If you look at countries with the most debt compared to their GDP the USA is not top of
the list, and we could say that’s a good thing for the country.
That’s because when it seems that a country is unable to pay the money back it could lead
to panic and hamper economic growth.
According to the World Bank the debt-to-GDP ratio shouldn’t exceed 77 percent for a
long period of time or the economy will suffer, and indeed the USA’s debt is over 100 percent
of the GDP.
We looked at a live USA debt clock and it told us the country’s national debt was
almost 23 trillion dollars, which if you divide that between every citizen it would mean each
person owes almost $70,000.
Whether this should bother the average American is something we’ll look at today.
Before you get worried we should say that just about all countries have a national debt
not every country, but almost every country.
These debts are for the most part sustainable, but some countries do owe way more than their
GDP.
But these countries don’t just go broke.
A country doesn’t just stand around pulling out its empty pockets saying sorry guys, we
don’t have any money, we can’t even afford to cut the grass at the Royal Palace.
With that in mind, how does this national debt thing work?
We went to the website The Balance because when it comes to matters of money those guys
seem to have all the answers.
We’ll let The Balance explain the two kinds of national debt.
This is what the website said: “The first is debt held by the public.
The government owes this to buyers of its bonds.
Those buyers are the country’s citizens, international investors, and foreign governments.
The second type is intragovernmental debt.
The federal government owes this to other government departments.
It often funds government and citizens’ pensions.
An example is the U.S. Social Security retirement account.”
The federal government spends the cash, say on military, and in the USA that’s a huge
amount of money.
Healthcare is also a big expenditure.
But when the government spends people find work and they in turn spend and this keeps
the economy healthy.
So in a way it’s good to keep that spending going.
If the debt remains moderate then the interest rates on the debt can stay low and in turn
the government can keep its deficit without getting into trouble.
It’s only when the deficit is too high and the debt becomes unsustainable that bad things
happen.
We are told the small increases in debt are good for the economy, but if the increase
is too big this will lead to skyrocketing economic growth.
That might sound good, but with the boom comes a bust.
What goes up must come down, so countries are careful not to spend too much too fast.
The Balance tells us that debt that just keeps rising over a very long period of time will
at some point lead to a slowing down of economic growth.
The interest payments will have to be paid and so at some point some cash needs to be
paid back lest the debt get out of hand.
If things do get out of hand then the outcome will be less spending and that will mean businesses
borrowing less and people not being employed.
Interest rates will also rise.
This is bad for everyone.
If people don’t have a job they spend less and in turn businesses lose out.
If no one is borrowing because of high interest rates and fewer people are working and not
spending what can happen then is a recession.
No one is borrowing and no one is buying.
Now the banks are looking at this country and thinking, hmm, it can’t pay its debt
so we are not going to invest anything.
They worry the country will default on its debt.
Inside the country you have a recession and no one wants to invest in that country.
At some point the country in recession just can’t pay off its debt and this could lead
to a financial crisis such as what happened in Greece.
So if anyone is going to invest in this country in crisis they will demand high interest rates.
This will slow the economy and it might lessen the value of the currency of that country.
The Balance explains it like this: “As the currency’s value declines, foreign
holders' repayments are worth less.
That further decreases demand and drives up interest rates.
As the currency declines, imports become more expensive.
That contributes to inflation.”
How does any of this affect you?
Well, two-thirds of the U.S. debt is actually owned by the public.
The other third is owned by federal agencies.
The public owes around $15 trillion, and as you know, that’s around $45,000 per person.
The U.S. per capita income is $33,205, so how does this work out?
If what the USA makes in one year, the GDP, is less than it owes then how come it just
doesn’t go bankrupt and have one of the crises we have talked about?
The simple answer is other countries have a lot of faith in the U.S. economy so countries
such as China and Japan keep investing.
This keeps the interest rates in the U.S. low and so the crisis is kept at arm’s length.
Now, the problem is if the debt just keeps increasing and countries start to lose faith
in the USA to pay back its debts.
Experts tell us the debt will indeed keep rising, and some economists are worried that
countries will soon start demanding higher interest rates.
This could lead to a financial crisis in the USA.
In an article called “The National Debt Dilemma” this was written:
“By 2023, the deficit will have risen for eight consecutive years, the longest such
streak in U.S. history, surpassing a five-year run during World War II.
On this steep trajectory, the publicly held U.S. debt will nearly double to more than
$29 trillion over the next decade.”
But does this even matter, lots of countries have debt?
According to the experts it could matter, because if interest rates rise then more money
will have to be spent on this debt.
That could mean less cash going on things such as infrastructure, education, or research.
This slows the development of a nation, of course.
On top of that, how much money is spent on humanitarian operations around the world
or overseas military actions, will also be affected.
If countries start seeing the USA struggle they will also likely stop investing, and
this will in turn be bad for business and bad for the average Joe in the USA who is
looking for a job.
He will have less cash to spend and the economy will suffer.
The very worst outcome is what experts call a debt spiral and a financial crisis.
The article we just mentioned said this is what might happen after that:
“It could hamper the country’s ability to navigate future economic crises.
In the view of some experts, massive debt accumulation could undermine U.S. global leadership
by eroding Washington’s ability to respond to future crises.”
We found some politicians that said the debt and the future debt is not sustainable and
indeed the USA is heading towards a crisis.
This will weaken the country and it might not be such a powerhouse as it once was.
Erskine Bowles, the Democratic co-chair of President Obama’s bipartisan National Commission
on Fiscal Responsibility and Reform, said this, “If I had to give you an analogy
I would say that the deficits are truly like a cancer, and over time they are going to
destroy our country from within.”
But we should say a lot of people don’t share this doomsday scenario opinion.
They say the deficit is sustainable but most agree that it should be reduced over time.
Some economists argue about this a lot and there is an ongoing debate as to how much
this debt matters.
And that’s kind of the current argument.
Some people are asking does the debt even matter and others are talking about a crisis
in the pipeline.
Many say as long as the economy remains robust then there is just no need to pay off the
debt.
That economy is pretty vibrant as things stand and the US dollar is in good shape, so at
the moment the debt is very much sustainable.
Whether it will remain so is a divisive issue.
Does the debt actually matter?
Tell us in the comments.
Now go watch “What If The US Budget Was Only $100 - How Would It Spend It?”
Thanks for watching, and as always, don’t forget to like, share and subscribe.
See you next time.