National Debt reaches $8,000,000,000,000 (8 trillion dollars)

[frizzfreeling]

At least that is what you people are desperately hoping for.

My thought exactly. Its amazing what people think will just go away or solve itself. For some reason, most people get the idea that the U.S. system is invulnerable to catastrophic failure because...well, because it hasnt happened yet or because the doomsdayers have always been wrong before, etc.

Then you have those who will pull 1945 out like a shining sword and say "look, government debt was much higher then and everything went fine afterwards". In so many ways, this economy is much different and on much more fragile footing than in 1945. Not just the government, but the average citizen is up to their necks in debt now and saving virtually nothing. Its a snowball effect just waiting for the wrong conditions to happen.

There are others who think that the debt is just fine, because interest rates paid on it are low. Some even think that the Fed sets these rates, which is wrong. The interest rate on our federal debt is governed by ALL THE MAJOR PURCHASERS of that debt (including those who do it through government institutions ie grandma and grandpa's savings). If there arent enough people to buy all the bonds, the rate must go up to entice them (this is done through discounting the face value of the bond at sale time). Its an auction. Currently, we are lucky enough that many folks think that our bonds are a good buy. If they change their minds in any drastic fashion, we're screwed. We completely depend on the perception of value investors have in our bonds for them to be sellable at all.

Very shaky ground, at the least.

[DVaut1]

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At least that is what you people are desperately hoping for.

My thought exactly. Its amazing what people think will just go away or solve itself. For some reason, most people get the idea that the U.S. system is invulnerable to catastrophic failure because...well, because it hasnt happened yet or because the doomsdayers have always been wrong before, etc.

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Good post. I think this is an excellent explanation why some here, as well as some in government, need to become better acquainted with Gambler's Ruin/RoR.

I'm more than willing to accept that the national debt and budget shortfalls might not be disasterous; but I won't accept "ain't never happened before" as a cogent argument to turn a blind eye to such problems.

[SinCityGuy]

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Bingo, its a global economy now, unless our debt becomes extremly high nothing to worry about.

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That's not true, and that cavalier attitude has been persistent during the "tax cut and spend" years of Reagan, George H. W. Bush and George W. Bush.

Part of the annual budget is a mandatory payment of the interest on the national debt. Obviously, the higher the national debt, the higher the mandatory payment on the interest, which diverts money from infrastructure, national defense, education, and a host of other necessities.

[FishHooks]

The interest on the national debt is very small, its basically just slightly over inflation. Most of the people in this forum dont know much about economics, just like I can't spell, but I dont claim to be a spelling champion. No one has given any reason why the U.S. economy would collaspe. It wont collaspe because eveyone depends on us because we import and export so much to the entire world. Also we owe everyone money, why would anyone want to screw over a country that owes them money. Would you kill some guy who ows you 1 million dollars because your mad he wont pay, or would you wait it out and hope that he ends up paying you. I would say the budget deficit would have to become 10%+ of our GDP before something might happen. If it becomes that big the value of the dollar could fall and we would probably experience a multiplier effect.

[Arnfinn Madsen]

Well, you aren't a economics champion either.

I am not claiming a US collapse, but assuming that nobody wants to screw you over since you owe they money shows no understanding of how it works. It is explained earlier in thread, the US debt is refinanced continiously by issuing new bonds and using the money to pay interest and pay bonds that expire. If fear of lack of US payment would arise, it would lead to a risk premium on new issued bonds (already issued ones are set) meaning that interest rates would increase sharply, meaning that GDP would decline, meaning that investors would demand a even higher risk premium etc. etc. A vicious cycle. This also shows that your interest as part of GDP-argument is irrelevant as bonds with current interest rates would expire and be replaced by higher interest ones.

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why would anyone want to screw over a country that owes them money.

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Yeah, that never happens. Just ask the Mexicans. Or the Argentinians.

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National Debt reaches $8,000,000,000,000 (8 trillion dollars)

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Bingo, its a global economy now, unless our debt becomes extremly high nothing to worry about.

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WTF

[theBruiser500]

Interesting thread guys. I've heard China is buying up a lot of US debt. If this debt is bought in the form of bonds, does that mean that US will have to pay these bonds (China) on an already set schedule, when the bonds appreciate. Or does China wield some sort of power over the US and can demand payment on the bond when they want?

[Arnfinn Madsen]

Yes, all schedules are set and the bonds (representing claims for these schedules) are then traded between investors (however, for practical and balancing reasons the government also trades in this market).

China's only real way of cashing in earlier, is to sell the bonds at the market. This market is liquid, and China should be able to sell all the bonds if wanted, but it would probably send interest rates higher (but not crisis-like higher).

See link for nationality of foreign holders:

Foreign holders of debt