The US is in Debt? Good Or Bad Thing?
AAA AA A BBB BB B CCC CC C D, If you have ever seen these, it is a form of grading for businesses, called Credit Ratings. It is mostly based on how likely the company is to pay its debts back. A company like Microsoft has the best grade possible tripling In AAA. Since they have a long history of paying people on time. However, a newer company like Tesla has a B.B. rating. This affects their interest rates. Microsoft pays its investors 2.5%. Tesla pays a bit more at 5.3%. The riskier the grade, the higher the interest rate. However, it's not just companies that have grades: countries do, too. The United States, for a long time, had a AAA rating. "Lawmakers have just two days to raise the nation's debt ceiling and avoid a catastrophic default on its loans, which could create turmoil in the U.S. economy and worldwide." The U.S. has a weird thing called "the debt ceiling," which is just a limit on how much debt the country can take on. If the national debt reaches that limit, the U.S. might not be able to pay its investors. The U.S. regularly comes close to hitting it; however, the government always ends up raising it. Until 2011, when it almost didn't. After that, The U.S. was downgraded by a credit agency for the first time due to the quote "Political Risks." Since then, Congress and the president have had to raise it seven more times. It's becoming an almost annual task, and of course, it always goes super swell. In the last 20 years, the U.S. has borrowed more and more money. The national debt is at an all-time high. However, how should we feel about this debt? What happens if we don't pay it back? The U.S. national debt is nearing 29 trillion dollars, with a capital T. Depending on when you watch this, it might already be there. It is best not to look at it as a number. However, instead of as a comparison to the size of the economy. You'll see the U.S. takes on more debt when the country spends a lot of money on wars or investments needed during recessions and now the pandemic. The department in charge of all of this is the U.S. Treasury. They collect taxes and spend them to fund the government. And, for the record, it's Congress and the president who decides how much taxes should be and where the money should be spent. The Treasury just handles the flow of money. But essentially, ever0 they approve more spending than they bring in with taxes. So the Treasury has to make up that difference by taking on debt. It does it by selling bonds. They can vary, but generally, it works like this: you buy a 1000 dollars 30-year bond at a locked-in 2% interest rate. Every year the Treasury sends you 20 dollars, the 2% interest rate you have earned. After that 30 years, you can cash out the bond and get your 1000 dollars back. It's a win-win situation, in all fairness. The U.S. gets money to fund the government, and you make some profit on a safe investment. More than a third of these bonds and, therefore, the total U.S. debt is owned by Americans and American companies. The federal government debt owns investors and also banks, Local governments and the largest part. The money for social security is kept in bonds. So is the money for medicare? The federal reserve has bonds, too. Foreign Investors only own a quarter of the U.S. Debt. While Chinese investors used to have the largest share. Japanese investors own more now. They are around 4% of all U.S. Debt, and it is a lot of debt. Out of all developed countries, the U.S. has the fourth Largest debt compared to the size of the Economy, So is this bad. The frustrating answer is we don't know debt has pros and cons. The question is, what are you doing with the debt when you're in an economic recession or an emergency? Not only should you borrow. you are borrowing a lot. But what you shouldn't do is borrow when your economy is strong, and the political inconvenience of paying things is too high. Another fundamental question is, what are interest rates? In recent years, Interest rates have been meagre. Where we are now doesn't make me nervous. I worry about the debt while all counties take on debt. Only Denmark and the United States have a debt ceiling. Denmarks, however, are kept so high they are not going to come close to hitting it. Unlike the United States, where the government constantly has to raise the debt ceiling to pay for spending they have already approved. The big problem with the debt limit is it is internally contradictory. The government passed a law that says you have to spend 10. It passes a law that you can only collect 8 in taxes, and then it passes another law saying you are not allowed to Borrow 2. If the U.S. does hit the debt ceiling, the Treasury couldn't issue any more bonds. So no more debt revenue. Taxes Would still be coming in, but that's not enough to cover all these responsibilities, So maybe they stop paying federal employees. Or stop sending money for programs. However, at some point, they won't be able to pay the interest to these investors or cash out social security bonds. That's called a default. Based on a reassessment, interest rates could rise that the United States was considerably riskier than people had thought before. If you borrow for anything, whether it's for a dishwasher, a car, college, or your credit card, that will be more costly. We are going to lose jobs. Wages won't go up as high or have a high debt limit. That's never a threat to the economy because Congress and the president want to take on less debt. They can change the tax system or reduce spending. The debt limit does not make sense if you are functioning Congress, you're saying we need to put in place some policy to make sure that we borrow more than we mean to, or we stop, and we pause, and we check on the borrowing. That certainly isn't how it is working. The simplest thing would be to repeal it even if the U.S. never actually defaults on its debt. The more political fights and "will they or wont they" unease could make the U.S. a less desirable place to invest. It's long been as this kind of the safest asset that you can invest in, and so that's given the U.S. a lot of advantages. However, the more our political system is so polarized and dysfunctional, the more it becomes a little bit question of whether the U.S. should have an incredible advantage; thus, it thus far had an A score.