US public debts

[Till]

Hi all,


I am no expert on financing but just met some numbers...


The public debt of the US is now around 22 trillion dollars (US counting):
https://www.statista.com/statistics/...ates-by-month/


The per-year deficit seems to top 1 trillion (US counting):
https://www.reuters.com/article/us-u...-idUSKBN1FI2P2


At 1% interest rates, the US had to pay 220 millon dollars a year. (not that much)

At 10% interest rates, the US had to pay 2.2 billion dollars a year. (three times the defence budget)


I guess that this might lead to loads of problems.


I could imagine as well that this has some influence on keeping interest rates in the EU on a low standard. But of course we have Italy and Greece with even worse stats...

[bsquared]

I'm no financing expert either, but I'm not sure where you are getting some of your numbers.

The US defense budget is more than $600B.
The US GDP is ~$21T.
2018 Debt-to-GDP ratio was around 106%, less than or comparable to many other G8 nations.

In general I agree that the US debt is a concern and I wish our govt would take it more seriously, but, here we are.

[Till]

Originally Posted by bsquared

I'm no financing expert either, but I'm not sure where you are getting some of your numbers.

The US defense budget is more than $600B.
The US GDP is ~$21T.
2018 Debt-to-GDP ratio was around 106%, less than or comparable to many other G8 nations.

In general I agree that the US debt is a concern and I wish our govt would take it more seriously, but, here we are.

I got confused by converting millions, billions, trillions from European to US standards.

This was wrong:

Originally Posted by Till

At 1% interest rates, the US had to pay 220 millon dollars a year. (not that much)
At 10% interest rates, the US had to pay 2.2 billion dollars a year. (three times the defence budget)

Roughly correct:
At 1% interest rates, the US had to pay 220 billion dollars a year. (not that much)
At 10% interest rates, the US had to pay 2.2 trillion dollars a year. (three times the defence budget)

Now our numbers should be more in agreement?


EDIT: And yes I think that it is a big concern. On the short run it is a guarantee for low interest rates. On the long run, it might be a kind of nuclear bomb for world economy.

[axn]

Originally Posted by Till

At 1% interest rates, the US had to pay 220 millon dollars a year. (not that much)

At 10% interest rates, the US had to pay 2.2 billion dollars a year. (three times the defence budget)

Your are off by 3 o-o-m ?
10% of 22 trillion = 2.2 trillion
1% of 22 trillion = 220 billion

What am I missing here?

EDIT:- Nevermind :)

[bsquared]

I think the US finances most of its debt with treasury bonds, which have been around 2.5% to 3% interest, so, roughly equivalent to the defense budget in interest payments.

If we were to cut the defense budget to 0 and instead use that to pay off the debt we could be debt-free in ~30 years. What would the world look like in 30 years with no US defense spending?

If we were to instead spend $600B a year on other things like cancer research, the space program, energy infrastructure and renewables, or agriculture, how would things look in 30 years? With numbers so big, it boggles the mind. Sadly, zero percent chance of it happening.

[Till]

Originally Posted by bsquared

If we were to cut the defense budget to 0 and instead use that to pay off the debt we could be debt-free in ~30 years. What would the world look like in 30 years with no US defense spending?

If we were to instead spend $600B a year on other things like cancer research, the space program, energy infrastructure and renewables, or agriculture, how would things look in 30 years? With numbers so big, it boggles the mind. Sadly, zero percent chance of it happening.

Maybe zero percent chance of happening, but interesting questions.
_No_ US defence might not be required, what if they just reduce to Russian/Chinese standards?

[LaurV]

Something is odd with those rates. I am not financial expert either, but I know for sure that 10% interest rate is much more than ten times 1% interest rate... (non-believers should put it on paper)

[ewmayer]

Unlike, say, Greece and Italy, the US is a monetary sovereign, so it can never go broke. In fact, there is not even a need for it to issue interest-bearing debt - the Federal Reserve could create ex nihilo fiat money in any desired amount and buy up all the Treasury-issued IOUs, if the latter were 0% interest and failed to attract private-market buyers. But the Treasury debt has traditionally borne interest and supports a huge investment industry, so such a switch would be needlessly disruptive. The only practical limitation of deficit spending is if begins to stoke hyperinflation, a bogeyman often invoked by deficit hawks - "Weimar! Zimbabwe!" - but not supported by recent history (consider e.g. Japan). As bsquared notes, the more important issue is whether deficit spending is used for the public good (infrastructure, education, social welfare) or not - and the US's massively bloated 'defense' outlays, the corrupt military-industrial complex they enrich and the global imperial violence they support surely fall into the "not" column here.

Here is a long, in-depth recent essay at Naked Capitalism on the US dollar's key role in supporting the above.

[Till]

Originally Posted by bsquared

If we were to cut the defense budget to 0 and instead use that to pay off the debt we could be debt-free in ~30 years.

Just noticed that that is wrong. Currently you have a 1 trillion deficit a year; cutting defence to zero will leave you with a 300-400 billion deficit a year. So debts would still keep on piling up.

Originally Posted by ewmayer

Unlike, say, Greece and Italy, the US is a monetary sovereign, so it can never go broke.


...


Here is a long, in-depth recent essay at Naked Capitalism on the US dollar's key role in supporting the above.

"the US is a monetary sovereign, so it can never go broke"
There are many countries that print their own money. But that does not mean that they are intouchable. Think about Venezuela ;-)

The article you pointed to looks interesting, I'll study it.

[ewmayer]

Originally Posted by Till

"the US is a monetary sovereign, so it can never go broke"
There are many countries that print their own money. But that does not mean that they are intouchable. Think about Venezuela ;-)

The contrast between US/VZ is actually quite illustrative: both have their own currency, but:

1. VZ Bolivar is not a global reserve currency, much less the dominant one of same;

2. Venezuela has a nondiversified economy overly dependent on oil exports and a severe government-corruption problem which has allowed much of its oil erevenues to be stolen by the elites;

3. VZ has been the target of decades on economic warfare fomented by US regime-change hawks. The overreliance on oil exports makes such economic warfare much easier.

[Dr Sardonicus]

I note that banks create money ex nihilo all the time -- by making loans. They lend more money than they've got. If a borrower doesn't keep up on loan payments, there will be problems. What kind of problems? That depends. The old joke goes, if you owe the bank a hundred thousand dollars it's your problem, but if you owe them a hundred million dollars, it's the bank's problem.

Banks also have depositors. But they never have enough reserves on hand to cover all the deposits. As long as most depositors are willing to leave their money on deposit, no problem. But if a whole lot of depositors want to withdraw their money, the bank will be caught short. This is called a "run on the bank."

In the US, deposits in federally chartered banks are insured by the FDIC up to (IIRC) a hundred thousand per account, a quarter of a million dollars per person. (When Continental Illinois went bust around 1986, big depositors were payed in full; the usual limits on coverage were ignored.)

A run on a bank generally indicates a loss of confidence in the bank's ability to keep operating.

In VZ, there was a different sort of run on banks when the economic strategy based on oil exports began failing badly: people began converting their VZ Bolivars to US dollars as fast as they could. The government, alarmed at the situation, enacted severe limits on such conversions.

Hyperinflation, like bank runs, indicates a loss of confidence -- in this case, of the government to honor its financial obligations. Money -- currency -- is seen as not being worth the paper it's printed on. Neither large annual deficits, nor the amount of public debt, are enough in and of themselves to lead to hyperinflation. As long as the government is seen as able to meet current obligations, no problem. (IIRC, in the financial meltdown heralding the Bush Depression, lucky bankers holding mortgage-backed securities got to redeem them at full face value, despite their not being worth the paper they were printed on.)

What could cause a problem is a major default -- the government acknowledging an inability to meet a current financial obligation. One way this could happen is if the government reaches the "debt ceiling" -- its statutory authority to borrow more money. Sort of like a consumer maxing out a credit card. Hopefully, the current budget deal will alleviate this prospect for a year or two. Another way the government could default is a sudden demand for more money than it can amass in time to meet the demand, say, a major holder of US treasury obligations decides to cash out. Another way would be if enough people stopped paying their taxes. I seem to recall hearing that this was a major problem in Italy.

A default would result in the lowering of the ratings of US government debt, and a rise in the interest the US would have to pay to borrow money to meet other needs.