Uncle Sam is up to his neck in debt. Debt has been building up and nobody seems very keen to stop the trend. The United States’ national debt is expected to exceed gross domestic product in the next year. And to add insult to injury, the gap will continue to widen in the years to come. Meanwhile, the politicians don’t seem very concerned. Many do not understand such apathy with debt. The press always speaks of debt with great concern. And many have pointed out the seriousness of the matter. However, the authorities ignore this. What the hell about the national debt in the United States?
The government is allowing itself to largely let the deficit go because it can. Tax increases in the United States are never easy because all of this has to go through Congress first and everything is very complicated there. Taxes are a very sensitive issue. And it is very rare that bipartisan agreements are made. The budget is another controversial issue. Few want too much bureaucracy. Republicans in particular always promote the philosophy of the small government. And in the current political climate it is not easy to pass a budget that is too big.
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However, The parties cannot stop spending. Republicans always talk about small governments, but they love spending a lot of money on defense. The Democrats prefer to put this money into social programs. But expenses are expenses. In summary, there is always a lot of effort. Administration can be in Republican or Democratic hands. The deficit is always huge because they can’t stop spending money. Of course, the problem is fundamentally structural. And it comes from the budget and taxes.
It’s actually not quantum physics. Let’s imagine a home for a minute. If you plan to spend $ 100 a month on $ 100 but are going to spend $ 1000, the difference has to come from somewhere. So the original sin lies in the discussions in Congress about the budget and taxes.
Of course, when we talk about government debt, we’re finally talking about government bonds. And these bonds also play a very important role in managing the economy. Bonds drain liquidity from the system and create deflationary pressures on the economy. In other words, they are a macro-economic instrument. Raising or lowering bonds is a game of the monetary system. The issuing of debt is closely related to the issuing of money.
Now there is a debt. But, Who is the believer? I mean who is it owed to? Because credit is a coin with two sides. Debt is a promise that must be paid in the future. In the main books it is written twice. For one thing, it is a liability for the debtor. On the other hand, it is an asset for the creditor. I mean, my credit card debt is my liability. But it’s the bank’s capital. For example, Warren Buffett is a shareholder in Bank of America. I’m assuming you have a credit card with you. Assuming you are using it. For one thing, you owe the bank money. On the other hand, he (partially) owns the bank. How much in debt is Buffett really knowing he’s on both sides?
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Who are the main creditors of the American national debt? At the top of the list are agencies from the same government (funds, social security) and the Federal Reserve. Then we have the central banks of other countries (Japan and China at the top). There are also commercial banks and the general public. Here the risk of default is minimal because the debt is in dollars. And the Federal Reserve can always print dollars out of nowhere. For example, Argentina does not have this privilege, which has to pay a debt in dollars, but its central bank can only print Argentine pesos. The Argentines can only pay their debts with a positive trade balance. That is not always easy. Especially with the drop in prices on the raw material market.
After Japan, China is the largest foreign creditor for US debt. Could China use this debt as a weapon in the context of tension between the two powers? Yeah, but not really. First, despite all the debts, the Chinese don’t have that much stake. China owns $ 1.1 trillion of the $ 22 trillion debt. And we can’t forget that the Federal Reserve can always take on this debt.
A government usually buys debt from another country to keep its local currency weak. A very strong yuan is not a good fit for China as it would affect its exports. The US is an extremely important trading partner for China. If the yuan rises sharply against the dollar, China will lose competitiveness against the United States. Certainly, for political reasons, China could try to move away from the US bond market. But we have to remember that the debt was originally acquired for Chinese reasons. So using it as a weapon would do a lot of harm to China. I mean it would be a suicide attack.
Politicians don’t worry about debt because they know they can print money to pay it off. The problem might be inflation, but in the current deflationary picture, inflation is not an issue right now. It is for this reason that Congress is indifferent to debt. They are very confident and feel that they can achieve more in the years to come without it being a problem.
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Of course there is a detail. There is a chance that something could go wrong with this equation. Let’s assume for a moment that geopolitical tensions escalate sharply over the next decade. The United States opts for isolation and the other countries are gradually withdrawing from the American financial market. Alternatives to the dollar are emerging and countries are starting to trade other currencies. In this scenario, the United States could have great difficulty controlling its inflation. And if we take into account that the trade balance is negative, the debt in this case would be gigantic. This scenario is not very likely, but it is possible. Debt always plays with fire. Politicians are too calm about it. It seems to me that they are underestimating the risks.
Debt is always spoken of with a moral connotation. People usually deal indignantly with debt. In the imaginary, debt is irresponsible. In most cases, this is because the national debt is confused with private debt. And government debt doesn’t work exactly like private debt. However, debt in general means that we will have the most limited options in the future. Too much debt today means a more serious crisis tomorrow. Debt increases liquidity today and decreases it tomorrow because debt has to be paid. Understanding debt is critical to understanding business cycles. Debt is no longer a problem today. But at the current speed we are forming the mega-crisis of the future.