill.

The problem with this whole scheme is that our government never want to pay off these debts that the Treasury Bills represent. Let's say the holder of our example $1,000 Treasury Bill holds the Bill until it matures, and then cashes it in. The holder gets their $1,000 back, plus all the interest they received while holding the Treasury Bill. For a fraction of a second, the National Debt has decreased by $1,000, since the government paid off that $1,000 it owed to the Treasury Bill holder. Unfortunately, in the next fraction of a second, the government prints another Treasury Bill with a face value of $1,000 and auctions it off to whomever will buy it.Now, the national debt has not decreased, and has in fact increased because of the interest the taxpayers will have to pay on this new Treasury Bill that the government has sold, and which represents the original $1,000 that the government has already spent.

Imagine having a credit card with no credit limit. You can charge up whatever amount of debt you want as long as two things happen: First, you must be able to pay the interest on the credit card debt. Second, your creditor must continually be interested in extending you credit. Some officials in our government believe that the amount of the debt is irrelevant, as long as we are able to service the debt (pay the interest on it). In this fashion, inflation will always make it cheaper to pay off the debt in the future than it would be to pay it off now.

Where China and other foreign countries come into this picture is that other governments are buyers of our Treasury Bills. Our government will sell a Treasury Bill to anyone. Because of the sheer scale of Treasury Bills in existence, other governments are the largest holders of our debt. The other governments get income in the form of interest payments and they get the security that our government is unlikely to default (stop paying the owed interest) on these Treasury Bills. Their currency is more likely to collapse than our currency (at least for now).

Again, this is massively oversimplified. I just wanted to describe the mechanism by which our government has come to owe so much money to other governments (or to any other entity that buys and holds Treasury Bills).

[bdickens]

Buy American products....

I'd love to. Where can I find some?

[stroo]

One or both of two things will happen.

First, the Government can try to monetize the debt by printing money hand over fist. This leads directly to inflation and if done long enough at a high enough level to the destruction of our economy.

Second, the Government can drastically increase taxes. This is likely to lead to a huge economic slowdown, can you say Depression, and in the end is not likely to produce the required tax revenue.

The Government could try a third tactic, that of reducing spending. That has proved pretty difficult to do historically, particularly in partially socialistic systems like ours where the spending reductions would have to be done in entitlement spending, think Social Security, Medicare and Medicaid, or transfer spending, think welfare and unemployment benefits.

[karder]

The National Debt is money that is borrowed by our government from foreign governments to run our government and pay for all of our "entitlements".

Trade deficit is Walmart, Target, Best Buy, Costco, Sams, and any other retailer in the USA buying goods from a foreign country for resale in the USA but nothing is being exported for resale in the foreign country.
Government borrowing money = National Debt
Retailers buying stuff for resale = Trade Deficit

These statements are true, but I would respectfully argue that the National Debt and the Trade Deficit are very closely tied together. Remember, I am offering very simplified opinions and there are probably hundreds of related issues that I have not even considered.

At the end of the day, we are a Capitalist society. Private companies building and exporting goods creates capital funds in their accounts which flow back to the government as taxes, (sales tax, employment taxes, income taxes, and on and on). It is an extraordinarily complex picture, but at it's most basic roots, a negative gross GDP cannot be maintained over an extended period of time without significantly impacting our national debt under the current government spending rates. We have to do two things: a) make more money (create a positive GDP) and b) spend less money (slash government spending). Our national debt is not as terrible as it seems and could be corrected in a relatively short period of time if our politicians and the American people had the mindset necessary. Unfortunately, as many here have pointed out, the American people have a very strong "entitlement mindset" and our current administration has been on a spending spree that no society in human history could maintain very long. Oh well, just print up some more of those Treasury Bills.

[chabouk]

In a nutshell, the National Debt has been accumulated by many years of a chronic trade deficit. This means we import more than we export, and if you spend more than you make, at some point you go bankrupt.

The National Debt has nothing to do with trade deficit.

Correct. I'll paraphrase Walter Williams here: I have a total trade deficit with Wal-Mart. No matter how much I spend there, they don't buy anything from me. And yet, I don't owe them a penny.