The US Literally Cannot Repay Its National Debt.

Summary

The U.S. faces a mounting national debt of $34.8 trillion, which continues to rise due to annual deficits. The government borrows by selling bonds, but the increasing debt is exacerbated by higher interest rates. While the U.S. could theoretically 'inflate away' the debt by printing more money, this risks inflation and economic instability. The key challenge remains controlling the deficit and adopting smart fiscal policies, as exemplified by Australia's more sustainable approach, which focuses on budget surpluses and fiscal discipline.

Takeaways

• 😀 The US national debt is currently at $34.8 trillion, which equals more than $100,000 per person in the US.
• 😀 The real concern is not the absolute value of the debt, but the worsening trend of increasing deficits and debt over time.
• 😀 The US government raises money by selling government bonds, and investors (including foreign countries) lend money to the Treasury with the promise of repayment plus interest.
• 😀 In 2023, the US government brought in $3.29 trillion in income but spent $4.5 trillion, creating a $1.2 trillion deficit.
• 😀 The US national debt has grown significantly from around $10 trillion in 2001 to $34.8 trillion in 2023, largely due to worsening annual deficits.
• 😀 The biggest spending categories are Social Security, Medicare, and interest payments on debt, which together account for a large portion of the budget.
• 😀 The US faces an additional challenge from rising interest rates, which make it more expensive to roll over existing debt and increase future debt servicing costs.
• 😀 The Congressional Budget Office predicts that the US deficit will grow from $2 trillion in 2024 to $2.8 trillion by 2034, exacerbating the debt burden.
• 😀 One potential way to manage the debt is through inflation, where the government could let inflation erode the value of debt over time, making future repayments easier.
• 😀 While inflating away the debt might work theoretically, it risks causing high inflation, economic instability, and social unrest if not carefully managed.
• 😀 A more sustainable long-term solution for managing national debt involves reducing the deficit and improving productivity rather than relying on inflation or debt accumulation.

Q & A

What is the current U.S. national debt, and how does it compare to the population?

The current U.S. national debt is $34.8 trillion. With a population of around 333 million people, this equates to over $100,000 of debt per person.

Why is the trend of national debt more alarming than the absolute value?

The alarming aspect is not just the current national debt, but the growing trend over time. The Congressional Budget Office predicts that the situation will worsen in the next 10 years, leading to even higher levels of debt.

How does the U.S. government raise money to fund its debt?

The U.S. government raises money by selling Treasury bonds. Investors, including individuals, businesses, and foreign governments, buy these bonds, lending money to the U.S. Treasury in exchange for repayment with interest.

What role does the Federal Reserve play in U.S. government debt?

The Federal Reserve buys Treasury bonds to inject money into the economy, effectively printing new money. This process, known as quantitative easing, helps the government by increasing the money supply and providing funds for spending.

What is a budget deficit, and how does it affect national debt?

A budget deficit occurs when the government spends more money than it earns. This gap between spending and income leads the government to borrow more money by issuing bonds, which adds to the national debt.

What is the trend of the U.S. budget deficit over the past few decades?

Since 2001, the U.S. has run a budget deficit every year, except in 2001 when there was a surplus. The deficit has worsened over time, with the Congressional Budget Office predicting it will grow from $2 trillion in 2024 to $2.8 trillion in 2034.

How has the rise in interest rates affected U.S. government debt?

The rise in interest rates, from nearly zero to around 5.5%, increases the cost of refinancing government debt. As old debt matures, it must be refinanced at higher interest rates, leading to higher annual interest payments, which further exacerbate the deficit.

What is the concept of inflating away the debt, and how does it work?

Inflating away the debt involves the government using inflation to reduce the real value of its debt. This occurs when inflation causes the value of money to decrease, so the government can pay back debt with less valuable currency. This is what the U.S. did after World War II.

What are the potential risks of using inflation to reduce government debt?

While inflation can decrease the real value of debt, unchecked inflation can lead to economic instability, social unrest, or even the collapse of a currency. The Federal Reserve must carefully manage inflation to avoid these risks.

How does Australia's approach to fiscal policy differ from that of the U.S.?

Australia has had a more balanced approach, managing its budget with a surplus. For the financial year ending June 2023, Australia had a surplus of $22.1 billion, allowing the government to pay down debt and make investments, unlike the U.S., which faces persistent deficits.