Will The U.S. Ever Pay Off It’s Debt?

What many people have been talking about for years is finally making the mainstream press. Politicians are starting to talk about it. Michael Moore even made a movie about it…

Debt is power for the one who loans the money, not the debtor.

Any debtor that can not pay back their debts will eventually go bankrupt. The trend for many years has been that the U.S. pays past debts by creating new debts. Will this game continue as it has? It’s probably not sustainable, but so far it has worked. What you need to be afraid of is not how it will stop working, but when…

Who owns the U.S. debt?

The answer is that the U.S. does…

Currently the U.S. holds about 50% of its own Treasuries to help pay for entitlement programs such as Social Security and Medicare.

Foreign Governments, with Japan and China being the largest, own about 25%.

Institutional and Individual investors make up the the other 25%, with U.S. state and local governments making up the majority.

With governments owning most of the U.S. debt, why should it be such an issue? Why is it such an issue that foreign governments own so many U.S. Treasury bonds?

Ask yourself why they buy them in the first place and you will have your answer…

They buy them so that they will have a secure revenue stream in the future. If returns are guaranteed then governments are better able to budget in the future. They will better be able to still provide government services even if their tax revenues go down.

This is why China doesn’t want to let their currency inflate against the dollar and why the U.S. wants it so badly. All their investment in U.S. Treasuries won’t count for much if they make less than what their inflation rate is.

So why does the U.S. sell so many Treasuries?

For the opposite reason from why other government buy them. Because they don’t currently have enough tax revenue to pay for everything they want. (i.e. a large technologically sophisticated military, big government pensions and payrolls, social security/medicare allowances, etc.)

The U.S. federal government is betting on inflation, while other governments are betting against it. If the dollar continues to inflate then U.S. debt will be washed away. All those dollars of debt will seem small years from now as inflation grows. (Think of the cost of goods 50 years ago…)

Maybe other governments aren’t necessarily betting against inflation. They are betting that the interest rate they get on their loaned money would at least beat inflation. (i.e. They get an interest rate of 4% while inflation stays at 3% or less.)

In the end, the debtor always loses…

By taking on so much debt the government almost forces itself to cause inflation as best they can. They continue to borrow money, dump it into the economy in the form of stimulus, keep interest rates low, and everything else within their power to do, just to keep inflation going, so they can keep borrowing more.

It is a cycle that is hard to escape without changing the whole system.

“Why pay for something now, that you can pay for later?” Simple and easy, yet morally wrong, is the way I would put it.

So will the U.S. ever pay off it’s debt?

The short answer is… No, not in total.

The long answer is… Yes, if it want to keep paying for all the government services that it provides.

Many people think that we are near our max on the credit card, and spending has to be cut. The question is, will our leaders have the fortitude to make those cuts now, or will they be forced to in the future?

Or, will inflation save the day? And we can keep spending like none of this matters?

I fear it’s the third idea that is in too many of our leaders heads. And its a risk I wouldn’t want to take. Would you?

Our leaders are hoping that the American culture will continue to support that idea, and so far it has. People keep spending with no end in sight.

Money is power.

And he who has the money makes the rules.

Fun times for us all to be living in. Wouldn’t you agree?

This entry was posted in Economics, Politics.

3 Comments

  1. Rob February 22, 2011 at 9:59 pm #

    Hi I’m an idiot and don’t understand anything. But If I am in the whole for a thousand dollars pay it off I’m back at 0. If I keep earning money I’m in a surplus. The two wars and the housing bubble bursting is a reason we are at 14 to 20 trillion dollars. Sounds like Americans need to get it to 0. You need to slash things. I’d say military nearly thats at like 600 billion dollars a year right. So if we didn’t spend for 2 years we would have a trillion dollars right? That would go directly towards the 14 trillion debt. So now its 13 trillion. If you collect the money from the countries the owe us we can also put money towards the debt.
    billions add up yeah know thats how we got to 14 trillion dollar debt yeah know. Severl hundred billion dollars turned into trillions. Saying we can’t pay it off is wrong if we got this far in debt we can then get out of it.

  2. Jo May 20, 2011 at 1:44 pm #

    Inflation rises while wages don’t. A lot of the middle class are F’d out of their money. You are right. That’s one way..

  3. chicatita October 22, 2011 at 10:17 pm #

    none of the politicians are treating their personal budgets this way, why do it with the nation’s budget? this is not fair and a type of cheating and thievery!

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    […] I said before in Will The U.S. Ever Pay Off Its Debt, I fear that the U.S. will keep increasing the size of their debt hoping that inflation will help […]