The US Literally Cannot Repay Its National Debt.

Summary

The video script delves into the alarming US national debt of $34.8 trillion, outlining its implications for each citizen and the country's financial health. It explains the mechanics of government debt, the role of treasury bonds, and the Federal Reserve's impact on the economy. The script highlights the persistent US deficit, the challenges of reducing it, and the potential risks of a debt spiral driven by rising interest rates. It also explores the controversial idea of inflating away the debt, weighing its theoretical benefits against the practical dangers of unchecked inflation. The summary calls for smart fiscal policies and productivity to manage the debt sustainably.

Takeaways

• 💼 The US national debt currently stands at $34.8 trillion, which equates to over $100,000 per person in the US population of 333 million.
• 📉 The trend of the national debt is concerning, with the Congressional Budget Office predicting a worse situation in 10 years rather than an improvement.
• 🏦 The US government accumulates debt by spending more than its income, leading to the issuance of Government Bonds to raise funds, which need to be repaid with interest.
• 🌐 Investors, including foreign countries like Japan, China, and the UK, buy these bonds, meaning a US default would have global economic repercussions.
• 💡 The US Federal Reserve can buy Treasury bonds, effectively printing money and injecting it into the economy, which is how a country can finance its debt.
• 📊 The US has not run a surplus since 2001, with the deficit trend worsening over the years, requiring more debt to be raised annually.
• 💔 The US faces a challenging fiscal situation where neither raising taxes nor cutting spending is politically popular, yet both are necessary to address the deficit.
• 📈 High interest rates, set by the Federal Reserve, increase the cost of servicing the national debt, exacerbating the deficit and potentially leading to a debt spiral.
• 💸 The idea of 'inflating away the debt' suggests that the government could reduce the real value of its debt through inflation, but this comes with risks of economic instability.
• 🌳 The Federal Reserve aims for a steady 2% inflation rate to encourage spending and economic growth, which can gradually ease the burden of debt repayments over time.
• 🌍 The key to sustainable debt management for the US, as with other countries like Australia, is smart fiscal policy focused on reducing the deficit and achieving a surplus.

Q & A

What is the current US national debt?

The current US national debt is sitting at $34.8 trillion.

How does the US national debt compare to the US population?

The US national debt equates to over $100,000 of national debt per person, given the population is around 333 million.

What does the Congressional Budget Office predict for the US debt situation in 10 years?

The Congressional Budget Office predicts that the situation will be worse than it is today, not better.

How does a country go into debt?

A country goes into debt when it spends more money than it brings in each year, and it raises additional funds by selling government bonds.

What is a Government Bond and how does it work?

A Government Bond is a debt security issued by the government to raise funds. Investors loan money to the Treasury, which promises to pay back the principal plus interest at a future date.

Who are the major holders of US government bonds?

Major holders of US government bonds include businesses, foreign countries, and the US Federal Reserve. Notable foreign holders are Japan, China, and the UK.

What is the current US 10-year treasury yield?

The current US 10-year treasury yield is at about 4.3%, which is an annual rate of return.

What is the main reason a country goes into debt?

The main reason a country goes into debt is because it spends more than it earns, resulting in a deficit.

What is the current US fiscal year to date budget outcome?

The US has brought in $3.29 trillion in income and has spent $4.5 trillion, resulting in a deficit of around $1.2 trillion.

What are the largest expense categories for the US government?

The largest expense categories for the US government are Social Security (21%), Medicare (14%), interest payments on debt (13.3%), Health (13.3%), and defense (11%).

What is the projected trend of the US debt GDP ratio according to the Congressional Budget Office?

The Congressional Budget Office projects the US debt GDP ratio to increase from 99% this year to 122% in 2034, surpassing its previous high of 106% of GDP.

What is the theory of inflating away the debt?

The theory of inflating away the debt suggests that a government can reduce the real value of its debt by allowing inflation to decrease the value of its currency, making fixed-rate debt repayments easier over time.

What is the main challenge of using inflation to reduce the debt burden?

The main challenge is that unchecked inflation can lead to economic instability, social unrest, and potentially a collapse or abandonment of the currency.

What is the Federal Reserve's target inflation rate and why is it important?

The Federal Reserve targets a 2% inflation rate to keep the economy growing steadily, encourage spending, and gradually devalue the currency, making debt repayments easier over time.

How does Australia's financial situation compare to the US in terms of debt and surplus?

Australia's gross debt is around $890 billion Australian dollars or 35.2% of GDP, with an interest payment of 11.9 billion Australian dollars. However, the government returned a surplus of $22.1 billion, indicating that its income exceeded expenses.

Outlines

00:00

📊 US National Debt and Its Implications

The US national debt stands at $34.8 trillion, equating to over $100,000 per person. With the population at 333 million, this alarming figure is not just a static value but a growing trend. The government is unable to repay the debt, and the Congressional Budget Office predicts a worsening situation within a decade. The script delves into the basics of government debt, explaining how it accumulates through government bonds and the role of the US Treasury and Federal Reserve in managing it. It also touches on the global implications of US debt, given that major countries like Japan, China, and the UK hold significant portions of US bonds. The US's annual deficit, or the gap between spending and income, is worsening, leading to an increased need to sell bonds and further deepening the debt. The video script highlights the difficulty of addressing this issue through raising taxes or cutting social programs, which are both unpopular options.

05:02

🔄 The Challenge of US Debt and Potential Solutions

This paragraph discusses the challenges the US faces in addressing its growing debt and deficit, which is expected to increase due to higher interest rates set by the Federal Reserve in response to inflation. The government's debt has a maturity date, and as it rolls over old debt into new bonds at higher interest rates, the annual interest payments increase, exacerbating the deficit. The script outlines how interest payments have become a significant expense for the US and are predicted to rise in the coming years, leading to potential economic instability. It also explores the concept of inflating away the debt, where the government could theoretically reduce the real value of its debt through inflation. However, this approach comes with risks, as unchecked inflation can lead to economic and social problems. The Federal Reserve's role in managing inflation and interest rates is crucial to avoiding a debt spiral and maintaining economic stability.

10:02

🌐 Economic Strategies to Tackle US Debt

The final paragraph of the script emphasizes the importance of smart fiscal policy and reducing the deficit as the primary means to manage the US's debt situation sustainably. It contrasts the US's situation with Australia's, where the government returned a surplus, demonstrating a financially healthy position. The script suggests that while there may be economic tricks to alleviate debt, the focus should be on increasing productivity and making sensible fiscal decisions. It concludes by highlighting the creator's personal endeavors on Instagram and promoting educational resources for investing, encouraging viewers to engage with their content across different platforms.

Keywords

💡National Debt

National debt refers to the total amount of money that a country's government owes to its creditors. It is a significant concept in the video, as it discusses the current US national debt of $34.8 trillion. The script uses the national debt per person to illustrate the scale of the issue, stating it equates to over $100,000 per US citizen.

💡Deficit

A deficit occurs when a government's expenditures exceed its revenues. The video emphasizes the worsening trend of the US annual deficit, which is a key driver behind the increase in national debt. The script mentions that the US has not had a surplus since 2001, indicating a continuous state of deficit.

💡Government Bonds

Government bonds are debt securities issued by a government to raise funds. In the script, they are explained as a means for the US government to borrow money when it spends more than its income. Investors, including foreign countries and businesses, loan money to the Treasury, expecting repayment with interest.

💡Treasury Yield

Treasury yield refers to the return an investor receives for holding a government bond. The video uses the example of the US 10-year treasury yield being at about 4.3% to illustrate the interest rate environment and its implications for government borrowing costs.

💡Federal Reserve

The Federal Reserve is the central bank of the United States, responsible for monetary policy, including setting interest rates. The script discusses its role in buying government bonds to inject money into the economy and its current challenge of managing inflation through interest rate adjustments.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video explains how inflation can be used to 'inflate away' debt, making past debts smaller in real terms as the currency's value decreases over time.

💡Interest Payments

Interest payments are the funds that a borrower pays to a lender, in this case, the government paying interest on its debt. The video highlights that interest payments are a significant expense for the US government, projected to increase as a result of higher interest rates and a growing debt load.

💡Debt Spiral

A debt spiral is a situation where increasing interest rates lead to higher interest payments on government debt, which in turn necessitates further borrowing, causing debt to grow. The script warns of the dangers of unchecked debt accumulation and the potential for a debt spiral in the US.

💡Quantitative Easing

Quantitative easing is a monetary policy in which a central bank creates new money to buy government bonds or other securities to inject money into the economy. The video suggests that this policy could be used to inflate away debt, though it also acknowledges the risks of unchecked inflation.

💡Fiscal Policy

Fiscal policy refers to government actions, such as taxation and spending, that affect the economy. The video concludes by emphasizing the importance of smart fiscal policy, particularly focusing on reducing the deficit, as the most sustainable approach to managing national debt.

💡Surplus

A surplus is the opposite of a deficit, where a government's revenues exceed its expenditures. The script mentions the last time the US had a surplus was in 2001, highlighting the contrast with the current situation of ongoing deficits.

Highlights

The US national debt currently stands at $34.8 trillion, equating to over $100,000 of national debt per person.

The Congressional Budget Office predicts the situation will be worse in 10 years, not better.

A country goes into debt when it spends more than its income, needing to sell government bonds to raise funds.

Investors, businesses, and foreign countries can buy US government bonds, exposing global economic risks in the event of a default.

The US Federal Reserve can buy treasury bonds to print money and inject it into the economy.

The US has not run a surplus since 2001, with a worsening annual deficit trend.

The national debt has ballooned from $10 trillion in 2001 to $34.8 trillion due to increasing deficits.

The US government's revenue is primarily from taxes, with individual income taxes and Social Security taxes being the largest contributors.

Major government expenses include Social Security, Medicare, interest payments, and defense.

Fixing the deficit requires earning more, spending less, or both, which are unpopular options.

The Congressional Budget Office expects the deficit to grow from $2 trillion in 2024 to $2.8 trillion in 2034.

Higher interest rates due to inflation increase the cost of servicing government debt.

Interest payments are the third-largest expense for the US government, projected to rise further.

Inflating away the debt is a strategy where the government uses inflation to reduce the real value of its debt.

The Federal Reserve's quantitative easing can increase the money supply and stimulate the economy, potentially inflating away debt.

Inflation can make past debts appear smaller over time as the value of money decreases.

The Federal Reserve targets a 2% inflation rate to encourage steady economic growth without unchecked inflation.

Smart fiscal policy and lowering the deficit are the most sustainable long-term approaches to debt management.

Australia's financial year ending June 2023 showed a surplus, demonstrating effective fiscal management.

Transcripts

the US national debt currently sits at $

34.8 trillion for context the population

of the US is currently around 333

million people so that equates to over

$100,000 of national debt per person but

the wiring statistic is not the absolute

value rather the trend as my friend

Richard from the plane Bagel once said

it doesn't take an economist to

recognize that this is a pretty alarming

chart but the scariest thing about this

situation is that the US government

can't pay the debt back literally they

cannot do it the Congressional budget

office has actually said that in 10

years from now the situation is going to

be worse than it is today not better so

what does this lead to and is there a

sneaky cheat code the US might be able

to use to get around the debt problem

well to get to that we first have to

understand the basics so the government

is $ 34.8 trillion in debt and they're

adding more and more debt to the pile

each year but how does that actually

work well just like you and me a country

goes into debt when they want to buy

something they can't actually afford so

like like us a country has income and it

has expenses and if it wants to spend

more money than it actually brings in

each year then it can go into debt to

raise some more cash now just like us

this debt needs to be repaid and if you

get into a situation where the country

can't pay back its debts the country

defaults just like a homeowner who can't

pay back their mortgage so how does this

system actually work well if the

government needs some more money they

will sell what's known as a Government

Bond so investors will loan out their

money to the US Treasury and the treasur

treasury promises to pay them back plus

interest at some stage in the future and

depending on the length of the deal or

the Bond's maturity date the interest

rate you get might be higher or lower

for example right now the US 10-year

treasury yield is at about 4.3% and

that's an annual rate of return it's

also worth noting that it isn't just you

or me that can buy these government

bonds either in the case of the United

States a lot of businesses and foreign

countries will buy these bonds for

example Japan China and the UK are huge

holders of US government bonds which

means if the US were to default on these

loans that would send Ripple effects

throughout the whole world and lastly

another interesting thing to mention is

that the US Federal Reserve which is

America's Central Bank can also buy

treasury bonds and this is the process

the US uses to print money and inject it

into the economy the Federal Reserve

will create money out of thin air and

then buy government bonds to put that

new money trademark pending into the

hands of the government so that's how a

country goes into debt and then the next

thing to understand is well what on

Earth is going on in the United States

well remember the main reason a country

goes into debt is because they spend

more than they earn and this is known as

a deficit so the worse the annual

deficit the more money the government

needs to raise in debt each year if the

government spends $4 trillion and only

generates 3 trillion they need to sell

$1 trillion worth of bonds to make up

the difference now have a look at this

chart of the US Surplus or deficit over

the years so back in the year 2001 the

US actually did run a surplus AKA they

earned more than they spent that year

$130 billion in the black that year but

what's a little scary is that this was

the last year that the US made money

since that time have a look at the

annual deficit this is income minus

expenses and as you can see Year bye the

long-term trend is worsening even taking

out the huge deficit years of 2020 and

2021 the trend is still that the gap

between spending and income is getting

wider and wider each year now as I

mentioned what this means is that to

balance the books each year the

government needs to raise more and more

money AKA they need to sell more and

more bonds to go deeper and deeper into

debt and that's what we can see in this

chart here in 2001 the national debt was

around $10 trillion but as the deficit

has worsened look at what's happened in

23 years the debt has ballooned to a

staggering 34.8 trillion now that is a

huge debt load but the problematic thing

is that the US can't pay it down and

honestly they may not want to have a

look at this this is the breakdown of

this year's budget so fiscal year to

date the US has brought in $3.29

trillion in income and has spent 4.5

trillion so since October 2023 they're

around 1.2 trillion in the red but have

a look when we break this down further

how did the government generate their

revenue well from taxes 51.7% from

individual income taxes 34.2% from

Social Security and Medicare taxes 99.4%

from corporate tax and then small

amounts from excise taxes estate gift

taxes and customs duties now let's flip

over to the expenses and see what's

going on there 21% of spending has been

on Social Security 14% on Medicare 133%

on interest payments for their debt 133%

on Health 133% on defense 11% on income

security and so on you're probably

already seeing the issue right to fix

the deficit the US needs to either earn

more spend less or do both all options

of which are very unpopular I mean do

you want to pay higher taxes of course

not do you want budget cuts to social

security schools hospitals or the

military no thank you but this problem

left unchecked is only going to get

worse the Congressional budget office is

actually expecting the deficit to grow

from 2 trillion in 2024 to 2.8 trillion

in 2034 and this worsening of the

deficit overtime is predicted to swell

the US debt GDP ratio from 99% this year

to 122% in 2034 surpassing its previous

high of 106% of GDP so it seems that

America is trapped in a bit of a tough

spot you know cutting back in certain

areas is unlikely to be very popular but

also raising taxes isn't very popular

either right now just to make things

worse the US faces another challenge on

top of that one that they haven't felt

in over two decades and that is higher

interest rates you see the government

doesn't set interest rates that's done

by the central bank called the Federal

Reserve in America now while they work

with the US government they're actually

separate from them and their main job is

to raise and lower lower interest rates

to keep the economy and the US dollar as

stable as possible but the problem is on

the back of all this inflation we've

been seeing over the past few years the

FED has now raised interest rates from

zero to around 5 1 half% so why is that

important well remember all of this

government debt has a maturity date on

it right once the Bonds hit maturity the

US pays back the bond holder well in a

deficit situation when these debts come

due the US doesn't have that money to

pay back their debts so they instead

roll the debt over they sell more bonds

to pay off the old ones but that's a

problem in today's conditions because

the previous debt would have been sold

at very low interest rates whereas now

the debt needs to be refinanced at much

higher interest rates and what this

means is that as more and more debts

roll over the amount of Interest the US

needs to pay each year Rises which

increases their annual expenses which

makes the deficit worse as we saw

earlier so far this fiscal year to date

interest has been the third largest

expense category for the us since

October 2023 spent $601 billion just on

interest payments and going back to the

cbo's report we can see that over the

coming years that number is only set to

rise they note that in 2025 interest

costs are greater in relation to GDP

than at any point since at least 1940

and are expected to rise to 4.1% of GDP

by 2034 totaling one 16th of all federal

spending and as you can see with

mandatory costs Rising this is going to

greatly reduce the amount of

discretionary spending that government

could carry out which naturally means

tougher times higher taxes or taking on

even more debt to cover the increased

interest payments this is what people

are referring to when they talk about a

debt spiral the idea that increased

interest rates cause the interest

payments on rolled over government debt

to rise which means that the government

simply borrows more money to account for

that which in turn creates an even

larger pile of debt with higher interest

rates now obviously this isn't ideal and

debt spirals can sometimes as the name

suggests spiral out of control so the

number one option is obviously to try

really hard to reduce the deficit and

return to Surplus in the long run but

with that seemingly nearly impossible in

the case of the US recently some people

have been wondering whether the United

States might take a different approach

that being inflating away the debt how

does this work well think about this

let's go back to 1970 for a second back

then the median house price in the US

was around

$24,000 the average annual salary in

America was

$771 for a full-time job and a loaf of

bread cost

24.3 now just imagine you're taking out

a mortgage back then say you took out

the full amount of

$24,000 now we look at that today and

say holy smokes that's cheap you know

how can that be today the same median

house will cost you

$42,882 standards have improved since

the 70s but you're still buying a house

right it's the same base commodity the

reason the same commodity is so much

more expensive today however is because

of inflation you know wages have risen

the cost of groceries have risen the

cost of houses have risen and now we

look at that $24,000 loan and say wow

that mortgage is like half of my annual

salary today today that mortgage would

be so easy to pay off because our wages

are so much higher well this same

principle applies to the government's

debt when people say The Government Can

inflate the debt away what they mean is

that the government can get into a

massive pile of debt but then let

inflation decrease the value of their

currency so that in the future the

government will be paying back all that

fixed rate debt with money that is now

worth less this is exactly what the US

did after World War II the US used

inflation to reduce its debt to GDP

ratio so how would this occur today well

it has a lot to do with money printing

by the Federal Reserve is quantitative

easing so stay with me here let's say

the federal reserve prints a lot of

money and buys some government bonds

this increases the amount of US dollars

in existence and it gives new money to

the government to spend now what they

could do with that money is invest it in

creating jobs or building infrastructure

or other programs designed at increasing

the productivity of the United States

and that's a good thing if productivity

Rises then businesses and workers earn

more which leads to higher incomes and

more tax revenue low lower borrowing

costs also means there's more investment

which causes asset prices to rise and

generally the inflation rate will pick

up too and if this scenario continues as

the years march on the acceleration of

the US economy The increased GDP and the

continued steady inflation of all things

eventually make the past debts look

smaller and smaller in comparison in the

same way that 1970 median house price

and median salary look tiny by today's

standards so that's the general theory

of inflating away your debt and it's

great in theory but in practice it isn't

quite as simple as that and that's

because there's always consequences in

economics the main problem with the

theory is actually one that we face

today and that is that when you do

employ these stimulative measures to

start encouraging

inflation well you get inflation and if

you leave inflation unchecked we know

from history that it can very quickly

get away from you which can lead to

economic instability

social unrest and at the extreme can

cause a collapse or abandonment of a

currency now as it's been well

documented over the past few years the

inflation rates we saw in America and

around much of the western world were

way too high to be sustained and thus

while they might assist in inflating

away the US government's debt burden the

Federal Reserve has had no choice but to

step in and raise interest rates to try

and slow down inflation inflation was

happening so quickly that it was

actually a problem so by raising

interest rates the FED puts the clamps

on the economy and slows it down for a

little while and that's what we're in

right now so while the theory of

inflating away your debt burden might

sound nice in reality it does come with

downsides and needs to be carefully

monitored and that's why the Federal

Reserve targets a 2% inflation rate as

opposed to zero it keeps the economy

pushing forward it keeps prices going up

steadily over time keeps wages Rising

steadily over time it encourages

spending sooner which grows the economy

and the big long-term benefit from a

debt perspective is that slowly but

surely devalues the currency making debt

repayments from y to year easier and

easier so overall that's the process of

how the government the central bank can

team up to lower the debt burden over

time but with all that said I think it

is worth remembering that the number one

way to keep on top of the debt situation

in the United States is going to be

through smart fiscal policy and a

particular emphasis on lowering the

deficit at the end of the day the most

sustainable long-term approach to a

country's debt management is not to

inflate the Deb away it's just to have a

country whose financials work so while

there might be some tricks you can pull

out of the bag the number one focus at

least in my view is that America should

focus on being more productive and try

to tighten the belt where it makes sense

to do so you can take my home country of

Australia for example now it is a

different economy but you know the same

principles apply for example Australia's

budget outcome for our financial year

ended on the 30th of June 2023 showed

that while we too had some debt on the

books with gross debt of around $890

billion Australian dollars or 35.2% of

GDP and you know we too had to pay

interest on that government debt around

11.9 billion Australian dollars this is

less of an overall issue because the

government returned a surplus of $22.1

billion so in Australia for that year

the government's cash coming in exceeded

its expenses so the government made

money that's the ultimate win because

then they can decide to put that money

to use building roads or schools or

paying down debt if they want or even

doing tax cuts which they did but

overall that is the story behind

America's debt situation also one thing

I did just want to mention before I sign

off I've been making a lot more

Instagram content recently I've actually

been really enjoying it so if you are an

avid Instagram user please check out the

link in the pin comment and come follow

me over on there as well I'd really

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getting started in you're investing

please check out stock market Investing

For Beginners or introduction to stock

analysis over on new money education the

link for that can be found down in the

description but with that said guys

thanks very much for tuning in I hope

you guys enjoyed the video please leave

a like on it if you did and I'll see you

guys in the next one

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