United States Debt and Fiscal Deficit

W.G.Ewald

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China currently holds over a billion dollar worth of American bonds and one fine day they decide to sell all those bonds, who will probably buy them?
Bonds should be redeemable by the US Treasury. Don't really know anything more.
 

W.G.Ewald

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On a side note, in the medieval period you will just send army to recollect your debt through taxation, but that does not seem feasible option for current times!!
You have no idea who we are dealing with. New IRS agents are being hired all the time, to enforce Obamacare* for one thing.

*AKA Patient Protection and Affordable Care Act
 

aeroblogger

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I like the sound of that, but we have a president who is not friendly to domestic energy development.
And he's right. Why should the US use its own oil when it can use the Middle East's? The US has extremely successfully managed to occupy the Middle East and keep a stranglehold on the oil market, through means like OPEC. When the world runs out, the US can laugh its way to Alaska.

As for the debt, it's not an issue. Spending does more to improve the quality of life for American people than austerity measures, and there is no pressing need for austerity measures. If the debt gets too large, the US can print money and the debt will go away. Inflation will be there, yes, but the effects will be spread throughout the whole world, since USD is reserve currency. No country would want this nuclear option to be used, and hence no country will come collecting.

At the end of the day, might is right. As long as the US remains the most powerful country in the world militarily, all this economic stuff is fairly irrelevant.
 

W.G.Ewald

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And he's right. Why should the US use its own oil when it can use the Middle East's? The US has extremely successfully managed to occupy the Middle East and keep a stranglehold on the oil market, through means like OPEC. When the world runs out, the US can laugh its way to Alaska.
I did not know US can control OPEC.
 

Sakal Gharelu Ustad

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You have no idea who we are dealing with. New IRS agents are being hired all the time, to enforce Obamacare* for one thing.

*AKA Patient Protection and Affordable Care Act
I meant collecting debt from foreign countries!
 

Armand2REP

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In case of US it is not a big problem..It is the European countries which make this topic interesting.

National debt is not a big issue, if there is a high possibility of decent long run growth rate. With growing economy, the % of debt will eventually go down. When this does not seem very feasible, countries use inflation to melt the debt as in most cases debt is not tied to any kind of real asset. Also, since $ acts as a reserve currency, exchange rate depreciation itself will erode some debt if needed.

Also, what matters in such cases is who holds the debt. In case of US, foreigners hold approximately 32% of its public debt. So, reneging on debt will essentially mean reneging on its own public, because they hold a high % of the US debt.
Who holds the debt always matters because Japan has the highest public debt as % of its GDP, but most of it is domestically held. So, again, reneging on debt does not make much sense for Japan because it is their own citizens who will lose the money. So, foreigners can still buy their government bonds or invest in Japan because they know, Japan would not default.

But it is definitely an interesting topic!!
The US can renege on any particular debt it wants to. If it wants to pay one creditor over another it is free to do so. If it doesn't uphold it's promise to repay just one bond, it's credit rating will tank on international bond markets. In short, they can screw the Chinis if they want, but it will have a cost.
 

Sakal Gharelu Ustad

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The US can renege on any particular debt it wants to. If it wants to pay one creditor over another it is free to do so. If it doesn't uphold it's promise to repay just one bond, it's credit rating will tank on international bond markets. In short, they can screw the Chinis if they want, but it will have a cost.
Exactly what I intended to convey. Cost far outweighs the benefits in current scenario and the local electorate cares far more about the business rating when compared to other countries. Also, inflating the economy is a more subtle way to erase the debt.

Imagine telling the people--we raise the taxes by 2%, or just inflate slowly. The first one will raise more hue and cry from the public.
 
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asianobserve

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Facing the 'Fiscal Cliff': US Taxpayers Have Had it Easy for Decades
By: John W. Schoen, NBC News
December 3, 2012


Americans hate paying taxes. They also want Congress and the White House to balance the budget.

They can't have it both ways.

On one side of the escalating budget debate is the premise, offered up by a generation of politicians and tax policy wonks since Ronald Reagan, that government spending is dangerously "out of control" and needs to be restrained. Even if the cure means starving the Treasury Department of cash.

One the other side is a promise, dating back to the Great Depression and expanded through Lyndon Johnson's Great Society, to divert a greater share of the nation's hard-earned resources to care for the oldest and most economically vulnerable Americans.

That decades-long conflict seems to be approaching something of a Moment of Truth.

"If we want to maintain ourselves as a very low-tax country, then we have to break some of those promises," said Michael Linden, a tax policy analyst at the Center for American Progress, a left-leaning think tank.

"That's the big dilemma that facing the country right now. That's the basic contour on the debate."

The debate intensified over the weekend, as Treasury Secretary Tim Geithner made the Sunday talk show circuit to lay out the case for the Obama administration's latest budget proposal. The plan calls for nearly $1.6 trillion in new tax revenue over the next decade, along with some $600 billion in spending cuts, including $350 billion from Medicare and other health programs.

The plan also calls for raising tax rates and limiting deductions on households making more than $250,000, a proposal Geithner told NBC's "Meet the Press" Sunday that he thinks congressional Republicans will accept.

"I think we're going to get there," Geithner told NBC.

House Speaker John Boehner, R-Ohio, isn't so sure.

His first response to the White House proposal: "You can't be serious," he told "Fox News Sunday."

Still, with the deadline for a deal to head off the so-called "fiscal cliff" now less than a month away, the debate has shifted from whether taxes should go up to just who should pay more. Both sides seem to acknowledge what some economists have been saying for some time.

The problem with the budget is that Americans don't pay enough taxes.

The case isn't hard to make. The U.S. federal tax burden, relative to gross domestic product, is lower than it's been in half a century. Americans pay lower taxes in relation to the size of their economy than all but a handful of developed countries, including Chile and Mexico.

The relatively low tax burden on Americans is, in part, an illusion that results from heavy reliance on hundreds of billions of dollars of so-called "tax expenditures." To make government spending appear lower than it really is, the U.S. tax code is larded with givebacks, deductions and exemptions.

For example, the government lets you off the hook for paying taxes on the cash your employer pays to cover your health insurance coverage - income by another name. The cost of those uncollected taxes would show up as spending if the Treasury paid you a direct subsidy for health care. (That tax break, by the way, is the biggest single giveaway the government provides.)

Or take the earned income tax credit, which issues payments to low-income households. This giveback costs the Treasury just as much as if it collected the money from all taxpayers and then turned around and used it to write checks for those with the lowest wages.

"It doesn't really make much difference whether the government taxes people - and spends the money in order to redirect it - or whether it gives a tax incentive that encourages people to spend their own money in the same way," said Bruce Bartlett, who served as a Reagan administration policy adviser and as a Treasury official under President George H. W. Bush. "Economically, it's exactly the same thing."

The biggest sticking point in the current debate centers on whether tax rates should rise. Thanks to the thicket of loopholes available at all income levels, those "marginal" rates have little to do with how much of your hard-earned money you must fork over to the government.

As a percentage of their total income, though, Americans are paying less than they have in more than a half century. Since 1960, the government's total take has been remarkably steady at about 18.3 percent of gross domestic product, give or take a percentage point.

In the second half of the 1990s, that changed. Thanks to a booming economy , the Treasury began collecting money faster than the government could spend it – without raising tax rates. The dot-com stock market boom, for example, produced a surge in capital gains taxes, even after the government cut the tax rate on those gains in 1997.

By the end of the decade, the Treasury was using the excess cash to pay down the national debt. But that raised the politically difficult question: if the government collects more than it needs, doesn't that mean tax rates are too high?

The result was 2000 campaign pledge from both President George W. Bush and his Democratic opponent, Al Gore, to cut taxes, a promise that the government apparently could afford to make at that time. Just a few years later, when the dot-com boom turned to bust, the new, lower tax rates starved the government of cash following the 2001 recession and the weak recovery that stalled wage growth.

That shortfall widened sharply following the deep recession of 2007, when tax receipts cratered. Last year, the Treasury's total take came to just 15.4 percent of GDP, the lowest level in 60 years.

When income dries up for the average American household, most people start looking for ways to cut back. But during the 2000s, no one in Washington was in the mood to cut government spending, which continued to rise throughout the decade, paid for with borrowed money. Ironically, that decade of government spending beyond its means without harm may now make it harder for Congress and the White House to convince voters to accept spending cuts.

"If you cut their taxes without showing people what that means in terms of cutting services, they don't understand that those two things are connected over time," said Linden. "All of a sudden, government services just seem cheaper to people."

For now, government spending doesn't appear to be the problem. After peaking in the first quarter of 2011, even before the mindless "fiscal cliff" cuts imposed by "sequestration," federal spending has begun falling gradually. That contraction is one of the reasons the economic recovery remains weak.

This may not be a good time to cut spending. As Europe's weaker countries are demonstrating painfully, trying to balance a national budget too quickly with tax increases and spending cuts can just as quickly send an economy in reverse. In the U.S., most private economists, along with the Congressional Budget Office, have warned that the "fiscal cliff" package of a half trillion dollars in tax hikes and spending cuts will almost certainly send the American economy back into recession next year.

That would take an even bigger bite out of tax receipts. Which is why there's widespread agreement that the best way to raise more money for the U.S. Treasury is to spur the economy to produce a bigger pie of wages, capital gains and investment income that can be taxed. After all, every new job creates new tax dollars without increasing the tax burden on those already employed.

The Obama administration argues that the government needs to invest more tax dollars to spur economic growth. The latest White House budget proposal includes $200 billion in new spending on jobless benefits, public works and help for struggling homeowners.

Until the day comes when the government collects enough taxes to pay its bills, it will have to borrow more money. And no one on either side of the aisle believes the government can balance the budget again for at least another decade, if not longer.

For now, the best hope is to shrink the deficit gradually and slow the expansion of some $16.3 trillion in government debt that has piled up after taxpayers shortchanged their government for more than a decade.

Despite widespread agreement on the long-term goal of eliminating budget deficits, though, the impact of a swollen national debt remains a largely intangible threat to most voters.

Unlike the Great Inflation of the 1970s, when double-digit interest rates all but killed the housing industry and prices of everything from groceries to gasoline soared, most consumers today aren't feeling the impact of the current federal budget debate on their own budgets.

That's eased much of the pressure on Congress and the White House to make a deal, according to Bartlett.

"What is the potential benefit of reducing the deficit?" he said. "Are you going to get lower prices? No. Are you going to get lower interest rates? No. Are you going to get more economic growth? No. So there's no tangible payoff. It's all theoretical or even hypothetical. I think that's the main constraint today in terms of putting together a budget deal."
 

jamesvaikom

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Sir,
Some people say US will default on the Chinese debt, what's your take on that?
How will China recover their money? The only way is to reduce exports to US. That will help US companies and affect Chinese companies.

Track record of Western countries to repay debts is very bad. Colonel Gaddafi had huge investments in Western countries. They freezed his assets after his death. If Saudi king face same fate then they will freeze his assets also.
 

Austin

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The only way to cut debt burden for US is to reduce spending and keep growing .......reducing spending is not an easy thing right now as Rep and Dem do not agree on how they should go about .... growth is not easy as global economy on the whole looks shaky.

China does not have to worry , the growing purchase of US bonds will make sure that future US Govt policy are more China friendly and in a way it helps keep chinas export market by artificially keeping the yuan weak against the dollar by accumalating US reserves.

Eventually China would gain most from it and in a decade it would take a role that US has been doing so far which is to the central pillar of Global Economy.
 

Austin

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Documentary on Debt : OVERDRAFT

[video=youtube_share;MqW628w_z4w]http://youtu.be/MqW628w_z4w[/video]
 

asianobserve

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Is China's Ownership of US Debt a National Security Risk?
https://www.uschina.org/info/trade-agenda/2013/debt-ownership.html

If you believe what you hear from political campaigns, China's government owns so much of the United States' government debt that it has leverage over us—and is waiting for the right moment to sell it and undermine the US economy.

Relax. China doesn't own as much of our debt as you might think. To the extent that it does, the problem is China's, not ours. The bigger issue for America is the size of our fiscal deficit and its long term implications for our economy, not the level of China's debt holdings.

Consider the facts: as of September 2012, the United States had over $16 trillion in debt—that is, how much the United States owes to creditors for overspending in budgets over the years.

US government debt is financed in a variety of ways, including through the sale of Treasury bills, notes and bonds, US savings bonds, and other government-backed securities. All of these are essentially promissory notes with pre-determined payment due dates.

Who buys these promissory notes? A wide variety of people and entities. About two-thirds of US debt is owned by Americans—local and state governments, institutional investors like banks and mutual funds, and individual investors. The remaining debt—about one third—is owned by foreign governments and investors. China is the largest foreign debt holder, with about 21 percent of the foreign-owned debt. However, this amounts to only about 7.2 percent of total US debt, worth around $1 trillion.

What does all of this mean? Most importantly, it means the United States has a large fiscal deficit that continues to contribute to our debt. This is an issue that affects the US economy in a variety of ways, few of them positively, and it is something that we as a nation must address.

Beyond that, it also means that China is a stakeholder in the economic success of the United States. Like any investor, China wants its assets to gain value, not lose it. In other words, it wants the US economy to get stronger and continue to prosper, because that means China will be guaranteed a good return on its investments here. A decision by China to sell off its shares of US debt would do just the opposite: send the American economy into a downward spiral, harming not only the value of China's investments, but also China's sales of products to the United States as the economy faltered.

The Pentagon did its own evaluation of the risks posed by China's ownership of US debt and came to the same conclusion: "Attempting to use US Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States."

Ultimately, China has become proof of an old adage: When you owe your bank thousands of dollars, it's your problem, but when you owe your bank millions of dollars, it's your bank's problem. We owe China around $1 trillion dollars, so until we come to terms with balancing the US budget and paying down our debt, China will continue to have a vested interest in America's prosperity.
 

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