The National Debt Isn’t Your Problem (it’s not really a problem at all)

The Debt Crisis began around 2001 at the hands of George W. Bush. Bush cut taxes on the upper class, amounting to a $1.4 trillion loss while subsequently increasing military spending for the war in Afghanistan and discretionary spending, totaling $3 trillion more for a net of $4.4 trillion in debt. Since then, the bank bailouts under Obama, COVID relief under Trump and Biden, and ever-expanding military budgets ballooned the number to the $28 trillion that stands today. While the national debt is a result of spending more than the U.S. generates in revenue, the tax cuts and spending contribute to the national debt as much as an equal amount spent elsewhere.

The national debt is issued through the Treasury in the form of bonds, usually in $1000 denominations. Foreign countries and their citizens own a little over 25% of the national debt, led by Japan, which owns a little less than 5%. China owns the second most debt, a little over 3% of total debt, and the U.K., Ireland, Brasil, Hong Kong, and Saudi Arabia are among the other foreign holders. Domestic debt holders have just under 75% of the national debt: those parties include pension funds, banks, insurance companies, Social Security, state governments, and individuals.

The national debt is treated differently than any debt you or I would have. For starters, the national debt doesn’t have any collateral backing it, and that’s because there is no risk of the U.S. defaulting on its obligations. One of the biggest concerns over the national debt is the fear that other countries could come knocking on the U.S. doorstep asking for their money back and take the country hostage when told it’s not ready. Aside from not being a legitimate concern whatsoever, the U.S. is actually in the black when speaking about international debts. In 2016 (the most recent data I could find), the U.S. owed other countries $6.004 trillion to other countries, and although that seems bad, the U.S. is owed $9.455 trillion by other countries. All considered the U.S. has a net positive account with foreign countries of about $3.5 trillion.

If that’s not enough for you to stop worrying, say (purely hypothetically) the U.S. was called on by every single owner to repay all of its debt, both the U.S. and the owners would be in worse shape than if they just let the debt be. If this happened, the U.S. would need to create $28 trillion out of thin air, leading to two consequences. The first, disadvantaging the U.S., would be inflation that inevitably devalues the dollar and makes cash held by Americans worth less than it already is. The second thing that would happen would be the debt becoming significantly less valuable. If the U.S. dollar got inflated to pay all the debt at once, that wouldn’t change the fact that the owners of debt own bonds/bills whose face value does not change. If a foreign investor owns 1 million $1000 bonds, they’re entitled to $1 billion when the bonds come due, but their $1 billion is $1 billion whether that amount of money can buy 30 mansions, 20 megayachts, and a spaceship or if it can just buy a Twix bar. Because the world economy relies heavily on the U.S. dollar, it is in the best interest of debt holders to let the debt mature rather than collect early.

Now that you know the debt isn’t the problem seems like it is, let me tell you why it can be a good thing. In almost any case, debt is necessary for large-scale investments. If you or your parents have ever bought a house with a mortgage, they’ve gone into debt. If you take out a loan to start a business, you go into debt. Debt isn’t bad if it’s being invested and producing returns in the case of much of the national debt. Think of someone who has their home paid off taking out a mortgage with the home as collateral. If the interest rate on the loan is 3.5% and the homeowner invests the loan, earning 8% annually, they make 4.5% that year by going into debt. Although this approach has its risks, much of the U.S. debt finances projects and investments similarly.

All in all, debt is used to finance deficit spending by the U.S. government and is typically a good thing. So long as the government doesn’t take out so much debt that the economy overinflates when it comes due, everything is alright. Politicians left and right use debt as a proxy measure of fiscal irresponsibility, but the mention of it is nothing more than political fearmongering.

Ethanomics note: I support taking on debt for public infrastructure projects like universal healthcare, education, housing, etc. however, all of those projects are possible without debt by taxing the rich and getting budget priorities straight (e.g. not spending $750 billion on the military each year). The debt taken on by the U.S. says nothing about the misappropriation of funds each budget cycle.

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