4 ms·

I don't get government debt. How can every country be indebted? Don't mutual debts cancel each other out? How can the whole world be in debt? Whom do they owe

I don't get government debt. How can every country be indebted? Don't mutual debts cancel each other out? How can the whole world be in debt? Whom do they owe that money? Whom do they pay the interest? Does a government debt mean that each citizen has a debt? Does it mean the government owes that money to its citizens? If anyone has insight in this, please enlighten me!

mkr-hn 15y ago
Government debt works like any other investment. http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm http://www.treasurydirect.gov/indiv/products/prod_tbills_gla... Debt serves an important function in modern economies as a safe place to put money. That's why this debt ceiling showdown is a problem. Investors will take their money somewhere else instead of putting it in T-bills if they think the US might default. Trillions in debt looks ominous, but it represents the trust (and wealth) of thousands of investors.
- watchandwait 15y ago
  Safe place? Ask investors in Argentine, Russian, and Greek government debt about that. The U.S. government is already working to cheat its debt investors by repaying them with devalued printed paper. One could argue that U.S. government debt is one of the least safe investments out there. You will get repaid, but it will be in devalued currency. That dollar you invested 5 years ago, for example, only buys about 1/3 as much oil as it did when you invested it. That is a catastrophic loss.
  - mkr-hn 15y ago
    Traditionally safe. The recent (past 30 or so years) unwillingness of the congress to invest that money into maintaining growth (things like infrastructure maintenance/improvement--"pork projects" as people like to call them) has started to compromise that. Corporate lobbyists haven't helped much either.
    - watchandwait 15y ago
      Please don't just rely on the nonsense they taught you in econ 101. You need to understand the relationship between debt, the currency, interest rates, and a government's ability and willingness to repay. These factors make government debt potentially VERY risky. Even in the U.S., which is generally very responsible, government debt has been a terrible investment at times through the years. The U.S. massively devalued during the Great Depression and devalued again after World War Two. An investment in a U.S. ten-year bond in the late-1960s would have been absolutely creamed, I'm talking about losing much of the real value of your investment. That's not anyone's idea of safe.
      - mkr-hn 15y ago
        Compared to the stock market (Depression) or moving your money overseas (WW2)? It seems like the US was still the best of what was available at the time. Gold and commodities would have been toast in an invasion (the axis invading the US) or collapse of society (French Revolution-style uprising). Giving the government all your money to keep it afloat in those situations was still superior, even if the government ended up ruining the value.
  - recoiledsnake 15y ago
    >That dollar you invested 5 years ago, for example, only buys about 1/3 as much oil as it did when you invested it. That is a catastrophic loss. Good point but really bad example which bring your intentions into question. Oil is in high demand, thus the price has increased. You should've picked a relatively stabler item to compare the price of. Also, how much interest did you gain on the dollar in 5 years? An investment is not the same as putting a dollar bill in your pocket.
    - watchandwait 15y ago
      Oil is not in high demand. US demand is actually down b/c of the recession and the higher price in dollars. It just takes more dollars to buy the same amount. You could also measure against corn, or gold, or the cost of college. It's been pretty ugly for the dollar for the past 11 years, and it may get worse.
      - wiredfool 15y ago
        Quite a lot of the commodities change is the investment banks slamming a lot of hot money into commodities.
  - uvdiv 15y ago
    Inflation-indexed US bonds: http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm http://www.treasurydirect.gov/indiv/products/prod_tips_glanc...
  - guelo 15y ago
    There's a reason economists look at core inflation which excludes energy and food, if you did that your whole argument would fall apart. Inflation is too low right now considering the high unemployment.
    - rgraham 15y ago
      So if you eliminate the commodities that are rising against the dollar (or insert currency here) and that everyone has to buy you can assert that there is no inflation? Is core inflation defined as the things people don't buy that are not currently changing in value? Do you want to add hedonics and substitution?
pessimizer 15y ago
http://en.wikipedia.org/wiki/Government_bond http://en.wikipedia.org/wiki/Government_bond A lot of government debt is held by private entities. You're thinking about the national debt, and here is a long detailed explanation: http://internationalecon.com/Finance/Fch5/F5-9.php http://internationalecon.com/Finance/Fch5/F5-9.php
3pt14159 15y ago
I get your root question which is something along the lines of this: How can the average amount of debt for an individual, country and corporation all be negative? Look into fractional reserve banking and the Federal Reserve.
Sukotto 15y ago
In addition to the great links already in this thread I'd like to add this post from Planet Money describing what happened that last time the US paid it off [1]. [aside] I love the the Planet Money podcast and highly recommend it. I wish more of the talking-podcasts I follow (Mixergy, Teckzing, back-to-work, stackexchange, etc) were available in 20 min chunks instead of the 60 min they all seem to favor. [/aside] [1] http://www.npr.org/blogs/money/2011/04/15/135423586/when-the-u-s-paid-off-the-entire-national-debt-and-why-it-didnt-last http://www.npr.org/blogs/money/2011/04/15/135423586/when-the...
nhaehnle 15y ago
I recommend you look into Modern Monetary Theory. It is an unideological look at how the monetary system works, starting with first principles. Its historical roots lie in Functional Finance. The Pragmatic Capitalism blog has a nice intro here: http://pragcap.com/resources/understanding-modern-monetary-system http://pragcap.com/resources/understanding-modern-monetary-s... For more details, I recommend the blog of Bill Mitchell, especially his Debriefing 101 section: http://bilbo.economicoutlook.net/blog/?cat=11 http://bilbo.economicoutlook.net/blog/?cat=11 The brief answer to your question is that yes, money is always a zero-sum game, just by the definition of how accounting works. If you sum up all financial assets and liabilities over the entire world, they sum up to zero. Now when people say that a country is indebted, what they really mean is that its government is indebted. The corresponding financial assets are owned by the private sector. It's really as simple as that. That is why trying to pay down the government debt is such a stupid idea. All it does it attempt to force the private sector out of its financial assets. And as the communists learned the hard way, putting undue force onto the private sector against its natural behaviour usually leads to bad results.

mkr-hn 15y ago

Government debt works like any other investment. http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm http://www.treasurydirect.gov/indiv/products/prod_tbills_gla... Debt serves an important function in modern economies as a safe place to put money. That's why this debt ceiling showdown is a problem. Investors will take their money somewhere else instead of putting it in T-bills if they think the US might default. Trillions in debt looks ominous, but it represents the trust (and wealth) of thousands of investors.

watchandwait 15y ago
Safe place? Ask investors in Argentine, Russian, and Greek government debt about that. The U.S. government is already working to cheat its debt investors by repaying them with devalued printed paper. One could argue that U.S. government debt is one of the least safe investments out there. You will get repaid, but it will be in devalued currency. That dollar you invested 5 years ago, for example, only buys about 1/3 as much oil as it did when you invested it. That is a catastrophic loss.
- mkr-hn 15y ago
  Traditionally safe. The recent (past 30 or so years) unwillingness of the congress to invest that money into maintaining growth (things like infrastructure maintenance/improvement--"pork projects" as people like to call them) has started to compromise that. Corporate lobbyists haven't helped much either.
  - watchandwait 15y ago
    Please don't just rely on the nonsense they taught you in econ 101. You need to understand the relationship between debt, the currency, interest rates, and a government's ability and willingness to repay. These factors make government debt potentially VERY risky. Even in the U.S., which is generally very responsible, government debt has been a terrible investment at times through the years. The U.S. massively devalued during the Great Depression and devalued again after World War Two. An investment in a U.S. ten-year bond in the late-1960s would have been absolutely creamed, I'm talking about losing much of the real value of your investment. That's not anyone's idea of safe.
    - mkr-hn 15y ago
      Compared to the stock market (Depression) or moving your money overseas (WW2)? It seems like the US was still the best of what was available at the time. Gold and commodities would have been toast in an invasion (the axis invading the US) or collapse of society (French Revolution-style uprising). Giving the government all your money to keep it afloat in those situations was still superior, even if the government ended up ruining the value.
- recoiledsnake 15y ago
  >That dollar you invested 5 years ago, for example, only buys about 1/3 as much oil as it did when you invested it. That is a catastrophic loss. Good point but really bad example which bring your intentions into question. Oil is in high demand, thus the price has increased. You should've picked a relatively stabler item to compare the price of. Also, how much interest did you gain on the dollar in 5 years? An investment is not the same as putting a dollar bill in your pocket.
  - watchandwait 15y ago
    Oil is not in high demand. US demand is actually down b/c of the recession and the higher price in dollars. It just takes more dollars to buy the same amount. You could also measure against corn, or gold, or the cost of college. It's been pretty ugly for the dollar for the past 11 years, and it may get worse.
    - wiredfool 15y ago
      Quite a lot of the commodities change is the investment banks slamming a lot of hot money into commodities.
- uvdiv 15y ago
  Inflation-indexed US bonds: http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm http://www.treasurydirect.gov/indiv/products/prod_tips_glanc...
- guelo 15y ago
  There's a reason economists look at core inflation which excludes energy and food, if you did that your whole argument would fall apart. Inflation is too low right now considering the high unemployment.
  - rgraham 15y ago
    So if you eliminate the commodities that are rising against the dollar (or insert currency here) and that everyone has to buy you can assert that there is no inflation? Is core inflation defined as the things people don't buy that are not currently changing in value? Do you want to add hedonics and substitution?

pessimizer 15y ago

http://en.wikipedia.org/wiki/Government_bond http://en.wikipedia.org/wiki/Government_bond A lot of government debt is held by private entities. You're thinking about the national debt, and here is a long detailed explanation: http://internationalecon.com/Finance/Fch5/F5-9.php http://internationalecon.com/Finance/Fch5/F5-9.php

3pt14159 15y ago

I get your root question which is something along the lines of this: How can the average amount of debt for an individual, country and corporation all be negative? Look into fractional reserve banking and the Federal Reserve.

Sukotto 15y ago

In addition to the great links already in this thread I'd like to add this post from Planet Money describing what happened that last time the US paid it off [1]. [aside] I love the the Planet Money podcast and highly recommend it. I wish more of the talking-podcasts I follow (Mixergy, Teckzing, back-to-work, stackexchange, etc) were available in 20 min chunks instead of the 60 min they all seem to favor. [/aside] [1] http://www.npr.org/blogs/money/2011/04/15/135423586/when-the-u-s-paid-off-the-entire-national-debt-and-why-it-didnt-last http://www.npr.org/blogs/money/2011/04/15/135423586/when-the...

nhaehnle 15y ago

I recommend you look into Modern Monetary Theory. It is an unideological look at how the monetary system works, starting with first principles. Its historical roots lie in Functional Finance. The Pragmatic Capitalism blog has a nice intro here: http://pragcap.com/resources/understanding-modern-monetary-system http://pragcap.com/resources/understanding-modern-monetary-s... For more details, I recommend the blog of Bill Mitchell, especially his Debriefing 101 section: http://bilbo.economicoutlook.net/blog/?cat=11 http://bilbo.economicoutlook.net/blog/?cat=11 The brief answer to your question is that yes, money is always a zero-sum game, just by the definition of how accounting works. If you sum up all financial assets and liabilities over the entire world, they sum up to zero. Now when people say that a country is indebted, what they really mean is that its government is indebted. The corresponding financial assets are owned by the private sector. It's really as simple as that. That is why trying to pay down the government debt is such a stupid idea. All it does it attempt to force the private sector out of its financial assets. And as the communists learned the hard way, putting undue force onto the private sector against its natural behaviour usually leads to bad results.