Economy The US National debt is 28 Trillion, the value of US stock market is 43 Trillion=never gonna pay

[Last Samurai]

The interest payments on the debt are like two thirds of the military budget these days. That is a huge figure. Social security is also the biggest spending done by government. I think at this point about half of the US spending is spent on debt.

In the next 10 years interest payments are projected to surpass the military budget.

Which means a huge chunk of the budget will go towards interest payments, and less money available for other things.

Also, with US bonds so low why would anyone purchase them?

Good question.

I guess because it's considered safe.

If they knew that the U.S. could default on its debt, maybe people would be more hesitant.

 

[jeremyemilio]

Does anyone on Sherdog know how it actually works?

I sure as hell don't.

Not a finance guru, by any stretch (and anyone who is more knowledgeable, please feel free to correct anything I write below), but my impression is that it works a lot like a massive corporate business loan.

At a certain level, the fates of the lender and the borrower become inexorable. So the lender(s) are in control in the long term and can squeeze a little bit in the short term, but the borrower has leverage too, because if they default they take the lender(s) down with them. Everybody loses everything.

So that dynamic allows the borrowers to keep borrowing so long as they can convince the lenders they need to keep borrowing to stay afloat.

To be clear, the lenders understand exactly what is happening and aren't entirely handcuffed. They lend because their profit model doesn't require that the original loan will be repaid; they only need to keep collecting interest. So long as the borrower keeps paying interest, the lender can use the debt as a mechanism to store capital while making some money on the side and, more importantly, can get their original investment back when they choose by selling the debt to someone else who sees it as providing the same opportunity.

As long as that dynamic holds up, everything holds.

The trouble is when the borrower can no longer make interest payments. At that point, the loan becomes unappealing as something that can be sold to others and unappealing as something the lender wants to hold. So they come to collect, and if you have multiple lenders, there's a run on the debt because only the first in line have a chance of getting something back.

This is where things are a little different if you're a nation with a central bank, because you can print your own capital and you now get into a spot where you need to print in order to pay back the loans. But that makes interest rates spike because no one is going to hold debt for you if you are flooding the market with inflationary cash injections that makes their investment an inflation adjusted money pit unless you can make it worth their while with higher interest payments. And this makes it harder to pay off the debt and now you're in a debt/inflation spiral.

Much of modern economic theory is based on the assumption that a central bank can prevent this death spiral indefinitely through constant interest rate tweaking, quantitative easing, and other central banking strategies and methods. The bears say this is an illusion and at some point real life will step in, we just don't know when, and that the longer we continue to hold it off, the worse it will be when it all crashes down.

So far, the Central Banking advocates have been correct. But then, so far you and I wake up alive every morning, too. So far.

 

[Cuauhtemoc]

The interest payments on the debt are like two thirds of the military budget these days. That is a huge figure. Social security is also the biggest spending done by government. I think at this point about half of the US spending is spent on debt.

Also, with US bonds so low why would anyone purchase them?

Countries need US dollars to conduct international business, the best way to have easily accessible USD is to have bonds, it's better than having piles of Benjamins.
Few countries would accept Chinese Yuan, for example, because they may suddenly lose half their value. There are other solid currencies such as the British Pounds, Euros, Japanese Yen and Swiss Francs(CHF) but their circulation is smaller or more local. Most South American countries happily accept Brazilian Reals but people in Asia will not, they may accept Yens but Yens aren't big in South America.

You mean why we seem to have infinite debt? Its not super complicated.

The government borrows at intrest rates less than the rate of inflation. Their debt "shrinks" over time just by waiting. Since the government can't die, it just waits.

As long as they can make the interest payments, the "principal" goes away on its own.

For example, ww2 put the government 260 billion in debt. At the time, paying all that off wasn't an option. Paying any significant amount wasn't an option. The government bonds were at 1.5% though. Paying that rate of 3.9 billion per year is absolutely on the table. After that, keep paying and wait.

Today, 260 billion really isn't that big of a deal. The government can wait until debt isn't a big deal through inflation.

Yes and there are also multiple expiration dates for US(or any country really) bonds and they're really long, 20 or 30 years.
That's something these fiscal conservatives don't talk about. If I buy a new US bond right now(2021), at $100, I will receive 1.25$ payments or so every year, in 2 smaller amounts of 0.625$ every 6 months. With a maturity time of 30 years, they will keep paying me that ridiculous amount for 30 years and then in 2051 I will get back $100.
So while China may hold 1 zillion US bonds some of these will only be paid in full in 20-30 years. Of course, some others will be paid in full tomorrow, and others in 6 months etc. I don't know the exact figures—because they're never quoted—but they're not as scary as "THE US OWES CHINA 1 TRILLION DOLLARS".
They can, however, sell it to other people/countries/corporations. If they sold it all it could cause a drop in price for US Treasury Bonds but it would also hurt China.
See also:
https://fas.org/sgp/crs/row/RL34314.pdf

The amount of interest payments the U.S. government makes to China each year is not precisely known since a breakdown of the types of Treasury securities, their maturity dates, and their yields is not published.45 A rough estimate can be made by taking the Treasury Department’s data on interest paid on the debt held by foreigners in FY2012 ($93 billion) and multiplying it by China’s holdings of U.S. Treasury securities as percent of total foreign holdings. Based on these data, it is estimated that U.S. interest rate payments to China on its holdings of U.S. Treasury securities in FY2012 were $113.4 million.

A lot less scary, the US has to pay China around $113.4 million every year, with spikes when a bunch of bonds mature.

 

[jeremyemilio]

This is what trashed Yugoslavia financially. Tito, unlike most dictators, understood he was mortal. So he borrowed like crazy and life was nicer than economic fundamentals would have otherwise allowed, then he died, and the bills came due. Maybe the difference is we can just tell China LOL we just nationalized all the companies & real estate you bought and aren't paying shit on the debt.

The trouble with that is, America is built on debt. The whole lifestyle is propped up not just by past borrowing, but by continuous borrowing. If America defaults (which is what you're talking about there), the borrowing ends, and the whole American lifestyle comes crashing down.

The Chinese, in contrast, have an artificially muted lifestyle due to their lending/saving habits. If America defaults, the Chinese lose the promise of that better future lifestyle they've been sacrificing to achieve, but their current lifestyle doesn't suffer. In fact, it may improve as they have fewer lending opportunities (and less motivation to save for another day that may not come) and instead spend for a better lifestyle today.

China really is in the driver's seat with all of this. The US should just be grateful that they are a patient people who clearly prefer the slow burn takeover endgame. Regardless of how it happens, though, the final result (China takes over as the dominant economic superpower, with gradually rising citizen lifestyles to match) is baked in the cake at this point.

 

[HomeCheese]

thanks Obama!!!! <-- yes the debt doubled under obama and at some point the debt is so high that the interest is so high and it is hard to pay it off. So remember that Trump was carrying all this interest from obama and also remember that the government grew under obama which makes debt go up.

Now add covid relief to that


But President Bidet will fix it all up.

Trump cut taxes and increased government spending, Biden won't do this. He will be much better than Trump with regards to the budget.

 

[mkess101]

Countries need US dollars to conduct international business, the best way to have easily accessible USD is to have bonds, it's better than having piles of Benjamins.
Few countries would accept Chinese Yuan, for example, because they may suddenly lose half their value. There are other solid currencies such as the British Pounds, Euros, Japanese Yen and Swiss Francs(CHF) but their circulation is smaller or more local. Most South American countries happily accept Brazilian Reals but people in Asia will not, they may accept Yens but Yens aren't big in South America.


Yes and there are also multiple expiration dates for US(or any country really) bonds and they're really long, 20 or 30 years.
That's something these fiscal conservatives don't talk about. If I buy a new US bond right now(2021), at $100, I will receive 1.25$ payments or so every year, in 2 smaller amounts of 0.625$ every 6 months. With a maturity time of 30 years, they will keep paying me that ridiculous amount for 30 years and then in 2051 I will get back $100.
So while China may hold 1 zillion US bonds some of these will only be paid in full in 20-30 years. Of course, some others will be paid in full tomorrow, and others in 6 months etc. I don't know the exact figures—because they're never quoted—but they're not as scary as "THE US OWES CHINA 1 TRILLION DOLLARS".
They can, however, sell it to other people/countries/corporations. If they sold it all it could cause a drop in price for US Treasury Bonds but it would also hurt China.
See also:
https://fas.org/sgp/crs/row/RL34314.pdf

A lot less scary, the US has to pay China around $113.4 million every year, with spikes when a bunch of bonds mature.

China wouldn't even need to sell "all" their US Treasuries to cause a currency war. If they mess around too much with the value of the dollar at this point, it cripples their economy more than it does ours. That's something I think most people don't realize. That doesn't mean it stays that way permanently or indefinitely, but right now the leverage that a lot of people think China has is way less in reality.

It may not be exactly apples to apples, but the US/China debt situation in some ways is like the mutually assured destruction scenario of the cold war between the US and the USSR. Both have each other over a barrel to a degree.

 

[degoj99]

The trouble with that is, America is built on debt. The whole lifestyle is propped up not just by past borrowing, but by continuous borrowing. If America defaults (which is what you're talking about there), the borrowing ends, and the whole American lifestyle comes crashing down.

The Chinese, in contrast, have an artificially muted lifestyle due to their lending/saving habits. If America defaults, the Chinese lose the promise of that better future lifestyle they've been sacrificing to achieve, but their current lifestyle doesn't suffer. In fact, it may improve as they have fewer lending opportunities (and less motivation to save for another day that may not come) and instead spend for a better lifestyle today.

China really is in the driver's seat with all of this. The US should just be grateful that they are a patient people who clearly prefer the slow burn takeover endgame. Regardless of how it happens, though, the final result (China takes over as the dominant economic superpower, with gradually rising citizen lifestyles to match) is baked in the cake at this point.

Smart stuff, esp. your comments on having less incentive to lend going forward. Hadn't thought of that angle.

 

[Jack V Savage]

Does anyone on Sherdog know how it actually works?

I sure as hell don't.

First thing to remember is that a gov't debt contract isn't like borrowing from Fat Tony. There's a schedule of payments. Here's interest (how much we actually have to pay) relative to GDP since 1940:

Not actually a big issue at all (you can see when it last was, which led to a movement to fix it).

 

[mkess101]

The trouble with that is, America is built on debt. The whole lifestyle is propped up not just by past borrowing, but by continuous borrowing. If America defaults (which is what you're talking about there), the borrowing ends, and the whole American lifestyle comes crashing down.

The Chinese, in contrast, have an artificially muted lifestyle due to their lending/saving habits. If America defaults, the Chinese lose the promise of that better future lifestyle they've been sacrificing to achieve, but their current lifestyle doesn't suffer. In fact, it may improve as they have fewer lending opportunities (and less motivation to save for another day that may not come) and instead spend for a better lifestyle today.

China really is in the driver's seat with all of this. The US should just be grateful that they are a patient people who clearly prefer the slow burn takeover endgame. Regardless of how it happens, though, the final result (China takes over as the dominant economic superpower, with gradually rising citizen lifestyles to match) is baked in the cake at this point.

I don't know about conflating the lifestyle of the Chinese people with the goals of their government though. They have hundreds of millions of people who are more poor than even the poorest of Americans, and the CCP really doesn't care. Those that don't live in that poverty have little say in the policies (economic or otherwise) of their government. Even Chinese corporations are controlled by the CCP to a degree and are proxies for them.

It's hard to say how it will all play out of course. China is only the third largest holder of US debt (behind ourselves and Japan). I do think you're right in that over time, America may well morph back into a more self sustaining country that doesn't borrow as much to buy foreign products. It's going to take a long time though.

 

[Jack V Savage]

The trouble with that is, America is built on debt. The whole lifestyle is propped up not just by past borrowing, but by continuous borrowing. If America defaults (which is what you're talking about there), the borrowing ends, and the whole American lifestyle comes crashing down.

The Chinese, in contrast, have an artificially muted lifestyle due to their lending/saving habits. If America defaults, the Chinese lose the promise of that better future lifestyle they've been sacrificing to achieve, but their current lifestyle doesn't suffer. In fact, it may improve as they have fewer lending opportunities (and less motivation to save for another day that may not come) and instead spend for a better lifestyle today.

China really is in the driver's seat with all of this. The US should just be grateful that they are a patient people who clearly prefer the slow burn takeover endgame. Regardless of how it happens, though, the final result (China takes over as the dominant economic superpower, with gradually rising citizen lifestyles to match) is baked in the cake at this point.

This is very misguided. Some things to keep in mind: The economy is based on goods and services. Gov't debt has very little to do with our lifestyles (building it can help us get out of downturns, but that's because it spurs the creation/provision of more goods and services). Most debt is to ourselves (and it's not physically possible for a nation to consume more goods and services than it has and produces). China is a poor nation because it produces much less per person than we do. China is likely to take over as the biggest market (and thus the dominant economic power) at least for a while because their population is so much larger than ours (though the long-term population trend for them is looking pretty ugly). Debt has nothing to do with that.

 

[Jack V Savage]

It's hard to say how it will all play out of course. China is only the third largest holder of US debt (behind ourselves and Japan). I do think you're right in that over time, America may well morph back into a more self sustaining country that doesn't borrow as much to buy foreign products. It's going to take a long time though.

Not seeing any signs on the horizon that we'd regress economically. As countries develop, their advantages change. If China gets to the point where it can be called a developed nation, it will no longer be a big manufacturer. We won't move that way (at least as it relates to our labor force) unless we see a big decline in our relative living standards.

 

[mkess101]

This is very misguided. Some things to keep in mind: The economy is based on goods and services. Gov't debt has very little to do with our lifestyles (building it can help us get out of downturns, but that's because it spurs the creation/provision of more goods and services). Most debt is to ourselves (and it's not physically possible for a nation to consume more goods and services than it has and produces). China is a poor nation because it produces much less per person than we do. China is likely to take over as the biggest market (and thus the dominant economic power) at least for a while because their population is so much larger than ours (though the long-term population trend for them is looking pretty ugly). Debt has nothing to do with that.

If you did a poll and asked people with even a marginal understanding of global economics who the largest foreign holder of US debt was, what % do you think would answer "China" without even a one second pause?

 

[mkess101]

Not seeing any signs on the horizon that we'd regress economically. As countries develop, their advantages change. If China gets to the point where it can be called a developed nation, it will no longer be a big manufacturer. We won't move that way (at least as it relates to our labor force) unless we see a big decline in our relative living standards.

I think it will edge that direction but not flip. China understands how it works. They need manufacturing to sustain their economy and it won't change massively but they will likely see it mildly lessen as more of their people see improvement in their lifestyles. But that's going to be a long, slow and arduous process and their government is a wild card because it isn't really beholden to its populace.

People always think of this stuff as a giant light switch being flipped where nations fates do massive turns on a dime. Outside major global military conflict, that's not how it works. China can't make any major changes without setting themselves back decades, yet people think "OMG they own us!!!"

 

[Jack V Savage]

If you did a poll and asked people with even a marginal understanding of global economics who the largest foreign holder of US debt was, what % do you think would answer "China" without even a one second pause?

Yeah, but I think the bigger misconceptions are 1) people thinking that debt holders can just, like, call the treasury secretary and say, "hey, I know we have a contract and all, but I think we just want all the money we've lent back right now." And then the U.S. has to somehow raise the money immediately; and 2) people thinking that debt enables America to borrow from the future and thus unsustainably fuel consumption the way it would for a household. The *trade* deficit allows us to consume a little more than we produce (that is, we get excess goods and services and other countries get more money), but borrowing (or tax cuts, printing money, spending money) only affects our total consumption ability to the extent that it induces people to produce more goods and services (it can do that in a recession but otherwise, it's just redistribution).

I think it will edge that direction but not flip. China understands how it works. They need manufacturing to sustain their economy and it won't change massively but they will likely see it mildly lessen as more of their people see improvement in their lifestyles. But that's going to be a long, slow and arduous process and their government is a wild card because it isn't really beholden to its populace.

People always think of this stuff as a giant light switch being flipped where nations fates do massive turns on a dime. Outside major global military conflict, that's not how it works. China can't make any major changes without setting themselves back decades, yet people think "OMG they own us!!!"

Right. They currently need manufacturing because they're a poor country. As they develop, they'll need it less, but that's a process. Their per-capita GDP is about one-sixth of ours. That gap will inevitably close over time because it's easier for countries that are behind to grow simply by adopting developed-world innovations, and as it does, they'll see less benefit from manufacturing and likely do less of it.

 

[jeremyemilio]

This is very misguided. Some things to keep in mind: The economy is based on goods and services. Gov't debt has very little to do with our lifestyles (building it can help us get out of downturns, but that's because it spurs the creation/provision of more goods and services). Most debt is to ourselves (and it's not physically possible for a nation to consume more goods and services than it has and produces). China is a poor nation because it produces much less per person than we do. China is likely to take over as the biggest market (and thus the dominant economic power) at least for a while because their population is so much larger than ours (though the long-term population trend for them is looking pretty ugly). Debt has nothing to do with that.

I think that's underestimating just how large the percentage of goods and services purchased by America are produced off shore. Debt plays a massive role in that. Net lenders loan capital to net borrowers who then use that capital to purchase goods and services from the net lenders. Once that dynamic falls apart the goods and services are purchased by the former net lenders themselves with the cash they were once using to buy debt, making their lifestyle go up. And the former borrowers no longer have access to those borrowed funds to purchase those goods and services, and so their lifestyle go down.

You are right, of course, that this isn't simply an international issues and that a massive percentage of borrowing and lending is domestic (with the same dynamic at work, just within the borders). And you are also right that in the long game China has a long way to go.

(I think per capita GDP numbers are a little skewed by the wild discrepancy in labour costs, though. If you measured GDP controlling for what it would cost to produce the same products in America, or vice versa, the numbers would be somewhat closer. That, too, is debt/inflation related.)

 

[SammyPops]

Makes you wonder why anyone would take our debt at this point.

B/c its all relative.

 

[Gandhi]

As long as debt service costs and inflation is low, debt is not a problem. That’s not to say we should not keep an eye on it and make the best resource allocation decisions, buts not decent into austerity la la land just because we have a dem in the WH.

 

[Gandhi]

I think that's underestimating just how large the percentage of goods and services purchased by America are produced off shore. Debt plays a massive role in that. Net lenders loan capital to net borrowers who then use that capital to purchase goods and services from the net lenders. Once that dynamic falls apart the goods and services are purchased by the former net lenders themselves with the cash they were once using to buy debt, making their lifestyle go up. And the former borrowers no longer have access to those borrowed funds to purchase those goods and services, and so their lifestyle go down.

You are right, of course, that this isn't simply an international issues and that a massive percentage of borrowing and lending is domestic (with the same dynamic at work, just within the borders). And you are also right that in the long game China has a long way to go.

(I think per capita GDP numbers are a little skewed by the wild discrepancy in labour costs, though. If you measured GDP controlling for what it would cost to produce the same products in America, or vice versa, the numbers would be somewhat closer. That, too, is debt/inflation related.)

You have the dynamics right imo, but the point is as long as the borrowing economy has capacity to spare it can basically print the debt away. Borrowing is really no different than printing money from a govt perspective. So watch bowering costs and inflation.

 

[Jack V Savage]

I think that's underestimating just how large the percentage of goods and services purchased by America are produced off shore. Debt plays a massive role in that. Net lenders loan capital to net borrowers who then use that capital to purchase goods and services from the net lenders. Once that dynamic falls apart the goods and services are purchased by the former net lenders themselves with the cash they were once using to buy debt, making their lifestyle go up. And the former borrowers no longer have access to those borrowed funds to purchase those goods and services, and so their lifestyle go down.

About 15% of our goods and services are imported by value, but we also export. But, yes, to some extent a trade deficit can be seen as a loan (we're giving other countries more money, and we get more goods and services--theoretically, at some point, they spend that money and the relationship can reverse), though it's a negative-interest loan, and it can go on for a very long time. This is all separate from the issue of gov't borrowing, though.

You are right, of course, that this isn't simply an international issues and that a massive percentage of borrowing and lending is domestic (with the same dynamic at work, just within the borders). And you are also right that in the long game China has a long way to go.

(I think per capita GDP numbers are a little skewed by the wild discrepancy in labour costs, though. If you measured GDP controlling for what it would cost to produce the same products in America, or vice versa, the numbers would be somewhat closer. That, too, is debt/inflation related.)

True. By PPP, China is more like a than a sixth of us. Doesn't really affect my point.

Anyway, point here is that contrary to what people say, our debt burden is not particularly onerous by historical standards, our lifestyle is perfectly sustainable in an economic sense (obviously we need to transition to different energy sources eventually, and the sooner the better), and China's only real economic advantage over us is their population (and we should fix that).

 

[PrinceOfPain]

If you did a poll and asked people with even a marginal understanding of global economics who the largest foreign holder of US debt was, what % do you think would answer "China" without even a one second pause?

Maybe because it's only been Japan for a little over a year. They barely pull ahead of China, and even then it's only because China dumped some of its holdings so they're currently at a multi-year low.
"China" is actually the answer you'd expect from someone who pays marginal attention. "Japan" is the answer you'd expect from someone who only looks things up to win internet arguments.

This is hardly a pat-yourself-on-the-back piece of trivia you guys are celebrating.