I just don't understand economics.

[H.E. Pennypacker]

Here's something I've never understood: how a country can be in debt, but at the same time, have a lot of money, or at least enough to keep things going.

Take the United States, for example. How is it that the US can have a growing debt, and not have a crisis?

The word "debt," when used to refer to countries, must be a lot different from personal debts that you and I have. When you and I are debt, we have to stop borrowing money, and find a way to make up for the debt, or else there will be serious problems (e.g. living on the streets).

So, what's the answer?

People talk about growing debt, but I don't see any American citizens starving because the debt is as large as it is (there are starving citizens, but they're starving for different reasons). In that case, is debt a "bad" thing at all, since it doesn't seem to have negative consequences?

Some person on Yahoo Answers said the US has more assets than debt. Okay, great. How about paying off the debt before moving things along, and letting the debt stack up like a pile of trash? Personal debt can't pile up, but national debt can....weird.

There's gotta be something I am missing...maybe it's some basic economic principle us laymen, or maybe just I, are missing. Don't hit me on the head for not understanding all this, please!

PS: Let's not turn this into politics. I just want to understand the economics of this.

[23meg]

The following may be a good start:

http://en.wikipedia.org/wiki/National_Debt
http://en.wikipedia.org/wiki/U.S._public_debt

[Nikron]

Government debt is not necessarily a bad thing... In fact, it'd be pretty horrid if we weren't allowed to have any..

[dpsleep]

well the national debt is the ammount of money borrowed to get rid of the yearly deficit. the deficit is the the ammount of money that the u.s. spends over the budget every year. we have the federal reserve that is reponcible for all our money's, and the irs for taxes. both are private organizations. and in a nutshell, the us doesnt give a crap about the debt, they can keep printing money and circulateing it into the economy. where does the money come from? nowhere. we have no gold standard so they can just keep inflateing the crap out of our money. i think a dollar bill is worth somthing like 4 "cents" of gold.

[konungursvia]

To my understanding, only a relatively simple financial house, like a young person, would stick to a no-debt situation. Doing business without borrowing capital is like doing a PhD without borrowing books. It makes things so much easier without actually necessarily posing any risk. Unless you're irresponsible, and those fines start to pile up and pile up. The US has a fairly big debt, but it also has a huge budget each year. It's the current account deficit that is more troubling. This means that all businesses, government offices and individuals in the US, put together, spend a lot more outside the country than they earn outside the country. They also owe a lot to each other. The danger is that outsiders will stop viewing the US dollar as a stable currency for reserves, and begin dumping. Then it drops in value and the debt is impossible to pay, a huge depression follows. Yuck, I'm going to have a bath.

[Ek0nomik]

well the national debt is the ammount of money borrowed to get rid of the yearly deficit. the deficit is the the ammount of money that the u.s. spends over the budget every year. we have the federal reserve that is reponcible for all our money's, and the irs for taxes. both are private organizations. and in a nutshell, the us doesnt give a crap about the debt, they can keep printing money and circulateing it into the economy. where does the money come from? nowhere. we have no gold standard so they can just keep inflateing the crap out of our money. i think a dollar bill is worth somthing like 4 "cents" of gold.

The United States can't simply print off money and call it even. Printing off money at will results in rapid inflation.

[bobbybobington]

The U.S. can afford to have so much debt right now because of foreign investment, but eventually I think somethings gonna give.

US debt clock (http://www.brillig.com/debt_clock/)

[C-A]

The United States can't simply print off money and call it even. Printing off money at will results in rapid inflation.

I am not disagreeing with you because honestly I don't understand enough to but how do we know that would happen? Isn't the whole system based upon the arbitrary value of gold and how much each nation claims to have? Does it really matter how much they have? Or does it just matter if they are ever called to exchange out gold for their debts?

[KyleJRM]

I am not disagreeing with you because honestly I don't understand enough to but how do we know that would happen? Isn't the whole system based upon the arbitrary value of gold and how much each nation claims to have? Does it really matter how much they have? Or does it just matter if they are ever called to exchange out gold for their debts?

Well, why is gold valuable?
Money is only a representation of stuff, the things people want to buy with the money (be it labor, raw materials, finished products, etc.)

If you add more money, but don't add more stuff, then people will just pay more money for the same stuff. Thus, prices go up.

[Ek0nomik]

I am not disagreeing with you because honestly I don't understand enough to but how do we know that would happen? Isn't the whole system based upon the arbitrary value of gold and how much each nation claims to have? Does it really matter how much they have? Or does it just matter if they are ever called to exchange out gold for their debts?

What KyleRJM said is pretty much it.

I am not an economics major (an information systems major to be exact ;)), but I have taken some courses in it. If the government simply prints off money to get rid of "debt", than does debt really ever exist? Why does anyone have debt if money can be simply printed out of machines? The printing of money would cause inflation, and also harm investors/savers.

Imagine tons of money being printed by your government. Does the "dollar" carry the same value? Absolutely not. It dramatically increases prices for goods. The actual term of this is hyperinflation. You can look it up if you feel studious. :)

[KyleJRM]

Imagine the government put a million bucks in everybody's bank accounts tomorrow.

everyone in your town/neighborhood rushes out to buy luxury cars. They get down to the luxury car store, but they only have one in stock.

So one of your neighbors figures "we've got a million bucks, I'll offer $150,000 instead of $100,000, then they'll give that last car to me!"

You see this, and offer $200,000. Eventually, everyone keeps bidding it up because they have more money to spend. The price soars on the car.

This is a simple example of what would happen with everything if more money is added to the country. The prices would just go up to compensate.

[maniacmusician]

Also, if everything is worth more, then the value of each dollar is less. So, if you've got 10,000 dollars stashed away as emergency funds, and inflation occurs, you may suddenly find that your 10,000 dollars will only be worth about 5,000; that is, 10,000 dollars will only be able to pay for what 5,000 dollars would have paid for before the inflation.

[Tuna-Fish]

Isn't the whole system based upon the arbitrary value of gold and how much each nation claims to have?

No, it's not based on gold and hasn't really been for a long time. Money is an arbitrary representation of value. Value can be anything, from work done, or work to be done, to raw materials, to services. Money in circulation roughly corresponds to amount of existing value, so that if more money is made, the ratio of value/money goes down, that is, the price of money decreases, or inflation occurs. An important point to notice is that low, but still existing levels of inflation has been found to be very beneficial to economy, so some amount of pretty much all currencies are being constantly made out of nothing to keep the inflation at a good level.

If a country prints much money out of nothing, it is essentially just taking a little bit of money from everyone who owns it's currency. This can actually be viewed as another form of taxation. The special case is that when much of a nations currency is owned by non-citizens, and the national debt of the said nation is calculated in it's own currency, like in the case of the $. This allows the country to arbitrarily drop the value of it's debt by dropping the value of it's currency. The ones actually paying the debt in this case are the ones owning some of the currency.

As dollar is used as the primary exchange current around the world, this caused that, along with us residents, europeans and asians paid a heavy price when US used this tactic to drop the value of it's debt in 1980's and early 1990's. This is indirectly the cause for both the heavy anti-americanism worldwide and the rise of the euro. (Europeans got so fed up with paying america's bills that they actually managed to work together for a while. This of course didn't last long.)

[Leeghoofd]

There is something very unnatural about the " size " of the us debt. It can however at this time be sustained by several reasons:

1. Foreign capital. Capital flows in from other countries.

2. IT is at this moment very costly for other nations not to keep supporting the US economy ( by investments & loans ). A collapse of the US economy would most certainly lead to a crash of the european and large portions of the Azian markets.

3. Economic growth. The US has a trend of spending more in order to get more economic growth.

A real problem could occur when the economy goes spiraling downwards ( not just an economic slowdown as seen previously. When there would be a contraction of the economy now, there is no room for extra spending ( due to massive debt ). In addition foreign investors would pull out, when risks get to high. In addition lending capital to the us would get unpopular, since inflation would be around the corner.

Truth is that macro economics are hard to understand, even when you have mathematical models to your disposal. Global economics have changed alot during the last few decades and we have yet to see if the current american model is sustainable.