Is The United States REALLY Broke?

For the longest time, right-wingers have been crying out to the world that the United States is broke. You constantly hear about the $18 Trillion dollar debt and immediately believe this to be true. After all, $18 Trillion is definitely a cringeworthy number! In addition to being presented with the $18 Trillion Dollar figure, we also hear the deification of China and we hear that they will emerge as the eventual ruler of us all. Well, in this article, I’m gonna show why — in as simple a language as I can put it — that the U.S. debt subject is really one that very few are qualified to talk about. Let me digress and say this: many right-wingers are well meaning, truly patriotic citizens of America. It’s just that in this case, they’re mistaken.

What if I told you that the U.S. National Debt is mostly money that we owe to ourselves? You might think that I’m crazy but that’s the case. The majority of the holders of our national debt are U.S. institutions and our private citizens. The rest of the debt, one third is owned by foreigners. As much as we hear about China, the own $1.24 Trillion of U.S. debt. Hardly a number to get into a fuss over. Many have said, “But, what if China decides to sell U.S. treasuries? Wouldn’t that wreck our economy?” And the answer is no. Regardless of what people think of America, investors would still much rather hold treasuries than any other bond. Therefore, even if China were to dump treasuries, there be a line of buyers ready to absorb their selling.

To the layperson who doesn’t understand what’s going on and who may have bought into the talking point about America being broke, here’s what you’ve got to understand. Whatever the government isn’t able to raise in taxes, they have to borrow. In order to borrow this money (dollars), they issue bonds (U.S. treasuries). As I said earlier, the majority of those bonds are bought by local institutions and local investors. The rest are purchased by foreign countries that may hold dollars. Because the majority of our debt are held by local institutions and private investors, we owe the majority of the money to ourselves because it hasn’t really gone anywhere! To what local institutions am I referring? The Federal Reserve, Social Security, financial institutions and private citizens. That’s who holds the majority of the U.S. national debt.

Another thing that has to be understood is that there is a difference between government debt and consumer debt. Many like to compare the national debt to household debt but such a comparison is inaccurate because it’s not the same. The majority of a household’s debt is owed usually to someone outside of that home, therefore, they stand to lose their collateral should they default. If we are gonna use households as an example, a more accurate comparison would be a son (who works a part-time job) borrowing 20 bucks from his dad. While it is true that the son has taken on a $20 debt, the son has a job which means that he has a way to make back the $20. Because the son has a way of getting the money back and also because he owes the $20 to his dad who lives under the same roof, the money hasn’t really left.

From a macroeconomic perspective, debt is not this monster that we hear about. Debt, when used to finance production, is good for an economy. That is because one person’s spending is another person’s income. Stated another way — when I borrow money to start a business of some sort, there a lot of people getting paid by me in the starting of that business. My spending is also helping the employees at those businesses from whom I’m receiving my products and service. In turn, I will end up starting my business, realizing a return on my money, paying off my debt and adding to the production of the economy. On the other hand, I’m sure many of you have heard of governments in European countries talking a lot about austerity (which means to cut spending in hopes of reducing a country’s debt). When you try to cut debt, not only do you lessen the ability of businesses to fund their needs, but you’re also taking away someone else’s income. When that happens on a large enough scale, nothing but economy turmoil can ensue. That is why austerity isn’t a good idea. The key is to make sure that the debt that’s being taken on is financing production and not waste.

Conclusion: I’m not saying that things are rosy economically but one shouldn’t pay too much mind to this doom and gloom crap that you hear from those who’d have us believe that the Unites States is broke. That simply isn’t true. There’s also no need to stand in awe of China, either. You hear a lot about “we are borrowing from our children” and similar rhetoric and that simply isn’t true either. If one wants to get a look at the real situation, this information isn’t at all difficult to find online.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s